Last week turned out to be a mixed bag of economic developments culminating in the release of “strong” US Housing and Inflation figures late on Friday. The notional “improvement” in the US economy has raised expectations that the Fed may raise interest rates during the course of the year. This morning, precious metals markets dropped in unison with Gold plumeting over $40 at the open. Greece’s banks open their doors today and Chinese officials rejoice in their regulatory ability to control the stock market.
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Mon 20 July
Australia Monetary Policy Meeting Minutes
Tue 21 July
Australia CPI q/q (expected: 0.8% previous: 0.2%)
Wed 22 July
New Zealand Official Cash Rate (expected: 3.25% previous: 3.25%)
Thu 23 July
US Unemployment Claims (expected: 285K previous: 281K)
Fri 24 July
Europe German Flash Manufacturing PMI (expected: 52.1 previous: 51.9)
The spotlight is shared by the Fed and Gold this morning: Gold had done the unthinkable by breaking below a previous low and $1100, and the Fed is coming under increased pressure that it “must” raise rates this year.
Gold dropped to a five year low of $1087 this morning. Reuters news agency attributes the drop to Friday’s strong US Inflation (CPI) and Housing data, deducing that these figures heightened expectations that the Fed will raise rates later this year. The figures were:
CPI month-on-month actual: 0.3% (expected: 0.3% previous: 0.4%)
Housing Starts actual: 1.17M (expected: 1.10M previous: 1.07M)
However, the independent opinion of Zero Hedge is that the Gold crash was the result of a deliberate “stop hunt” by a single large player who sold $2.7 billion worth of Gold. Their list of suspects include Citibank, BIS, or a Chinese deal unwinding.
Whatever it was – and we cannot be sure without objective evidence – this morning saw a simultaneous sell-off in all precious metals charts that had been declining in concert for most of this year.
According to Reuters the PBoC announced on Friday that their Gold reserves had increased by 57% during the past six years. Gold accounts for 1.65% of the central bank’s forex reserves.
Mainstream Keynesian economists and the Austrian School of economists, at least agree on one thing: lowering interest rates stimulates the economy. They might not agree about everything else, but on this part of the business cycle they concur, as Austrian economist Ludwig von Mises describes:
The lowering of the rate of interest stimulates economic activity. Projects which would not have been thought “profitable” if the rate of interest had not been influenced by the manipulation of the banks, and which, therefore, would not have been undertaken, are nevertheless found “profitable” and can be initiated.
As the business cycle progresses interest rates gradually increase as money becomes scarce and economic activity wanes. Low interest rates, therefore, accompany the start of a business cycle and the Keynesian (and Monetarist) economists believe that through manipulation of interest rates, via the banking sector, the business cycle itself can be manipulated.
This was the reasoning behind the Fed’s ZIRP (zero interest rate policy) implemented after the 2008 Credit Crunch. By artificially lowering interest rates and flooding the economy with money (QE) they hoped to elude the recessionary effects of a market crash and to jump start a brand new business cycle.
Well, it’s been almost seven years and the signs of a new business cycle having started, or even “recovery” taking place, have eluded the Fed. Mainstream economists argue that the Fed should continue the manipulation they started by forcefully “progressing” the business cycle and setting interest rates where they “should” be in a healthy economy.
It sounds idiotic when plainly stated, but this is the logic behind calls for central bank interest rates hikes.
As CCN.LA reported in Bitcoin Price And The Federal Reserve:
Once QE has ended, the Fed will then begin raising interest rates to between 1.25% and 1.50% in late 2015 and between 2.75% and 3.0% in late 2016. Ironically, this will happen against the tide of an ailing business cycle. A component of the past five years’ QE program was to cut interest rates to near 0% in order to bolster business with cheap loans – a plan that the Fed insists has worked, but which remains unconfirmed by higher employment, increased productive output and the associated inflation.
Hence, even slight glimmers of hope, such as this past Friday’s pitifully “strong” housing and inflation data, has the markets speculating about rates hikes. So what? The reason why a hike in US interest rates is critical relates to its impact on the global economy, as we described in the same article linked above:
The Fed presently holds the starter-gun to global interest rate increases – if the Fed increases rates then the globe’s central banks must follow by necessity. Ironically, most central banks are not ready to do so, for example, the European Central Bank has only just begun experimenting with negative interest rates as a means of counteracting deflation.
 Ludwig von Mises, The Austrian Theory of the Trade Cycle (Auburn, Ala,: The Ludwig von Mises Institute, 1983), pp. 2-3.
In a typical show of officials’ over-estimation of their own power, China’s Zhu has announced, with joy, that the recent stock market crash was halted by “timely measures”, reports the Hong Kong Standard.
If he were honest with himself and the world, he’d admit that the crash was halted by making stocks inaccessible, threatening sellers with imprisonment and through central bank funding of margin debt.
VantageFX reports that, after three weeks of closure and tight capital controls Greek banks open their doors to the public again, today.
Withdrawal limits have been relaxed from a €60 per day limit to a new weekly single-transaction allowance of €420. Capital controls have not been lifted and restrictions on foreign remittance remain.
VantageFX quotes Greece’s Banking Association, Louka Katseli:
When the banks reopen and normality is restored, let’s all help our economy. If we take our money out of chests and from our homes – where they are not safe in any case – and we deposit them in the banks, we will strengthen the liquidity of the economy.
Just to show that, even in Greece, you can always rely on a trusted third-party bankster to give you good advice.
Traders will need more than four screens after last week:
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Last modified (UTC): July 20, 2015 12:23