Month: September 2024

Since the Russia-Ukraine war began in February 2022, there have been periodic tit-for-tat waves of punitive actions unleashed on diplomats on either side of the conflict between Moscow and the West.

This has often centered on accusations of spying and espionage. It’s no secret that nations often use embassies and consulates to place deep cover intelligence operatives, often posing as diplomats. That’s exactly what Russia is newly alleging in expelling six British diplomats on Friday.

Russia’s Federal Security Service (FSB) has announced it has revoked the accreditation of six British officials, alleging they were in the country for espionage and were “threatening Russia’s security.”

“As a measure of reprisals to the multiple unfriendly acts of London, the Russian Foreign Ministry… has withdrawn the accreditation of six employees from the political department of the British Embassy in Moscow,” the FSB said.

The diplomats stand accused of “subversive activities and intelligence” gathering, and the Russian agency further claims it possesses evidence of “coordination of an escalation in the international political and military situation.”

This new action comes just after Britain’s top diplomat, Foreign Secretary David Lammy, confirmed that his country is mulling giving Kiev Storm Shadow missiles with an authorization to mount long-range attacks on Russian territory.

This is being discussed in coordination with the US (and likely the rest of NATO), but it is an authorization which technically hasn’t come yet.

Russian Foreign Ministry spokeswoman Maria Zakharova in a Friday press briefing alleged that “the British embassy has largely flouted the limits set by the Vienna Convention.” She said it is conspiring to inflict a “strategic defeat” on Russia.

Her comments strongly suggest that Moscow’s action against the diplomats is politically-motivated punishment for Britain’s recent escalations in providing Ukraine with more money and arms.

London has called these allegations “completely basis” and has chalked it up to revenge for London previously expelling Russian diplomats and nefarious Moscow-linked entities.

The war has reached an extremely dangerous moment given that President Putin on Thursday warned that if the US and UK greenlight long-range strikes on Russian soil, this means NATO and Russia will be in an official state of war. Putin still has not ordered a full military mobilization of the country, which is a card he still holds.

Authored by Jane Johnson via The Mises Institute,m

Does Any Daylight Exist Between Monetary and Fiscal Policy?

Conventional wisdom has it that the Federal Reserve system (the “Fed”) and the US Treasury Department are two separate entities. Congress created the Fed in 1913 as a legally and financially independent federal agency, privately owned by its member banks, with no funding from the federal budget. The US Treasury, on the other hand, is an Executive-branch cabinet-level department reporting directly to the President, with funding appropriated in the federal budget.

Conventional wisdom also tells us that the Fed’s monetary policy (managing the money supply and interest rates, directed by the Fed’s Chair and Board of Governors) is separate from Treasury’s fiscal policy (collecting taxes and implementing federal spending) at the behest of Congress and the Executive branch).

The modern-day separation of the Treasury and the Fed dates from the 1951 Treasury-Federal Reserve Accord, which established the Fed’s independence from the Treasury. During World War II, the Fed agreed to peg interest rates on short-term Treasury bills at 3/8 of 1%. The Accord clarified the separation between Fed monetary policy and Treasury’s debt-management powers, freeing the Fed to fulfill its dual mandates of price stability and maximum employment.

Confusion Between Monetary Policy and Fiscal Policy

Yet as I discovered teaching senior citizens in the Osher Lifelong Learning Institute, many Americans remain unclear about the Fed’s and Treasury’s respective responsibilities, and how the two entities coordinate when the Fed supplies fresh bank credit to support Treasury’s need for spendable funds.

The Treasury sells bonds to both foreign and domestic investors when federal tax revenues fall short of its spending needs. Once bonds are in the open market, the Fed can then buy them for its own portfolio, creating new bank credit—spendable funds—literally out of “thin air,” sometimes referred to as “monetizing the debt.”

Such Fed credit creation occurred in massive amounts during the 2020-22 Covid era, when the federal government spent $5.2 trillion for congressionally-authorized programs such as enhanced unemployment benefits, employee retention credits, and consumer “stimulus” payments. To accomplish this spending, the Fed cooperatively expanded its balance sheet holdings of securities from $4 trillion to about $9 trillion, using its immense power to create spendable funds. Such massive credit creation arguably caused or exacerbated inflation to over 9% in mid-2022

This Isn’t Your Grandfather’s Monetary and Fiscal Policy

This coordinated Fed-Treasury credit expansion reflects a novel approach to monetary and fiscal policies, as new strategies were developed to satisfy one-off federal spending needs. It began when Ben Bernanke, Fed Chair 2006-14, created Quantitative Easing (QE) during the 2008-09 financial crisis, purportedly to avoid another Great Depression. QE involves massive open-market purchases of Treasury debt—as well as mortgage-backed securities for the first time in the Fed’s history—to flood financial markets with newly-created bank credit in order to support the economy in what was then called the Great Recession.

