Money Guide
Inflation rates since 2020 Also: Indicators, World Watch, Weekly Agenda, News, Musings, Opportunities
Money Guide is a personal project, supported by paid-subscriptions. I hope that all readers find the news timely and relevant, the musings interesting, the opportunities attractive, and my thoughts enriching and provoking
In this issue: waiting for the CPI report, weird US economic activity, US-China trade resilience, currency fears, warnings for bonds and equities, contrasting demand for Stablecoins, weekend Crypto volatility, and a few thoughts on Inflation rates since 2020
Indicators
Previous update: February 5th, 2023
🟢=positive mid-term forecast*
🔴=negative mid-term forecast*
⚪=neutral mid-term forecast*
🟩=positive past-period performance
🟥=negative past-period performance
⬜=neutral past-period performance
▲=increase during past-period
▼=decrease during past-period
─=no change during past-period
Click here for an in-depth look at how to read the Money Guide Indicators
🔒🟩▼ US Inflation: 6.50% (vs 7.10% 11/22)
🔒🟥▲ US Funds Rate: 4.75% (vs 4.50% 11/22)
🔒🟥▲ US 02Y T-Note: 4.39% (vs 4.23%)
🔒🟥▲ US 10Y T-Note: 3.74% (vs 3.52%)
🔒🟥▲ DXY index: 103.58 (+0.6% vs 102.99)
🔒🟥▼ EURUSD: 1.07 (-0.9% vs 1.08)
🔒🟩▼ EU Inflation: 9.20% (vs 10.10% 11/22)
🔒🟥▲ EU Funds Rate: 2.50% (vs 2.00% 11/22)
🔒🟩▼ USDMXN: 18.65 (-1.4% vs 18.91)
🔒🟥▲ MX Inflation: 7.91% (vs 7.82% 12/22)
🔒🟥▲ MX Funds Rate:11.00%(vs10.50% 11/22)
🔒🟥▲ MX 1Y Cetes: 11.21% (vs 11.10%)
🔒⬜─ DJIA: 33887 (0.0% vs 33898)
🔒🟥▼ S&P500: 4096 (-0.9% vs 4135)
🔒🟥▼ NDQ100: 12476 (-0.8% vs 12577)
🔒🟥▼ RUT: 1919 (-3.4% vs 1987)
🔒🟥▲ GSCI: 597.85 (+4.1% vs 574.52)
🔒🟥▲ Brent Oil: 87.25 (+1.8% vs 85.67)
🔒⬜─ Gold: 1865 (+0.1% vs 1864)
🔒🟥▼ BTC: 21789 (-5.0% vs 22936)
🔒🟥▼ ETH: 1515 (-7.0% vs 1629)
🔒|🟥 Overall
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World Watch
🔒⬜ International conflicts (Ukraine, US vs China, Middle East, East Asia)
🔒🟩 Local conflicts (US, Latin America, Europe, China)
🔒🟥 International Trade and Commodities (Shortages, chain disruptions)
🔒🟩 Bond markets (Liquidity, Participants, Volatility)
🔒⬜ Corporate health (Q42022 reports, 2023 forecasts)
For more:
2023 Threats
2023 Threats’ status updates
Weekly Agenda
All times are US ET (GMT-5)
Monday, February 6th
-
Tuesday, February 7th
08:30 🔒 US Consumer Price Index (CPI) report ⚠️
(Previous: *, Expected: *)
Wednesday, February 8th
02:00 🔒 GB Inflation Rate report
(Previous: *, Expected: *)
08:30 🔒 US Retail Sales report
(Previous: *, Expected: *)
Thursday, February 9th
08:30 🔒 US Producer Price Index report ⚠️
(Previous: *, Expected: *)
Friday, February 10th
-
Q4 Earnings reports during the week
⚠️Probable high volatility when information is released to the public
(Click here to read about the usual market behavior)
*Forecasts, analysis and additional information in the previous sections are available only in the premium edition of Money Guide for paid-subscribers
News
📰 🟢 US-China trade defies talk of decoupling to hit record high in 2022 | Trade between the United States and China hit a record high in 2022, even as political tension heightened between the world's top two economies (link)
📰 🔴 Global Bond investors' biggest fear on Japan cash is slowly coming true | Now that traders have an idea who’s likely to take the Bank of Japan hot seat, the focus will sharpen on the biggest worry of global bond investors -a wave of Japanese cash flowing out of international markets toward rising yields at home (link)
📰 🟢 Hedge funds caught in bigger squeeze than 2021 meme stock frenzy | Hedge funds betting against stocks globally abandoned those trades last week at the fastest pace since 2015, surpassing the speed of their exodus from the meme stock frenzy two years ago (link)
📰 🔴 Ford Mustang Mach-E has a mile of wires it didn't need. That's a big deal | Ford showed this week that it's not going to be as easy for traditional automakers to catch Tesla in the race to build the better electric vehicle, despite what Tesla's doubters think (link)
📰 🟥 Gautam Adani lost half his wealth in a flash. Here's what happened | Less than two weeks ago, Gautam Adani was the fourth-richest person in the world. Then Hindenburg Research, an American short seller with bets against Adani’s companies, accused him of pulling off “the largest con in corporate history”. Adani’s firms have lost $110 billion in value since then (link)
