Dear Investors,
Bank of America – 40-year downtrend broken
World nominal growth is likely to growth to 5%
“Since the early 1980s, a strong disinflation trend drove a secular bull market in bonds, with each successive cyclical peak and valley in interest rates lower than the one before.”
“For two decades prior to the pandemic, nominal GDP growth averaged about 4% – the lowest rate since the 1930s.”
“In the 4% world, inflation averaged a bit below 2% and real growth a bit more than that.”
“This historically low-trend growth and inflation raised the risk of deflation during cyclical downturns.”
“This caused the FED funds rate to run up against the zero-bound, complicating monetary policy and ushering in the addition of QE to the monetary policy toolbox.”
Inflation target revisions
“Over the past 75 years, inflation has averaged closer to 3% than 2%.”
“The 2% goal was abnormally low by modern standards and created problems associated with the zero-effective bound. “
“While the Fed is not expected to update its longer-term goals until 2025, speculation is rampant that it will eventually raise the target.”
“An inflation target closer to 3% coupled with a 2% real growth trend creates a 5% nominal growth world, which is closer to the long-run U.S. historical experience.”
“In short, it sets the stage for the whole interest rate structure to move up closer to the new, higher-nominal-growth world.”
Long term structural shift
“The low-inflation, low-interest rate world that prevailed before the pandemic shifted investors’ preferences toward Growth stocks.”
“In doing so that benefit relatively from those conditions at the expense of Value stocks.”
“While the cyclical slowing of the current economy is relatively beneficial for Growth stocks, the longer-term structural shift to higher rates and inflation would favor Value stocks over long-duration Growth stocks.”
“Higher nominal and real rates are also likely to reduce excessive stretching for yield and the over leveraging that’s more common in the zero-rate world of the past.”
T.Rowe Price – Global Markets Update
FED will remain on hold for the rest of the year?
“The probability that the Fed would remain on hold for the rest of the year, as measured by the CME FedWatch tool, rose considerably over the week, from 44.5% to 59.8%.”
“Atlanta FED President Raphael Bostic appeared to give sentiment a boost on Thursday.”
“He is telling a conference in South Africa that he believed the current level of interest rates was “appropriately restrictive” and on track to bring down the inflation rate to the Fed’s target of around 2.0%.”
What is happening in japan?
“The yen strengthened to around JPY 145.4 against the USD, from about JPY 146.4 the prior week, its historic weakness continued to stoke speculation.”
“That Japan’s monetary authorities could intervene in the FOREX markets to prop up the currency.”
“The BOJ announced that it would conduct bond-buying operations one day before its auction of 10-year notes in the week beginning September 4, which weighed on yields.”
“Seeking to alleviate the effects of high fuel costs on households and businesses, Japan’s government pledged measures to ease record-high gasoline prices.”
“Extending its subsidy program for oil wholesalers beyond September until the end of the year.”
Japan’s unemployment rate
“Japan’s unemployment rate unexpectedly rose to 2.7% in July from the prior month, against expectations of a 2.5% increase.”
“Labor demand weakened, with the number of manufacturing sector openings trending downward.”
China’s central bank cut reserves for domestic banks
“China’s central bank cut the amount of foreign currency deposits that domestic banks must hold as reserves.”
“The reduction in the foreign exchange reserve requirement ratio from 6.0% to 4.0%.”
“It means effectively freed up more foreign currency in the local market to buy the renminbi currency, which fell to its lowest level since 2007 against the USD in August.”