Across Europe after weeks of bad news, stocks rose in anticipation that the US Federal Reserve will make a change to their current policy and raise interest rates. Markets in Europe have reacted positively with the FTSE 100 rising 1.3% in London after opening, while over in France and Germany both the CAC and the DAX gains exceeded 2% (2.1% and 2% respectively).
US Treasury Secretary Janet Yellen is calling a meeting of several key financial regulators this week to discuss market volatility driven by retail trading in GameStop and other equities favoured by online investors.
Yellen will convene the heads of the Securities and Exchange Commission (SEC), the Federal Reserve, the Federal Reserve Bank of New York and the Commodity Futures Trading Commission, Reuters first reported on Tuesday.
Yellen sought a waiver from ethics lawyers prior to calling the meeting, according to a document seen by Reuters. Her decision to seek permission follows reports that she received $700,000 in speaking fees by hedge fund Citadel, a key player in the GameStop saga, potentially creating a sticking point for Yellen.
A Treasury official, who declined to be named by Reuters, said the meeting would be held this week, potentially as early as Thursday.
“Secretary Yellen believes the integrity of markets is important and has asked for a discussion of recent volatility in financial markets and whether recent activities are consistent with investor protection and fair and efficient markets,” said Treasury spokesperson Alexandra LaManna in a statement to Reuters.
The move by Yellen follows a week of unprecedented market volatility as retail investors piled into stocks that had been targeted by short-sellers. Brick-and-mortar video game retailer GameStop saw the most trading activity, with its stock price rising more than 1,600% from its state at the beginning of the year, though other struggling outlets including AMC, BlackBerry and Bed Bath & Beyond were also affected.
The investors’ coordinated push against short-sellers cost hedge funds billions of dollars, with the resulting volatility causing Robinhood to restrict purchases of the focal stocks – a move which also caught the attention of lawmakers, who subsequently called for an investigation into the platform.
European stocks opened lower on Thursday following an overnight sell-off on Wall Street that weakened equity markets globally.
The Dow Jones closed down 2% on Wednesday, the index’s biggest single-day fall since October. The slump came shortly after a pessimistic assessment of the US economy from the US Federal Reserve, and amid a market war between activist retail investors and hedge funds in parts of the market. The S&P 500 also lost 2.5%.
Asian stocks slid shortly after the Wall Street sell-off, with Japan’s Nikkei falling 1.5% -- its own steepest drop since October – and South Korea’s Kospi fell 1.7%. Chinese blue-chip stocks also lost 2.7%.
Losses were mirrored in European stocks when markets reopened, with the FTSE 100, CAC 40 and DAX sliding 1.5%, 1% and 1.7% respectively.
Though impactful, the Federal Reserve’s pronouncements on Wednesday were overshadowed by activity around so-called “Reddit Stocks” – equities being boosted by a wave of investors aiming to lift stocks that hedge funds are attempting to short, causing immense losses on Wall Street.
The focal point of the war is GameStop, a high street video game retailer that was targeted by short-sellers and then saw a flurry of trading activity as investors flocked to it. The company’s shares jumped 134% on Wednesday alone and are currently valued at $347, having been down as low as $17 earlier in the year. Cinema chain AMC has also been boosted by the movement’s attentions, gaining 300%.
“The whole business is seen as a trump for the little traders, the Robinhood account holders who use Reddit to get their financial information,” said David Morrison, market analyst at Trade Nation. “On the other side is the Wall Street players who would happily see GameStop go out of business and people lose their jobs if it brought from a profit.
“Of course, life is never that simple, and the GameStop story is far from over as traders hunt out other heavily-shorted stocks. But it’s a salutary tale of our times and a timely reminder of the dangers that can lurk when shorting individual stocks."
US Treasury Secretary Steven Mnuchin said on Thursday that several key pandemic lending programmes at the Federal Reserve would not be renewed, putting the outgoing Trump administration at odds with the central bank.
In a letter to Federal Reserve Chair Jerome Powell, Mnuchin asked the Fed to return $455 billion allocated to the Treasury under the CARES Act in March, much of which was earmarked as funds for pandemic relief lending to businesses, non-profits and local governments. The Fed has deemed these programmes vital to the continued stability of the US economy through the winter.
“I was personally involved in drafting the relevant part of the legislation and believe the Congressional intent as outlined in Section 4029 was to have the authority to originate new loans or purchase new assets (either directly or indirectly) expire on December 31, 2020,” Mnuchin wrote. “As such, I am requesting that the Federal Reserve return the unused funds to the Treasury.”