But There’s More to the Story: “Helicopter Money”

QE might be considered traditional monetary policy on steroids. But another new policy tool might be considered a hybrid of monetary and fiscal policy. Milton Friedman in 1969 first proposed “helicopter money,” a colorful phrase describing a type of stimulus that injects cash into an economy as if it were thrown from a helicopter. Future Fed Chair Bernanke (“Helicopter Ben”) in 2002 referenced helicopter money as a strategy that could be used to avoid price deflation.

A variant of helicopter money was employed during the financial crisis of 2008-09 and again in 2020 during the early months of the Covid pandemic. After Congress authorized consumer “stimulus” payments in the Economic Stimulus Act of 2008, the IRS deposited prescribed amounts into the bank accounts of qualifying taxpayers. Thus, instead of having to scoop up paper currency dropped from helicopters, taxpayers effortlessly received the funds in their bank accounts. In 2008, the IRS deposited payments ranging from $600 per tax filer plus $300 for each qualifying child, for a total of $152 billion.

In 2020 and 2021, Congress authorized three tranches of pandemic stimulus payments, called “economic impact payments”: The CARES Act in March 2020 authorized $1200 per tax filer plus $500 per child; the Consolidated Appropriations Act in December 2020 authorized $600 per filer plus $600 per child; and the American Rescue Plan in March 2021 authorized $1400 per filer plus $1400 per child. All told, these three tranches distributed $814 billion in 476 million separate payments. Although about 40% of the stimulus payments were spent on consumption, 60% of Americans saved the funds or paid down personal debt.

Are QE and Helicopter Money Different?

QE involves an “asset swap” between the Fed and another economic entity. The Fed purchases Treasury bonds or other financial assets from private parties, adding them to its balance sheet and creating new bank credit. With new bank reserves, depository institutions can then increase their own lending activity to businesses and consumers, the intended result being new economic activity boosting GDP. This asset swap is reversible—as Quantitative Tightening (QT)—if the Fed sells financial assets to reduce the amount of credit outstanding.

But helicopter money is different from QE, and economists don’t all agree whether helicopter drops qualify as monetary policy or fiscal policy. Helicopter drops, unlike QE, do not involve an asset swap, since the Fed simply gives away the money created without increasing assets on its balance sheet.

Some Views on QE and Helicopter Money

John Cochrane of Stanford University’s Hoover Institution, considering the Fed to be a vital part of fiscal theory, refers to pandemic spending as “….a one-time $5 trillion fiscal blowout…”, adding that “….the Fed is still important in fiscal theory….[buying] about $3 trillion of the new debt and [converting] it to [bank] reserves.”

Stephen Miran of the Manhattan Institute warns that the Fed has allowed QE to remain in place far too long, engaging in large-scale asset purchases in eleven of the sixteen years since the 2008-09 financial crisis. And recent Fed policy of “run off”—allowing maturing Treasury bonds to leave its balance sheet, as a form of (QT), without replacement by new purchases of like duration—implies that the Fed is intervening in public debt maturity profile decisions that are traditionally left to fiscal authorities. He also describes how the Treasury can interfere in monetary policy, potentially forcing the Fed to sell at large mark-to-market losses on its securities portfolio, rendering QT moot as a monetary policy tool. He opines that, “Allowing Treasury to set monetary policy is extremely dangerous.”

Modern Monetary Theory (MMT)—a fringe movement within economics—claims that instead of creating credit to buy Treasury bonds, the Fed should create money to directly fund public expenditures or tax cuts. Further, MMT’s advocates consider helicopter drops a form of fiscal policy, not monetary policy. The Fed creates the helicopter money, but does not acquire any assets such as Treasury securities in exchange for creating new bank reserves. The Fed simply gives away the created funds, and the Fed’s capital declines. It appears that MMT fans might more accurately brand their cause Modern Fiscal Theory (MFT) rather than MMT. Note that the majority of economists do not accept MMT’s views.

What Lies Ahead for Fed and Treasury?

