Economics summary

As expected, the Federal Reserve has lowered the federal funds interest rate by 25 basis points to a range of 1.75% to 2%. The opinions of the FOMC members are divided, similar to the July meeting, three members have voted no to the decision of lower the interest rate, Esther George of Kansas City and Eric Rosengren of Boston both prefer to keep the interest rate unchanged, while James Bullard of St. Louis wants a 50 basis points cut. Seven of the members are expecting at least one more cut this year of 25 basis points,   five members are expecting a hike of 25 basis points by the end of this year while the last five members are expecting unchanged interest rate. At the press conference, Jerome Powell states several times that the future path of the target range for the federal funds rate will depend on incoming information for the economic outlook, and that the FOMC is not on a preset course, he also says that its difficult to have a hardened expectations about where the rat...

According to a research paper published by the federal reserve’s board of governors, the uncertainty that is created by the trade conflict can lower the GDP growth by 1% in the period from end of 2018 to early 2020. Economic indicators have been showing lower investments and exports and weaker growth in employment, mainly in the manufacturing sector. The data for industrial production in  August has showed a stronger increase in production than expected, the production has been 0.6% from July to August. Comparing to August 2018, this year’s production is 0.4% lower. Consumer spending and the activity in the service sector, though, are still strong. The interest rates in the US money markets has increased by 10% in a short amount of time, four times than the Fed’s rate. This pushes the Fed’s benchmark lending rate to rise above its targeted range, thus forcing the Fed to make an emergency injection of liquidity through market interventions. Through repo auction, the Feds has...

Prior to the attack on Saudi’s oil production facility, the long term treasury yields have been rising. But due to current event and increase in uncertainty, the long term yields are now again declining.  Market’s expectations for tomorrow’s Fed interest rate decision meeting still haven’t changed. The market is quite certain that the Fed will cut interest rate by 25 basis points tomorrow, and 50% probability of another rate cut at the next meeting on the 30 th of October. Yesterday’s speech by the ECB’s chief economist, Philip Lane, indicates that he is confident with the volumes of debt purchases, and that they are consistent with the parameters of the APP program for an extended period of time and the ECB’s guidance of interest rates outlook is still the most powerful monetary policy measure. NY Empire State Manufacturing index data that has been released yesterday shows that the manufacturing activity has been lower than expected for September. Indices for 17 t...

The weekend’s attack on Saudi petroleum processing facility has led the oil price to soar and with  the highest movement in percentage since Iraq’s invasion of Kuwait in 1990. The reason for this strong rise in oil price is because a significant amount of Saudi’s oil production is put to a halt. Aramco says the attack has cut the oil production by 5.7 million barrels a day, which is more than half of Saudi’s daily oil production, and more than 5 % of global oil supply. Saudi Arabia produces more than 10 % of the global oil supply, as well as it is the world largest oil exporter. Both the US and the IEA says that they are standing ready to tap emergency oil reserve if necessary. Saudi Arabia will also most likely have an emergency meeting with OPEC to discuss an increase in oil production. So, even though the oil production has fallen sharply from the Saudi Arabia, the global oil supply won’t be declining by 5% a day. The attack shows that the tension has become high i...

As of November, the ECB will be purchasing 20 billion euros worth of debt a month. Even though the amount is lower than what the markets have expected of 50 billion euros, the bond yield still declined immediately after the announcement. Unlike previous announcements of debt purchasing, this announcement doesn’t give a time horizon of when the purchasing will end. The ECB says the debt purchasing will be as long as necessary. The deposit rate is reduced even further to minus 0.5% from minus 0.4% with potential further rate cuts in the future. The ECB says the interest rates will be at the present level or lower until the inflation converges to the goal of 2%. Banks and lenders also get exemption from negative rates for some of their deposits at the ECB. ECB’s TLTRO program has also been changed. The loan’s maturity is extended from two years to three years. The interest rates of the loan is lowered from 10 basis point above the average interest rate to the average interest ra...

The UK prime minister, Boris Johnson announced yesterday that he would shut down the British parliament for five weeks in September and October. The British parliament is currently on a summer break until the 3 rd of September. The parliament members will be returning to work for a week before they are suspended until the 14 th of October. From the 14 th of October, there will only be less than three weeks before the UK will have to leave the EU, with or without a Brexit deal. Johnson says he has to shut down the parliament to prepare for the Queen’s speech which will be held at the opening of the parliament to mark the beginning of a new parliamentary session. Johnson will try to get a new Brexit deal before the deadline of 31 st of October. After meeting with the EU-leaders, Johnson seems to agree on the Brexit deal that Theresa May has negotiated forth, except that the current backstop plan with the Irish border has to change. The current backstop plan risks of locking...

Recent auctions of the 2 years US treasury notes have been keeping the 2 year treasury yield from declining. Similar to how a strong demand increases the bond price and decreases the bond yield, a strong supply would decrease the bond price and increase the bond yield. Due to this, the 2 year treasury yield has risen more than the 10 year treasury yield. This makes the yield curve to invert. Inverted yield curve has been a reliable indicator for economic recessions. Italy’s 10 years treasury yield has also declined. Bond yield decreases when there is high demand for treasury bonds. Investors in the financial markets tend to seek assets in safe haven countries, such as treasury bonds of Germany, France and the US, when there are uncertainty in the market , thus making the price of treasury bonds to rise and the treasury yield to fall. Lately, bond yield of countries that usually are not considered as safe haven, like Greece, Italy and Portugal have been falling more sharply than f...