The move came as a surprise to the Fed, who said in an emailed statement that it “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”
S&P 500 futures fell by 0.75% following Mnuchin’s request, and benchmark US Treasury yields also slipped.
In addition to the request for the money’s return, Mnuchin did extend for 90 days three separate programmes which did not make use of CARES Act Funds, including measures acting as backstops for commercial paper and money markets.
Recent data has shown that an expected early recovery from the historic economic downturn caused by the COVID-19 pandemic has begun to fade. 10 million US citizens who have lost jobs since January remain out of work.
Shane Neagle explores the results of a study into attitudes towards Bitcoin and what it could mean for the future of crypto.
You may have noticed that the stock market seems to retain remarkable resilience despite the cascading economic recessions affecting all developed nations whose economies have been impacted by the COVID-19 pandemic and resulting lockdown measures. This year has seen mass unemployment claims, obliteration of small businesses, and entire industries scrapped.
Amidst such a calamity, governments had little choice but to enter emergency salvage mode. In doing so, the Federal Reserve and the Treasury broke many people's conceptions of what it means to have money and incur debt. With trillions upon trillions of dollars pumped into the economy, and more on the way, it is easy to lose confidence in fiat currency.
For the time being, the Fed’s strategy rallied the stock market — but uncertain times lie ahead. Bitcoin (BTC) is emerging as the bulwarking choice against such uncertainty. More and more people view Bitcoin as an insurance policy against inflation. After all, BTC remains a unique alternative as it resides outside the ecosystem of governments, central banks and fiat currencies.
The Tokenist conducted an important comparative survey in April 2020, covering nearly 5,000 respondents across 17 nations. Surveying at the pandemic’s peak gives us an insight into people’s attitudes compared to three years ago, when BTC achieved its highest performance.
Speaking to Bitcoin’s increased credibility compared to traditional financial institutions, almost a third of respondents view Bitcoin with greater trust than in 2017:
Male and female millennials are tightly clustered together in the “more trustworthy” group. Covering all age groups, a solid majority of respondents, over 59% consider Bitcoin as a “positive innovation” in the realm of digital technology and finance. This represents a significant increase of about 27% compared to those surveyed three years ago.
Predictably, male millennials, with female millennials behind, report the most positive attitudes toward Bitcoin. Equally predictably, the age cohort over 65 shows little enthusiasm for Bitcoin. They are most likely to never use Bitcoin, no matter the degree of familiarity.
As far as millennials go, it bears noting that 44% of them would be interested in acquiring BTC in the next 5 years. Those older than 65 make for a stark contrast when expressing the same desire – merely 3% show interest in acquiring BTC in the next 5 years.
Incidentally, we can see the same elderly reticence when it comes to cashless and contactless systems as a whole, with security concerns popping up as the main obstacle for adoption. Still, even when taking into account highly publicised crypto exchange hacks over the years, significantly fewer people across all age groups consider BTC to be some kind of “bubble” ready to pop.
Millennials appear to be far more confident in the fundamentals of BTC, with just 24% viewing it as a bubble. However, twice that many in the over-65 age group would agree with the sentiment that BTC represents a risky fad. Notably, BTC has a long road ahead to assuage people of its worthiness to replace fiat currency, as one-third of survey participants, spanning all age groups, report doubt.
Although Bitcoin has been integrated into major online stores as a payment method, among them Microsoft’s Xbox Store, Whole Foods, Starbucks, Overstock, and even some invoicing software making it a means of payment for small businesses, Bitcoin’s utility resides in the form of digital gold. Meaning, BTC serves as a store of value first and foremost. The recently popularized term “HODL’er” testifies to this trend, as it describes people who hold cryptocurrencies instead of selling them, no matter the weekly fluctuations.
As you can see from the graph below, over half of millennials show interest in holding onto Bitcoin, with 27% interested in selling it. The over-65 age group holds no such confidence, with only 13% showing interest in holding BTC and 44% suggesting they would sell it immediately.
The HODL trend has remained implacable recently, as both the KuCoin crypto exchange hack and CFTC coming after BitMEX resulted in no substantial BTC price drop. In previous years, each of those events separately would likely have caused a significant price disruption.
One could interpret such results to suggest that the perception of Bitcoin as an insurance policy against the ventures of central banks has become even stronger since this survey was conducted in April.
Having been conducted prior to June, when decentralised finance (DeFi) really took off from $1 billion to an over $10 billion valuation, this comparative BTC adoption survey is quite conservative. That is to say, the significant gains in BTC adoption from three years ago have likely jumped higher since.