The distinction today between monetary and fiscal policies is muddled. Some may view this as the Fed’s and Treasury’s interfering in each others’ traditional responsibilities, amidst the advent of new strategies and tools such as QE and helicopter money. Others may view this as overly-zealous cooperation between Fed and Treasury to flood credit markets with too much liquidity that can later result in price inflation and/or the inability to reverse the credit creation process as economic conditions change.

Perhaps it is time for a latter-day Treasury-Fed Accord to clarify the respective responsibilities and limits of the Fed and Treasury. Or, more aptly, it is time for Congress to step up its oversight of both the Fed – the independent agency that Congress created in 1913 – and the US Treasury Department, which dates from the earliest days of our Republic.

Authored by Brayden Lindrea via CoinTelegraph.com,

OpenAI has released several new artificial intelligence models under a revised naming scheme — starting with its latest OpenAI o1 model it says can “think before it answers.”

“For complex reasoning tasks, this is a significant advancement and represents a new level of AI capability,” OpenAI said in a Sept. 12 blog post.

“Given this, we are resetting the counter back to one and naming this series OpenAI o1.”

The new models can take their time to think and use “chain-of-thought” reasoning to solve complex tasks — particularly in STEM (science, technology, engineering and math) and coding-related tasks, OpenAI said.

Source: OpenAI

The AI firm shared videos of OpenAI o1 coding a video game from a prompt and solving a complex logical puzzle, among other things.

The OpenAI o1 “preview” and “mini” models were made available to ChatGPT Plus subscribers with the firm planning to release improved versions in the coming months.

OpenAI shared data suggesting OpenAI o1 defeats GPT-4o in several benchmarks, including PhD-level science topics in Biology, Chemistry and Physics and some United States high school exams.

OpenAI o1 improvement model compared with GPT-4o on several benchmarks. Source: OpenAI

OpenAI o1 mini’s focus on STEM reasoning capabilities means it isn’t as knowledgeable in other areas outside of its narrow focus, OpenAI said.

“[Its] factual knowledge on non-STEM topics such as dates, biographies, and trivia is comparable to small LLMs such as GPT-4o mini.”

“We will improve these limitations in future versions, as well as experiment with extending the model to other modalities and specialties outside of STEM,” it added.

Industry pundits anticipated OpenAI would release a reasoning-focused AI model in September under the codename Strawberry.

However, OpenAI doesn’t disclose distinctions between different models under development.

Much has been said – certainly during this week’s presidential debate and in its aftermath – about that certain Goldman report that analyzed the impact of either a Trump or Harris administration on the economy.

While it is true that nobody has any idea what will happen over the next administration, even as 63% of voters agree that the economy was better 4 years ago when Trump as president, Goldman made some assumptions, crunched some numbers and found a modest boost to its economic modeling under a Kamala administration and a modest hit to the economy under Trump.

Harris pouned on this, saying during the debate that “I am offering what I describe as an opportunity economy, and the best economists in our country, if not the world, have reviewed our relative plans for the future of America… What Goldman Sachs has said is that Donald Trump’s plan would make the economy worse, mine would strengthen the economy.”

Yet much of this is because – as we first discussed back jn April – Goldman now equates millions of illegal aliens with “strong growth and lower inflation”, while completely ignoring the social aspect of this alien flood, including collapsing social safety nets, soaring crime and countless other adverse consequences (there is, after all, a reason why illegal immigration is illegal, and why there is such a thing as legal – and regulated and controlled – immigration, and why Democrats always try so hard to equate the two).

Incidentally, this is hardly a surprisewe explained back in April that as the narrative against illegal immigration was shifting, Goldman was pushing hard to spin the millions of illegal aliens flooding into the US as beneficial (the bank’s chief economists of course live in luxury, doormaned Manhattan high rises and gated CT mansions, so they never get to see the “fringe benefits” of millions of illegal aliens tearing up the social fabric). Note this following comment from us as of April 5…

Here we go: if you are against illegal aliens, you hate America.

According to Goldman, the one thing allowing “strong growth and lower inflation” is “elevated immigration” pic.twitter.com/lQIr6m28oA

— zerohedge (@zerohedge) April 5, 2024

… and compare to the latest report from Goldman, as summarized by ultra-left wing cable news network CNN (spoiler alert: they are identical):

Trump’s tariff policy would controversially charge dramatically higher import taxes on practically everything that comes into the country’s ports from overseas. That could raise revenue for the government — but it could also cause Americans to pay higher prices for goods and services. Goldman Sachs economists estimated that every one percentage point increase in the effective tariff rate could raise core inflation as measured by the Personal Consumption Expenditures price index by a tenth of a percentage point. And Trump is talking about 10% to 20% tariffs on most things except Chinese goods — which would get a 60% tariff.

