Markets

Halver’s market assessment: Don’t worry, the Fed is still head-to-toe bailed out

Before the presidential election, the Fed refrained from further flooding of money because of its political independence, which disappointed the financial markets. But she made it clear that the US economic recovery will not fail if US monetary policy persists. However, she criticizes the fact that fiscal policy is only inadequately doing its homework. It just has to act, the Fed is paying all debts.

The Fed can lead the horses to watering …

The massive improvement in sentiment in US industry – the highest level since November 2018 – is leading to a recovery in production. But the momentum is slowing and is still around seven percent below the previous year’s level.

Employment planning in industry is still a long way from its pre-crisis level. At the same time, the actual increase in employment is decreasing.

According to Fed Chairman Powell, coronal downside risks continue to dominate. In its growth projections for 2020, the US Federal Reserve is assuming a less severe slump than initially assumed, at minus 3.7 after minus 6.5 percent previously. But it reduces the expected recovery for 2021 to four after five percent and for 2022 to three after 3.5 percent. In 2023 the upswing is expected to weaken even less to 2.5 percent.

Therefore, the Fed does not want to hear about rate hikes indefinitely. Even the hawks among the Fed directors do not expect interest rate hikes until 2024 according to interest projections (so-called “dot plot”). The key interest rate will remain at an all-time low until maximum employment has been achieved in the US labor market. By not specifying this economic size in concrete terms, the Fed gives itself a lot of leeway for monetary policy laissez-faire.

In addition, they should remain at the lowest level until inflation has risen to two percent and the price increase moderately exceeds the two percent target for some time. Two percent is now just an average target that allows, after a long period of too low inflation, to allow a long period of higher inflation.

In this context, the weak oil price, fueled by fears of an end to the production cuts by OPEC and its allies (OPEC +), does not in fact point to any inflationary pressure.

Overall, the Fed has little confidence in its ability to create sustained price pressure. According to its revised inflation projections (2020 1.2 after 0.8 percent; 2021 1.7 after 1.6 percent; 2022 1.7 after 1.8 percent and 2023 two percent), it will not change for the foreseeable future Achievement of their new average inflation target. This means that it can gallantly ignore price increases in the meantime. Nothing stands in the way of the ongoing monetary policy safeguarding debt sustainability and the stabilization of the economy and the labor market.

And so the US Federal Reserve continues its bond purchases totaling 120 billion US dollars a month and emphasizes that it will increase this if necessary.

… but they have to drink by themselves

In economic terms, the Fed can pull the rope, but it cannot push it. The counterpart to monetary policy must add fiscal policy. The Fed is formally asking the US Congress to take on more debt to stimulate the economy.

At the moment the congress can sell over 1.5 trillion. US dollars already held in the central government’s account with the Fed. However, the election campaign has so far prevented an agreement between Democrats and Republicans on how the funds will be used.

But since both sides do not want to reveal themselves as economic pests, the negotiations seem to be gradually moving. For example, “helicopter money” in the form of consumer checks could help boost domestic demand as the backbone of the US economy. Presumably, Americans with an annual salary of less than 75,000 US dollars will again receive a sum of 1,200 US dollars, which is gradually reduced to zero until an income of more than 99,000. Up to this limit, families receive an additional $ 500 per child. In order to create income security, they want to hold on to the extended unemployment benefit of 450 US dollars per week for an additional eight weeks. Subsequently, the unemployed are to receive either full wage compensation for their previous job or US $ 600 per week. The lower sum is decisive here.

US politicians fear that the acceleration in retail sales will turn out to be a barn fire. Because consumer expectations are stubbornly staying at the lowest level since the end of 2013.

Market Situation – The liquidity boom is everything but not over

The first disappointment of the financial markets about the current lack of another flood of money from the Fed shows their dependence on the stupid Mammon. The foreign exchange market also conveys this picture with an appreciation of the dollar against the euro. However, reading between the policy lines makes it unequivocally clear that the liquidity glut persists.

The Bank of Japan is also sticking to its course of unlimited bond purchases. Even lower negative key interest rates cannot be ruled out. The counterpart, borrowing to stimulate the economy, has already been promised by the new Japanese Prime Minister Yoshihide Suga.

Worldwide, investment rates are still not an attractive investment alternative to stocks. The global liquidity offensive of the central banks forms an effective backstop for sustainable equity consolidations.

Using mobile data from the Google COVID-19 Community Mobility Reports, the “Corona Relaxation Index” provides movement trends in retail, grocery stores, pharmacies and at work. Thus, depending on the country, the economic consequences of the containment or easing measures can be identified. After months of stagnation, the major economies are continuing to catch up to their pre-crisis levels.

Even a worsening of the virus situation in the winter half-year cannot dampen the good mood for stocks. Many companies have adjusted to problems in their supply chains and increased inventory levels. And the governments will only react to rising new infections with regional, but not macroeconomic restrictions.

Recently, further advances in the corona vaccine are brightening the stock outlook. There are increasing indications that several vaccines will be widely available in the first quarter of 2021.

While the assessment of the current state of the German economy is gradually improving, according to ZEW, the rise in ZEW economic expectations to their highest level since spring 2000 shows that the economy, which has been cold-started by monetary and fiscal policy, will fix things in the future. The OECD also expects a less severe global economic slump (minus 4.5 instead of minus six percent) than initially feared.

With regard to Brexit, British Prime Minister Johnson is pushing ahead with his plan to undo the EU exit agreement with his internal law. Just a provocation to blackmail the EU for a better deal? The final vote is due in the next week. There is certainly resistance to Johnson. Nevertheless, according to the trend of rising volatility of the British pound, the financial markets can no longer rule out a failure of the negotiations with the euro exchange rate falling as well. The rupture of supply chains and export disruptions must then be taken into account. But the stock markets are now set for a no deal Brexit. And if they have survived Corona, Brexit will not lead to sustained share distortions either.

Sentiment and chart technique DAX – willingness to take risks, albeit timid

According to a survey by Bank of America Merrill Lynch among fund managers, tech stocks are currently being avoided due to their high valuation. In doing so, they are also paying tribute to a possible choice Biden, whose camp the industry wants to regulate. Instead, cyclically sensitive stocks are gradually gaining popularity as part of an industry rotation.

Overall, the fund managers expect stocks to remain stable. This assessment is also expressed in Citigroup’s Macro Risk Index, which – if only tentatively – has established itself in the “risk-taking” category. Values ​​greater than 0.5 indicate an increasing aversion to risk, values ​​less than 0.5 indicate risk appetite.

In terms of the chart, the first resistance on the way up is at 13,339 points. The next barrier is at 13,367. On the downside, the first supports are at 13,181, 13,156 and 13,080. Below that, the brands hold at 13,043 and 12,750 points.

The weekly outlook for week 39 – How strong is the Ifo business climate warming?

In the USA, the purchasing manager indices for industry and services, accompanied by recovering orders for durable goods, signal an advancing economic stabilization.

According to purchasing managers’ indices for the manufacturing and service industries, the economic recovery in the euro zone is continuing at a slower pace.

According to the Ifo Business Climate Index, the economy in Germany continues to recover, but the upward trend is slowing. According to the GfK consumer climate index, the domestic economy has gained traction.

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