When people witness trillions of dollars injected into the cracked economy, it brings a shock to the system. While some portion of the cryptocurrency sector may be manipulated by big crypto whales, BTC stands out as a haven for many in the upcoming financial storm.
Nobody is in a position to tell if the stock market can be kept afloat with further Fed interventions, or how the turbulent presidential elections ahead may impact it. What we can see is an indication that Bitcoin is seeing increased adoption. One would rationally think the current political and economic climate would only accelerate its adoption even more.
Tom Meiman, Product Line Manager for Liquidity Balances and Demand Deposit Account Services, BNY Mellon Treasury Services, and Sam Schwartzman, Head of the IMG Cash Solutions Group, BNY Mellon Markets, explore how businesses can successfully traverse the changing liquidity landscape and achieve their cash management goals in this turbulent environment.
For over ten years, treasurers and risk managers have faced the challenge of low interest rates in the US. Imposed following the 2008 global financial crisis, these low short-term rates have dominated the liquidity landscape ever since.
Although short-term rates increased somewhat after December 2015, the unprecedented volatile conditions brought by the COVID-19 pandemic caused rates to decline back to very low levels, making liquidity management more difficult than ever.
As uncertainty rose in mid-March, market players faced the rapidly changing economic and regulatory environment caused by the global pandemic. In a six-week period, over $1 trillion was moved into Government and Treasury money market funds (MMFs). T-bill and overnight Treasury repo rates subsequently became negative at times due to the significant increase in demand in such a small time frame. LIBOR rates were also greatly affected and rose dramatically in March with credit spreads widening.
Even though overnight Treasury repo rates are currently positive and LIBOR rates have declined from their extreme levels, the long-term effects of the pandemic are yet to be seen. Businesses are increasingly worried about a second wave and the effect it could have on the economy for the foreseeable future.
Even though overnight Treasury repo rates are currently positive and LIBOR rates have declined from their extreme levels, the long-term effects of the pandemic are yet to be seen.
In this uncertain and turbulent liquidity landscape where organisations continue to face historically low interest rates, what is being done? What can banks do to mitigate the impact of the new liquidity “norm” to ensure they can support their clients in executing successful cash management strategies?
In an effort to inject liquidity into the markets, the Fed took swift regulatory action, injecting $3 trillion into the US market.
Meanwhile, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed in March, containing billions in one-time cash payments to individual Americans, increased unemployment benefits, aid for small and large businesses, and funding for state and local governments. The unprecedented $2.2 trillion economic rescue package – the largest in US history – delivered urgently-needed relief to the American economy.
Additionally, the Fed made the decision to remove the reserve requirement ratio on deposits, which stipulated that banks must set aside a percentage of their assets as cash at the Fed. While banks generally hold more than the required amount, this initiative freed up cash reserves for individual and corporate lending.
The response also included temporary changes to the supplementary leverage ratio rule (SLR). Until 31 March 2021, bank holding companies are not required to factor in federal reserve deposits and Treasury securities when calculating their total assets – which, in effect, reduces the amount of capital that they are required to hold. This was particularly useful at peak uncertainty during the pandemic thus far because it freed up bank balance sheets and provided further liquidity to the market.
The Fed introduced several other initiatives aimed at securing additional liquidity. Some of the most noteworthy programs include: the Money Market Mutual Fund Liquidity Facility (MMLF), the Primary Dealer Credit Facility (PDCF), and the Primary Market Corporate Credit Facility (PMCCF). With more program use expected and continuing purchases of Treasury and mortgage-backed securities, the Fed’s balance sheet will continue to grow.
As the impact of the COVID-19 pandemic stretches into the foreseeable future, treasurers and risk managers continue to face considerable uncertainty. So what does the future hold for short-term market rates?
The federal funds rate is expected to stay near zero. At the end of July, the Fed confirmed it was maintaining its target range of 0% to 0.25% and is expecting to maintain this range until it is “confident that the economy is on track to achieve its maximum employment and price stability goals," which will likely not occur before 2023. According to a recent survey, nearly 60% of economists believe that this target range will either remain in place or will have dropped even further by the end of 2021. However, it is important to note that, at the moment, rates are not expected to go negative.
T-bill rates began to gradually rise after the market overcame the initial volatility – but have stabilized recently. If T-bills begin to trend upwards again, their rates could be capped as banks begin to move deposits away from the Fed and into the T-bill markets in search of yield.