Meanwhile, Trump promises to drill a lot more oil, a key cost for many businesses, to bring down prices — but there’s an open question over whether he could achieve that. The United States is already pumping more oil than any nation in history.

Additionally, the unprecedented immigration crackdown Trump has vowed if he returns to the White House could also lead to higher inflation, economists say, despite Trump recently asserting prices would “come down dramatically and come down fast” as a result.

 If mass deportations occur, businesses could struggle to fill open positions, forcing them to raise wages and pass those costs to consumers.

Even deporting 1.3 million workers, which is lower than the 10 to 20 million deportations Trump has advocated for, would be an “inflation shock” that lifts inflation by 1.3 percentage points after three years, according to research presented at the Peterson Institute for International Economics by Australian economist Warwick McKibbin. Gross domestic product, the broadest measure of the US economy, would be 2.1 percentage points lower – a dramatic decrease.

And here is the bank’s own summary (full note available to pro subs in the usual place).

A couple observations here:

Regular readers know our view: when it comes to forecasts from Goldman’s sellside research (as opposed to the bank’s phenomenal sales and trading/FICC desk), the outcomes tend to be the opposite of those predicted by Goldman about 80% of the time. Whether this is just because their analysts are terrible, or because their work is meant to wrong-foot institutional and retail investors as Goldman’s own traders take the other side of the trade, is unclear. What is clear, is that Goldman will far more likely be wrong in its estimate that a Trump admin would lead to adverse consequences for the US: after all, everyone still remembers economic life under 4 years of Trump (ignore the deep state-funded covid pandemic, which was meant to normalize mail-in voting more than anything) and can compare it to 4 years of Biden: here the jury is clear.

What is also clear is why Goldman CEO David Solomon tried to distance himself as much as possible from the work of his own employees (perhaps realizing that Trump’s odds of wining are far greater than those of Kamala) and said in a Wednesday appearance on CNBC with host Scott Wapner that “that report, which was mentioned last night in the debate, came from an independent analyst, and it’s interesting, Scott, I think a lot more has been made of this than should be.”

“What the report did is it looked at a handful of policy issues that have been put out by both sides, and it tried to model their impact on GDP growth,” Solomon explained. “The reason I say a bigger deal has been made of it is what it showed is the difference between the sets of policies that they’ve put forward is about two-tenths of 1%.”

Omg the CEO of Goldman Sachs just destroyed Kamala for lying about their “report” in the debate

“That report came from an independent analyst… and the differential was two-tenths of ONE PERCENT. This blew up into something that’s bigger than intended”pic.twitter.com/37BPf0k2TM

— johnny maga (@_johnnymaga) September 12, 2024

“So, the economy grows, if you took these particular sets of policies they looked at — and by the way, we have no idea whether these policies, these things that are talked about, will ultimately be implemented — and what was the growth impact? And the differential was two-tenths of 1%,” he said.

“I think our clients are trying to look at what’s going on from a policy perspective and make judgments. I think this blew up into something that’s bigger than what it was intended to be,” Solomon said.

Unlike his predecessor, the rabidly pro-Democrat Lloyd Blankfein, who famously paid Hillary Clinton millions for secret speeches in which she told his bank’s employees one thing while telling the deplorables something else entirely, Goldman’s current CEO David Solomon appears to at least try to comes off unbiased and preserve neutrality.

Perhaps to offset the unduly favorable impact that his economists created (perhaps unwittingly so), this morning Goldman FICC trader Douglas Millowitz wrote an explanatory post-mortem (available to pro subs here) to all the confusion that was unleashed as a result of the debate and the multiple overblown references to the Goldman economist report, in which Millowitz said that “we have had some questions about whether the reactions through Tuesday’s US presidential debate are in line with our prior analysis of earlier episodes. Below are two updated tables from our last election-related piece that add asset performance from the debate to the other 3 episodes we already considered.”

And here is the punchline: while Goldman’s economists may conclude that a Harris victory would lead to a 0.2% overall benefit to US GDP (almost entirely due to preserving the flow of illegal immigration, something which Trump should have hammered during the debate, as it would have crushed any credibility Kamala may have had), what the Goldman trader says next is that as shown in the table below, “the expected pattern continues to be visible here, with a shift towards a Harris victory being associated with modest declines in equities (and underperformance of US vs non-US equities and of Russell vs SPX), lower yields and a weaker USD.”