📰 🟥 Commodity trader Trafigura faces $577 million loss after uncovering nickel fraud | “Since late December 2022, a small proportion of the containers purchased from these companies have been inspected as they reached their destination, and were found not to contain nickel,” Trafigura said in the statement (link)
📰 🟥 Banxico boosts rate more-than-expected, signals smaller hikes ahead | The Bank of Mexico's five-member governing board unanimously voted to increase the benchmark interest rate by 50 basis points to 11.00% on Thursday, above market forecasts, citing a complex inflation scenario and suggesting future hikes would be smaller (link)
📰 🟢 Tether records surprise profit as Stablecoin giant aims to put reserve controversy behind it | Tether said its latest quarterly results were buoyed by interest rate hikes by the US Federal Reserve, which have resulted in higher yields on government debt. Tether said it had again boosted its U.S. government debt holdings so that now more than 58% of its assets consist of Treasury bills (link)
📰 🔴 BUSD depegs from rival Stablecoin Tether after New York Regulator tells Paxos to stop minting new tokens | Traders seem to be migrating from Paxos' BUSD stablecoin to Tether (link)
📰 🔴 New york regulator says Paxos unable to "safely" issue Binance's Stablecoin | Paxos Trust Company, the firm behind Binance's stablecoin, was unable to administer the token in a "safe and sound" manner (link)
📰 🟢 Bitcoin resurgence brings back old phenomenon of wild weekends | The most compelling theory on the strong weekend moves might be that liquidity is thinner, meaning that price swings on large orders can be more pronounced (link)
Musings
💭 🔴 US Dollar dominance to end as China's Yuan creates bipolar currency system | "The intensifying geopolitical contest between Washington and Beijing will inevitably be felt in a bipolar global reserve currency regime as well" (link)
💭 🟢 What recession? Some economists see chances of a growth rebound | The Federal Reserve has raised rates rapidly. But instead of cracking, some data point to an economy that’s thriving (link)
💭 🔴 Want to understand the weird economy? Watch the Super Bowl | How the big game’s ads explain the crypto bubble, the price yo-yo, and the revenge of the touch-grass economy (link)
💭 🔴 Morgan Stanley strategists say Stocks ignore US Fed, Earnings reality | US stocks are ripe for a selloff after prematurely pricing in a pause in Federal Reserve rate hikes (link)
💭 🔴 Treasury says cloud computing poses risks to financial sector | Department says reliance on Amazon, Microsoft or Google could have broad consequences (link)
💭 🔴 World’s biggest public hedge fund bets on emerging-markets rout | “We are expecting the selloff within the next two months […] People have added exposure, probably a large part of the rally has already taken place, and now find themselves very long on risky assets with very tight valuations when the liquidity conditions are turning. This is why we think you will have a significant selloff” (link)
💭 🔴 The devaluation run in emerging markets is just getting started | The year has already seen three debt-laden countries -Egypt, Pakistan and Lebanon- drop their exchange rates to unlock International Monetary Fund assistance. That may be just the beginning. With at least two dozen nations queuing up before the Fund for rescue packages, currency traders are bracing for a potential fresh wave of devaluations in the developing world (link)
Opportunities
💡 The week that Tech became exciting again | Some of the world’s biggest companies teased significant upgrades to their services, some of which are central to our everyday lives and how we experience the internet. In each case, the changes were powered by new AI technology that allows for more conversational and complex responses (link)
💡 This new idea could reduce steel’s carbon emissions by 90% | University of Birmingham researchers have developed a method for reducing emissions compatible with current steelmaking facilities (link)
A few thoughts on…
Inflation rates since 2020
This week, the US Bureau of Labor Statistics will release the Consumer Price Index (CPI) report, “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services”.