Elsewhere, LIBOR rates are expected to remain relatively flat for the moment. However, this expectation assumes that the market remains steady and does not experience the turbulence and uncertainty seen in March and April.
MMF yields have been on a downward trajectory since March. This is because the funds were benefiting from holding securities purchased prior to when the two Fed interest rate cuts took effect in mid-March. This lag effect has now run its course, however, most Government and Treasury money market funds are yielding at or close to zero.
It is important to note that, at the moment, rates are not expected to go negative.
The recent turbulence in the liquidity landscape has led to a dramatic increase in bank deposits in the short-term market space. So, how can treasurers most efficiently and effectively optimise their operating cash?
Demand Deposit Accounts (DDAs) have been a favored option in cash management strategies for decades. Since they don’t bear interest and avoid direct tax obligations, they are a leading transaction accounts providing security, flexibility and cash on demand. Other popular tools include sweeps, interest bearing accounts, hybrid accounts, and netting and pooling – each used to maximise operating cash but with their own unique advantages.
Investment accounts can also be used to purchase securities, MMF positions, and the increasingly popular FICC SMP repo product.
But with an array of tools available, how do businesses decide what is right for them? Each tool provides a range of benefits, but it is critical that the treasurer or risk manager applies them carefully within a cash management strategy that takes into account their individual needs and, of course, the market landscape.
The US markets are historically accustomed to low interest rates, but the turbulent and uncertain environment of COVID-19 has brought rates close to zero once again. While the current outlook does not predict the implementation of negative rates, the economy continues to grapple with price volatility and uncertain supply and demand dynamics. It is especially prudent for businesses to plan for various eventualities, including the possibility of a negative rate.
Clients require expert support and guidance as the new realities become clearer in the coming months. Banks must educate their clients about the changing dynamics of the liquidity landscape and ensure they are forearmed with knowledge of the cash management options available. Only then will clients be best positioned to optimize their excess operating cash management strategies.
The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute Treasury Services advice, or any other business or legal advice, and it should not be relied upon as such.
US stock markets ended mostly lower on Wednesday following the release of a policy statement from the US Federal Reserve, with futures pointing towards a stock sell-off on Thursday.
The Fed announced that US interest rates would remain between 0% and 0.25% and indicated that they would likely remain that way until 2023 at the earliest. No additional stimulus plans were announced, though Federal Reserve Chair Jerome Powell pledged that the Fed “will not lose sight of the millions of Americans that remain out of work.”
Investors who had anticipated new stimulus measures were left disappointed by the statement. US stocks fell following Powell’s press conference, with only the Dow closing in the green. Thursday morning saw US futures skewing sharply negative; Dow Jones futures were down 1.3%, S&P 500 futures were down 1.6%, and Nasdaq futures were down 1.7%.
The negative sentiment had a ripple effect in European markets, which opened in the red on Thursday. The FTSE fell by 1%, the DAX 30 by 1.4% and the CAC by 1.3% in early trading.
Asian stocks also saw an overnight sell-off, though not so sharply. Japan’s Nikkei index fell by 0.6%, while South Korea’s KOSPI shed 1.2%. The Hong Kong Hang Seng suffered most, sliding by 1.7%., while mainland Chinese indexes were relatively unaffected; the Shanghai Composite slipped 0.4% and the Shenzen Component remained flat.
In addition to the absence of newly proposed stimulus measures, analysts noted that investors were likely spooked by the news that two officials on the Federal Open Market Committee voted against the move to keep the Fed’s inflation benchmark rate unchanged.
Connor Campbell, financial analyst at SpreadEx, said that the “no” votes indicated “a brewing hawk camp in an FOMC full of doves.”
In a statement on Tuesday, the Labor Department reported that its consumer price index rose by 0.6% last month, the largest net monthly gain since August 2012. The price increase follows an easing of 0.1% in May, and exceeds the rise of 0.5% predicted by economists polled by Reuters.
The increase coincides with the reopening of non-essential retailers and other businesses throughout the country, and continued anti-coronavirus stimulus spending that has driven the US budget deficit as high as $3 trillion over the past 12 months.
A hike in the cost of gasoline accounted for over half of the resurgence in consumer spending, with energy prices as a whole rising by 5.1% and gasoline itself rising by 12.3%. However, gas pump prices remain 23.% lower than they were a year ago.
Having risen by 0.7% in May, food prices also saw a further increase of 0.6% in June, contributing to the shift in the Labor Department’s index. Core inflation also rose by 1.2%, far below the Federal Reserve’s target of 2% in annual inflation gains.