He then adds that “the implied magnitudes of a full shift to one candidate or the other are similar to prior episodes, except that  the shifts in the USD look larger than in earlier episodes, particularly for CNH and SGD (JPY also saw an unusually large move but the debate coincided with some hawkish BOJ comments, so likely overstates its impact).”

Today’s Millowitz report reiterates a previous analysis from Goldman which it appears the Trump camp was clearly unaware of, as otherwise Trump would immediately counter Kamala’s claims, by saying that a Trump victory would be good for stocks (speaking of which, if the Trump camp needs someone to do actual market-based strategy for the campaign, they know how to reach us). This is what Goldman chief strategist Dominic Wilson wrote back on August 1 (report also available to pro subs):

… The message from these windows, combined with the moves over the debate, leave us with the following broad takeaways. The market seems to be trading a Trump win so far as consistent with:

• Mostly higher equity prices. The message at the equity index level has not been entirely consistent, however, with markets rallying on the Biden exit, when Democratic victory probabilities rose, perhaps because the removal of uncertainty was welcomed. There are also some signs that the market believes in small-cap outperformance from a Trump victory, and the two more recent episodes point to European equity underperformance in a Trump victory (especially in USD), an outcome that we think makes fundamental sense.
• Yields higher across the curve, and a generally steeper curve. The signals here have so far been the most consistent across the major asset markets, with yield direction even clearer than curve shape.
• The Dollar broadly stronger, but modestly. While the debate provided mixed signals around USD performance—and conclusions depended on the exact time frame—the two more recent events have been clearer, with broad USD strength as the market pushed Republican victory probabilities higher following the Trump assassination attempt and broad USD weakness as the market pushed Democratic victory probabilities higher following President Biden’s exit. But the magnitude of the USD moves have been fairly modest relative to the size of the shifts in prediction market odds, as the “scaled-up” estimates make clear.

Putting it all together, Goldman presents the following Election Outcome Scenarios & Market Implications (with Current Odds from PolyMarket)
 
Republican Sweep (32%)

• USD: Stronger (our ‘Trump = USD stronger’ view is the one where the magnitude has been least affirmed by markets, i.e. Trump-positive developments have overall be associated with USD gains, but smaller ones than we would have predicted)
• US Equities: Higher (with market reactions suggesting small cap outperformance, and US outperformance vs. Europe)
• US Yields: Higher (with market reactions suggesting higher across the curve, and steeper)

Harris President with Divided Congress (29%)

• USD: Slightly Weaker
• US Equities: Lower to Neutral (with market reactions suggesting small cap underperformance, and US underperformance vs. Europe)
• US Yields: Lower

Democratic Sweep (20%)

• USD: Slightly Weaker
• US Equities: Slightly Lower (with market reactions suggesting small cap underperformance, and US underperformance vs. Europe)
• US Yields: Higher

Trump President with Divided Congress (16%)

• USD: Slightly Stronger
• US Equities: Slightly Lower to Neutral
• US Yields: Slightly Higher

Of the scenarios above, the only outcome which sees stocks higher is a Trump sweep, hardly the endorsement Kamala wanted.

But it’s not just the market which would welcome a Trump victory however: Morgan Stanley recently published a note from its economist team which was more nuanced than Goldman’s, and found numerous favorable economic outcomes to a Trump victory.

Which is why if Trump does agree to another debate with Harris, he now knows how to counter her initial attack: yes, the economy may outperform – ever so slightly – under Harris, but that would be only thanks to millions more illegal aliens who “boost economy and lower inflation” (a trade off which countless Americans may have reservations about), and more importantly, a Kamala victory would mean another stock market wipeout, something which neither of the candidate brought up during the first debate showing just how underprepared both parties were to discuss what really matters, if only to our readers.

More in the full notes from Goldman (here, here and here) available to pro subscribers.

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

We have written many articles and commentaries forecasting interest rates. The analysis has used prior and current inflation and economic activity. Additionally, we have looked at market data on inflation expectations, Fed Funds futures, and other factors that influence interest rates. Today, we add an unorthodox factor to the list: cash cows.

This article introduces a unique way to imply where dividend investors think interest rates will be in the future. The impetus for this article came from a recent SimpleVisor Friday Favorites article in which we reviewed the Campbell Soup Company (CPB). Friday Favorites typically analyzes a company’s fundamental and technical conditions and valuations.

