The Fed does not have a good read of what the inflation should really be. The 5 Yr yields have jumped from low 60s to 90s, because this is where all the rate hike projections materialise. This comes after the Fed meeting this week said that the conditions for a complete liftoff can be met by this year end.
How do we navigate these waters now? After the Evergrande fiasco..-As it was running over indebted, the default didn’t take the markets by shock. The government is ready to bail out the company and make arrangements so that this doesn’t become a problem for the larger system.
Energy prices and Natural gas glut has started to take a pinch on corporate margins in the US and Europe. If things don’t improve the Central Banks might have a tough time controlling the inflation.
The EV race has ignored the fact that there are few players who are interested in the lithium ion battery recycle. But why is that so? Li-Cycle Holdings is one such company that is leading this space with its massive recycling unit in Toronto.
The ECB has gone against the wind of tightening monetary policy. This is unlike its western counterparts. The ECB still remains accommodative and wants a smooth recovery out of the pandemic crisis. Meanwhile their inflation is at a decade high level.
The energy crunch might take a toll on the economic growth. It is because of the supply constraints, supply chain bottlenecks, and price war between Europe and china. Market says that if winters are as cold as they are every year, we may see the energy prices soaring upto 110.
The Evergrande crisis should not come by surprise, as it was overloaded with credit and had been on the radar since China launched its 'Threered Lines' in August 2020. If the property developers stocks were dropped from the portfolio, the China MSCI Index underperformed the portfolio by 32% from Sept 2020 to today.
The Fed has increased the reverse repo limits for counterparties amidst the wall of cash waiting to make inroads to the Fed wallet. The counterparty limit has been doubled from $80 billion to $160 billion. This indicates the free cash in the system and then this eventually sits on the liabilities of the Fed B/S. These overnight repos have now undone nearly 1 0 months of QE, while the Fed has still been continuing with its bond purchase program on the other hand.
The Fed also increased the reverse repo rate to ensure the short term treasury rates remain positive. They have added 5 bps to the 0% rate for the reverse repo transactions. Furthermore, as the treasury decided to draw down its TAG account at the Fed, they started spending large sums and borrowing less. This led to an additional flush of $1.4 trillion in cash anew.
This week, UST 10 year spiked by almost 10 bps in a single day. This comes with the global Central Banks raising rates across the spectrum: The Bank of Norway today raised its policy rate by 25 basis points to 0.25% and put another rate hike on the table for December. The Bank of Iceland hiked its policy rate twice already this year, by 25 basis points each, to 1.25%. The Czech National Bank has also hiked its policy rate twice this year, to 0.75%. The Bank of Korea hiked its policy rate in August, by 25 basis points to 0.75%.
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