It is yet unclear how the consumer price index will be affected by the decision of several states to reverse their reopening plans in late June and early July following a resurgence in COVID-19 cases.
The US economy has been struck dramatically by the COVID-19 pandemic, with the economy entering a recession in February and April seeing the greatest single-month fall in consumer spending since the 2008 financial crisis.
Carl Slabicki, Head of Strategic Payment Solutions, BNY Mellon Treasury Services, explores the changing climate of US payments.
For a long time, banks in the US have competed primarily on price and service rather than as providers of payments solutions. But the payments and cash management space is now changing. New developments to existing payment rails, combined with the advent of new real-time solutions and overlay services are emerging, and organisations that are able to quickly adapt to the evolving payments landscape will be well placed to gain a significant market advantage.
As we enter this period of unprecedented disruption in the marketplace, the importance of expediting the journey from paper to digital transactions for payers and receivers is becoming increasingly clear; payments are faster, more streamlined and feature enhanced capabilities around validation, security and risk mitigation.
Certainly, in the current challenging environment, the continued investment in and implementation of digital solutions continues to highlight the timeliness of this initiative. Remote working has put a spotlight on the channels we choose to make payments, with the payments industry leaning more and more on a digital environment to stay connected and continue conducting efficient and timely business. So what changes are occurring, and how can organisations and their clients reap the rewards?
For over 45 years, the ACH network had been the core next-day batch settlements system in the US. But during its long tenure, the underlying ACH system – which is governed by the National Automated Clearing House Association (Nacha) – has continued to modernise and grow, with the latest figures showing an increase in transaction volumes of 8.1% year-on-year in Q4 2019. This growth has been driven by the increasing payment convenience brought about, in part, by the introduction of Same Day ACH (SDA), which from March 2020 has increased its transaction limit from US$25,000 to US$100,000 to help open up additional use cases for the market.
As we enter this period of unprecedented disruption in the marketplace, the importance of expediting the journey from paper to digital transactions for payers and receivers is becoming increasingly clear.
To meet that growing need, new payment rails are being introduced to replace legacy capabilities. For example, RTP® – the US’s real-time payments network – launched by The Clearing House in 2017, is providing real-time gross settlement on a 24/7/365 operating model. This is providing clients with greater speed, efficiency, convenience and transparency. What’s more, in a move that will further bolster the growth of faster payments in the US, the Federal Reserve has announced its intention to launch its real-time payments system, known as the FedNowSM Service, in 2023 or 2024.
Sitting right at the centre of the evolving US payments landscape is the move towards pre-validation services – foundational tools that are addressing security concerns that surround the entire payment process. Regardless of the payment channel being used – whether it’s ACH, Wire, RTP or other – the question remains: how do you know the payment or account data you have been provided for a transaction is correct and legitimate?
Indeed, the advent of new technologies that have enabled faster and more efficient payments sits at the intersection of another trend, namely the sophistication of fraud in the payment space. And, as people have settled into working from home environments, such security concerns have been further accentuated. The need to positively verify that an individual is authorised to transact on a paying or receiving account is, as a result, also becoming increasingly important.
It is for this reason that market leading banks are turning their attention to delivering solutions that enable real-time pre-validation – meaning the confirmation that a payee is the legitimate party occurs prior to a payment being sent. These solutions leverage a national shared database, such as the one maintained by fraud management and prevention service provider Early Warning Services, to validate the routing and account number, and verify the owner on the account, before the payment is sent. This increases security and risk mitigation, reduces fraud losses, and helps reduce the costs and processes associated with checks and other legacy payment systems.
Elsewhere, a host of overlay services are coming to the fore to address historical market challenges. For example, the migration from checks to electronic payments remains a significant pain point for cash managers. Though accepting and processing checks comes with a heightened risk of fraud and an array of manual processes, they continue to remain necessary as many businesses do not have the information required, or the technology interface needed, to send or request a payment digitally.
To address these issues, directories that allow payees to securely register their payment details and identities electronically are emerging, such as Zelle® in the US. Owned by a consortium of banks, the Zelle directory allows users to register identifiers, such as an email address or mobile phone number – referred to as “tokens” – which, following a thorough authentication process, can then be used to send and request electronic payments. Banks will then pull that authenticated token from the directory to find out the beneficiary’s bank, before using ACH or the card network to settle the payment. Going forward, Zelle, with the support of some of its member banks, including BNY Mellon, is working with The Clearing House to add RTP as an additional settlement mechanism. It is hoped that these capabilities will be implemented within the next year.