This time, however, because the company was a cash cow, we took it further and studied its dividend yield. In the process, we arrived at an implied ten-year U.S. Treasury yield based on the current and historical spread between Campbell’s dividend yield and the ten-year U.S. Treasury yield.    

Implying future interest rates based on CPB is somewhat laughable. However, implying future interest rates on a larger population of cash cows may be more telling.

What Is A Cash Cow?

Cash cow is a term dairy farmers use to describe mature cows that generate milk regularly with minimum maintenance.

Wall Street adopted the term cash cow to label companies that deliver reliable cash flows (milk), require little investment (maintenance), and have little to no sales and earnings growth (mature).

CPB is a good example of a cash cow. Not surprisingly, the soup business is a low-growth venture; therefore, it has negligible earnings and sales growth. Moreover, it has consistently paid dividends since 1989 and produces plenty of excess cash flow that should ensure future dividend payments.

While CPB lives up to the definition of a cash cow, we do not analyze it in this article as its dividend yield is below our threshold dividend yield. However, we did find fifteen other cash cows, which we will share.

Screening For Cows

In this analysis, we used the following screening criteria:

• Market Cap > $10 billion
• Five-Year EPS Growth < 5%
• Five-Year Sales Growth < 5%
• Dividend Yield > 2.50%
• Ten Years of Consecutive Dividend Payments

The table below shows the fifteen stocks that met the screening criteria.

What Can We Imply With Dividend Yields?

The following table shares our analysis of the fifteen companies.

After the ticker and name of each respective stock, we show the current dividend yield and the average dividend yield over the last five years. The next column, “Price Return to Avg. Div. Yield”, quantifies how much the stock price would have to change to bring the current dividend yield in line with the five-year average. Obviously, a company can increase its dividend or cut it, which would change the return.

The first set of analyses, which we just described, helps us compare the current dividend yield to recent yield history on an absolute basis.

Since some investors consider bonds a substitute for dividend stocks, we must also do a relative analysis of dividend yields. In other words, has the dividend yield risen accordingly with interest rates? To do this, we calculate the current dividend yield minus the current ten-year yield (“Spread to Tsy”). We also compute the average Spread to Tsy. for the last five years. With this data, we can calculate how much the stock price would have to change to make the dividend yield equal to its five-year average spread to Treasury yields.

Lastly, assuming the dividend yield reasonably predicts where rates are headed, we can imply where the ten-year U.S. Treasury yield may be in the near future. We share this in the column furthest to the right.

Cash Cow Conclusions

While there are many stories within the table, we focus on the averages of the fifteen stocks in this article. The current dividend yields are slightly higher than average. This is primarily a function of investors shunning dividend stocks in favor of higher-yielding bonds or stocks with better performance. Declining stock prices push the dividend yield higher, helping them stay competitive with bonds. Dividend yield is only one of many factors determining the price; however, it is a much more critical price determinant for cash cows than other stocks.

While the dividend yield may be higher than its norm for the last five years, it has not kept up with Treasury yields. Based solely on the yield spread, prices, on average, would need to fall by about 15% to bring the meager .41% spread over the 10-year UST back to normal.

But might stock investors be locking in higher dividend yields, anticipating a lower interest rate/yield environment? If so, our cash cows imply the 10-year UST yield would need to fall to 3.05%. Doing so will bring the average dividend yield spread versus Treasury yields back to its average.

Coincident or not, the market also thinks that the Fed Funds rate will trough at 2.87% when the coming rate-cutting cycle ends.  

Summary

Between our article Fed Funds Futures Offer Bond Market Insights and the cash cows we highlight, the Fed Funds futures market and stock market appear to be on the same page regarding future interest rates.

Some may find comfort in their similar predictions. However, caution is warranted. The bond market often underappreciates how much the Fed will cut interest rates. Furthermore, it has been proven to be a poor judge of where long-term Treasury bond yields will fall. Quite often, yields fall much more than anticipated. If this is again the case, some of our cash cows may see decent price appreciation if their dividend yield declines with lower bond yields.

By Philip Marey, Senior US strategist at Rabobank

Friday The 13th: The Cutting Cycle

Market speculation about a 50 bps rate cut by the Fed next week returned overnight after the Financial Times and the Wall Street Journal called the Fed’s rate choice between 25 and 50 bps a close call and former FOMC member Bill Dudley said there was a strong case for 50.