In October 2022, we talked about inflation as a design feature (not a bug or undesired consequence) of modern economies, some of its basic dynamics, and a few projections considering interest rates and other references.
The previous pieces can be read in full here:
Inflation Rates and Credit Rates
Getting Ahead of the (Inflation) Curve
The latest CPI report showed a 6.50% Year-to-Year inflation rate. That’s markedly down from the 8.20% rate back in October 2022. However, a 6.50% average change over 1 year in the prices paid by urban consumers is a very high rate. As I wrote back then:
When we say inflation is rising or falling compared to last month, that doesn’t necessarily translate to prices rising or falling in absolute terms compared to last month. That means the rate of increase or decrease is higher or lower. A car can slow down, but it will still be moving forward unless it fully stops and goes back. There’s a difference between speed and acceleration and, most importantly, distance. Right now, most reports give us a sense of the speed or the acceleration of prices
Sometimes it’s hard to visualize the compounded effect of inflation over a long period of time, so I included this graph:
As we previously discussed, that is close to 30% 10-year cumulative inflation, and the compounded rate for this projection equates approximately to a 2.41% annual inflation rate for 10 years.
That excercise was forward-looking and it is still very close to the newer reports that have been published since. This time, I want to look at the published rates since the beginning of 2020, to better understand the impact of the past 3 years:
What does the graph tell us?
The cumulative inflation (light grey area) from January 2020 to December 2022 was 15.09%. That means $115 in December 2022 had the same purchasing power as $100 in January 2020 or, conversely, that the $100 in January 2020 lost 15.09% of its value by December 2022.
Cumulative inflation is the result of compounding the rates of each full year, or of each full quarterQuarter-on-Quarter rates have been oscillating, trending higher towards June 2022, and then quickly going down towards 0.40%. In June 2022, cumulative inflation was at 14.86%, and the “normalization” of supply-and-demand dynamics helped it stay close to those levels
Year-on-Year (YoY) inflation rates (dark grey line) climbed steadily from December 2020 until June 2022, and the started dropping. When rates are higher, the compounded inflation increases faster. When rates are lower, the compounded inflation keeps increasing but at a slower pace
The US Fed inflation target rate is 2% YoY. That is 0.49% quarterly or 0.165% Month-on-Month (MoM). We should focus on the combination of YoY rates and MoM rates when the CPI report is released. That is how we can have a clearer picture of where we’re at and where we are going.
It took 18 months to go from 2% YoY inflation to 9% YoY inflation. It’s easy to guess that the way down will also take some time. Right now, one of the main concerns is that it will be much harder to take YoY inflation from 4% to 2% than it will be to get to 4%. That’s why the US Fed is sending a message of “higher (interest rates) for longer”.
take care, have fun, be chill
-SM
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