And while Zelle represents an effective way to securely send electronic payments to consumers and small businesses, there is also a demand for this in the business to business or vendor payments space. They too want to reduce the time and effort it takes to collect supplier banking account information, validate and keep it updated, as well as ultimately reduce or eliminate paper checks. This is increasingly achieved through settlement networks such as Paymode-X®, the largest business to business vendor payment network in the US, with over 400,000 members, processing over $200 billion in payments annually. It allows clients to convert vendor payments from paper (check) to ACH with electronic remittance, with the potential to earn revenue share on payables.
With the emergence of real-time payments, updated legacy rails and a new layer of overlay services, the US payments space is transitioning to an entirely new payments culture. Developments are moving quickly, with many banks looking to outsource their solutions to a trusted provider that already has the technology available – enabling them to swiftly go to market for a fraction of the cost.
As banks look to transform in this way, it is vital that they are able to provide clients with the options and capabilities they need to enable their businesses to run effectively and efficiently in the new faster payments environment. There is not a single, optimal channel that can solve every issue and meet all requirements – making it crucial that banks have a variety of tools in their arsenal, ready for instant deployment. The opportunity to provide improved, digital services to organizations, with greater levels of security, ease and efficiency has arrived. By working together to achieve ubiquity and interoperability, banks are developing the modern tools necessary for delivering a truly optimised payments experience.
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute Treasury Services advice, or any other business or legal advice, and it should not be relied upon as such.
US markets fell by upwards of 7% in early trading on Monday, triggering the NYSE’s circuit-breaker and automatically suspending trade.
In London, the FTSE 100 sank by more than 8%, as did other European share indexes. Germany’s DAX also fell by 8%, while France’s CAC 40 saw a full 10% depreciation in value.
The Dow Jones, S&P 500 and Nasdaq saw a similar decline, each falling by more than 10%.
The global collapse follows action by the US Federal Reserve, which on Sunday cut interest rates to a target range of 0% to 0.25% while simultaneously announcing a $700 billion stimulus programme as part of a coordinated action with the central banks of Canada, Japan, England, Switzerland and the eurozone.
David Madden, a market analyst at CMC Markets, suggested that the banks’ efforts to calm the markets by using “radical measures” was actually worrying them further them and resulting in a mass sell-off.
As with the market crashes seen last week, those companies affected most by the disruption on Monday were travel agencies. Following an announcement that it would reduce its flight capacity by 75% during April and May, airline conglomerate IAG saw a 25% decrease in share prices, and holiday firm Tui saw a loss of 27%.
The biggest risk to stock market investors right now is US Federal Reserve policy error - not a sharp bond market sell-off.
Tom Elliott, International Investment Strategist at deVere Group, is speaking out as financial markets have shown increasing nervousness in recent days.
Mr Elliott comments: “Investors in all assets can be forgiven for fearing a bond market sell-off, given the recent sharp increase in Treasury yields. Higher Treasury yields are likely to lift yields in other core government bond markets, increasing the risk-free rates that other assets have to compete against.
“But if the stock market rally is about to end, is it really going to be because bond investors become afraid of the growth and inflation risks of the strong US economy?
“This is, surely, not realistic given the modest inflation data.
“Fed chair, Jay Powell, has repeatedly made clear his nervousness of reading too much into the recent uptick in US wage growth, and the tightening labour market, which are often considered key determinates for inflation.
“Indeed, it is worth noting not only that September’s hourly wage growth, of 2.8% year-on-year, was actually lower than August’s 2.9%, but also that inflation expectations are broadly stable.
“The Fed’s preferred measure of inflation, the core PCE index, stands at just 2%.”
He continues: “With three more interest rate hikes expected next year, which would take the Fed’s target range to 2.75% – 3%, there is a growing risk not of inflation derailing the U.S economy, but Fed policy error whereby growth is harmed because of an overly-aggressive policy mix.
“This would include not only raising interest rates too fast, but also its quantitative tightening programme that is withdrawing $50bn a month from the U.S. economy, and so contributing to higher bond yields.”
Mr Elliott concludes: “Therefore, the risk to stock market investors comes not from a sharp bond market sell-off which raises the risk-free yields on Treasuries. It is from the Fed ignoring its chair’s own advice and tightening monetary policy faster than the American economy can stand.”
(Source: deVere Group)
Below Dan North, Chief Economist at Euler Hermes North America, lists several updates and thoughts on the latest matter surrounding the US federal reserve.