The rate slashers are back from hibernation. Inflation has kept them away for a few years, but now that central banks have their inflation targets in sight they are back to cutting. Yesterday, they struck in Europe. Next week, they’ll initiate the cutting cycle in the US.

At the start of the year, market expectations were that the Fed would have already cut 100 bps by now. pic.twitter.com/wrdQtvM6J1

— zerohedge (@zerohedge) September 11, 2024

As expected, the ECB cut the deposit facility rate by 25 basis points to 3.50% yesterday. As our ECB watcher Bas van Geffen noted in his ECB post-meeting comment, the 60bp cut to the main refinancing rate and marginal lending facility rate was merely a reflection of the technical adjustment to the policy rates corridor, communicated in advance. Inflation progress warranted yesterday’s rate cut, but the outlook remains highly uncertain. The staff projections are broadly unchanged from the June forecast. This does not warrant a change in pace. We continue to believe that the ECB will skip October, to cut again in December. Further out, the staff projections suggest a slightly lower terminal rate may be achieved in 2025. However, we maintain that the ECB overlooks geopolitical and trade risks next year.

The US PPI figures for August were slightly higher than expected, but at the same time there were downward revisions for July. The categories of the PPI that are used in the calculation of the PCE deflator were mild. The US initial and continuing jobless claims came in largely as expected and have been moving sideways at the turn of the month. In fact, the claims data suggest that the labor market is somewhat stronger than at the end of July.

The very same day Vice President Kamala Harris slammed Donald Trump’s plan to institute new tariffs on products Americans buy from abroad as a “Trump sales tax,” the Biden administration dropped… new tariffs on products Americans buy from abroad.

On Thursday, the White House announced new measures – largely aimed at Chinese e-commerce platforms such as Temu and Shein – aimed at reducing the range of low-value imports eligible for duty and tax exemptions. The new tariffs expand on Trump-era tariffs on China that the Biden administration kept in place, SCMP reports.

In 2018, then president Donald Trump imposed tariffs of 7 to 25 per cent on US$300 billion of Chinese imports under Section 301 of the Trade Act of 1974, citing “unfair” trade practices.

His successor Joe Biden retained most of these tariffs and expanded them to include Chinese solar panels, electric vehicles and batteries – with tariffs on electric vehicles reaching up to 100 per cent. -SCMP

According to US deputy national security adviser for international economics Daleep Singh, the measures will address the ‘de minimis rule,’ which exempts shipments valued at less than $800 from import duties, taxes, and rigorous screening.

“Since approximately 70 per cent of Chinese textile and apparel imports are subject to section 301 tariffs, this step will drastically reduce the number of shipments entering through the de minimis exemption,” said Singh, adding that the intent was to “curtail de minimis overuse and abuse.”

The new tariffs are built on existing measures under Section 201 of the Trade Act and Section 232 of the Trade Expansion Act of 1962, which covers industry, national security and human rights concerns. The now-plugged de minimis exemption has long been considered a “loophole” that allows Chinese e-commerce companies and fentanyl traffickers to evade tariffs and threaten public safety, according to the report.

Last June, a House Select Committee report on the CCP concluded that Temu and Shein alone are likely responsible “for more than 30 per cent of all packages shipped to the United States daily under the de minimis provision.”

According to a fact sheet released by the Biden administration, the number of annual shipments coming into the US under the de minimis rule has gone from roughly 140 million a decade ago to over 1 billion as of last year.

“That is just too high a volume for our officials to be able to target and block the shipments that are unsafe, illegal, or violate our laws in any other way, or are unfairly traded,” said a senior Biden administration official, who added “We are very concerned about large foreign companies exploiting the de minimis loophole in unprecedented ways, creating a scale and volume that we believe constitutes abuse.”

To ensure greater visibility into de minimis shipments, the US government also proposed new information collection requirements and stricter safety standards. Products that do not meet these standards will be blocked from entering the market.

Singh emphasised that the Biden administration will “always act” to protect Americans and enforce laws to “level the playing field for American workers, retailers and manufacturers”.

“We’re making sure foreign companies respect our laws and don’t endanger American families,” he said. -SCMP

Singh also suggested that Congress should pass legislation to “comprehensively reform” the de minimis exemption.

In August, a bipartisan group of lawmakers targeted textiles and clothing in a new bill.

“We’ll be specific about textiles and apparel, because they make up a huge percentage of the de minimis shipments that we’re seeing now,” the senior official told SCMP. “There may be others, and this is an area where we’d really like to work with Congress to figure out, how do we make sure that any changes we’re taking or making to de minimis now take into account how trade volumes might shift in the future.”

Looks like the “Trump sales tax” works?

Authored by Jack Phillips via The Epoch Times (emphasis ours),

A coalition representing state and local election officials across the United States warned that problems with the nation’s mail system could disrupt voting in some areas, with just weeks to go before the 2024 presidential election.

In a Wednesday letter sent to the U.S. Postal Service’s postmaster, Louis DeJoy, the National Association of State Election Directors and the National Association of Secretaries of State said they have “ongoing concerns” about USPS’s ability to perform ahead of the Nov. 5 contest.

Over the past year, they warned, mailed ballots that were postmarked on time were received by local election offices days after the deadline to be counted. They also noted that properly addressed election mail was being returned to them as undeliverable, a problem that could automatically send voters to inactive status through no fault of their own, potentially creating chaos when those voters show up to cast a ballot.

In that time period, “election officials across the country have raised serious questions about processing facility operations, lost or delayed election mail, and front-line training deficiencies impacting USPS’s ability to deliver election mail in a timely and accurate manner,” the letter stated.

Further, officials have told the two associations that mail sent to voters is being deemed “undeliverable” at higher than normal rates, sometimes in instances where a “voter is known not to have moved.”

“This has affected a range of election mail, including informational mailers about critical election information and voter address confirmation cards, as well as ballots,” the letter said.

Despite the alleged issues, the groups said that repeated attempts to contact the USPS to resolve them did not result in changes, adding that the mail delivery problems result from “a pervasive lack of understanding and enforcement of USPS policies among its employees.”

“We implore you to take immediate and tangible corrective action to address the ongoing performance issues with USPS election mail service,” they said. “Failure to do so will risk limiting voter participation and trust in the election process.”

Responding to their letter, the USPS said that it is equipped to deal with mail-in ballots. But the Postal Service said that voters who wish to submit ballots through the mail should not procrastinate.

“We are ready to deliver. We were successful in 2020 delivering a historic volume of mail in ballots; also in 2022 and will do so again in November 2024,” Adrienne Marshall, director of Election Mail and Government Services, said in a statement.

In December, the Postal Service said in a news release that it has consistently delivered mail and packages to 98 percent of the U.S. population in fewer than three days during peak volume periods.

DeJoy responded to previous criticism of his handling of the USPS in a Washington Post opinion article published in July, also noting that 98 percent of Americans received their mail and packages within three days. However, he noted that the service has suffered in recent times due to what he called “degraded operating conditions.”

“Although we have slipped recently because of difficulties in overcoming our degraded operating conditions while opening new facilities, and remodeling and repositioning existing ones, we will soon be back to a performance level that can make the nation proud,” he said.

The National Association of State Election Directors, described as an organization of state election directors, and the National Association of Secretaries of State, a coalition of all U.S. secretaries of state, have not responded to an Epoch Times request for comment. The Epoch Times contacted USPS for additional comment on Wednesday but received no response by publication time.

During the 2020 election, due to the COVID-19 pandemic, election officials in multiple states expanded vote-by-mail efforts. After the conclusion of that election, former President Donald Trump said that mail-in ballots can lead to election fraud. However, in 2024, he has urged GOP voters to vote by mail, early in-person, or on Election Day itself.

The Associated Press contributed to this report.

After a hope-filled rebound in August, analysts expect UMich Sentiment in preliminary August data to show further improvements with inflation expectations flat. They were right in their prediction as the headline sentiment beat expectations (69.0 vs 68.5 exp), as did the current conditions and expectations sub-indices.

Source: Bloomberg

The gain was led by an improvement in buying conditions for durables, driven by more favorable prices as perceived by consumers.

Year-ahead expectations for personal finances and the economy both improved as well, despite a modest weakening in views of labor markets.

However, more notably, medium-term inflation expectations picked up (while short-dated expectations – which largely reflect oil prices – fell to their lowest since Dec 2020)…

Source: Bloomberg

…which suggests (on a lagged basis) that 10Y yields are going a lot lower…

Source: Bloomberg

Finally, we note that confidence continued to rise for Democrats, was flat for Independents, and slid further among Republicans…

Source: Bloomberg

Consistent with their divergent views of the implications of a Harris presidency for the economy, partisan gaps in sentiment inched up.

Note that interviews for this release concluded prior to Tuesday’s debate; a more comprehensive look at election expectations will be released next week.