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In terms of central bank meetings, the week ahead is one of the busiest.  No fewer than 13 central banks hold policy meetings, divided between six major and seven emerging markets.  While the significance of US monetary policy for the world makes the…



In terms of central bank meetings, the week ahead is one of the busiest.  No fewer than 13 central banks hold policy meetings, divided between six major and seven emerging markets.  While the significance of US monetary policy for the world makes the FOMC meeting a highlight, it is Norges Bank, Norway's central bank, that will steal the march, becoming the first high-income country to lift rates since the pandemic struck.  

Among the emerging market central banks, Brazil is poised to hike the Selic rate by another 100 bp, as it did in August after three 75 bp moves.  Hungary is also expected to continue its tightening cycle. In contrast, the President of Turkey's central bank shifted the focus to the core inflation rate, which opened a door that appeared closed of a rate cut as early as its September 23 meeting.  The other four emerging market central banks that meet (South Africa, Taiwan, Indonesia, and the Philippines) are widely expected to stand pat.  

Norway's central bank did the right thing.  It slashed its overnight are from 1.50% to zero when the pandemic struck.  Although voted out of office after two terms, the government got high marks for handling the virus.  The economy was cushioned by the petroleum fund but is not overheating by any stretch.  The latest read put the June unemployment rate at 4.8%, almost a percentage point above the end of 2019 level.  After contracting in Q1, the economy snapped back in Q2 and remains firm into Q3.  Headline inflation is elevated at 3.4% in August. It has not been above 3.5% since 2016.  However, the underlying rate, which adjusts for tax changes and excludes energy, fell to 1% in August, a four-year low.  It seems the Norges Bank will raise rates because keeping the deposit at zero as the economy recovers is not prudent.  

There is not much the Bank of England can do.  Last month, there was one dissent in favor of a minor slowing of Gilt purchases, but he unlikely managed to persuade his colleagues.  The furlough program ends later this month, and by the time the next meeting comes around (November 4), some greater insight into the state of the labor market will be available.  Governor Bailey revealed that the eight MPC officials were split evenly on whether the minimum conditions for a rate hike exit in August.  The new chief economist will vote next week, and he is seen, like his predecessor, as a hawk.  Mann replaces Vlieghe, and both of whom are perceived to be dovish in the current context, 

Still, a 5-4 majority believe that a hike's minimum condition has been met does not mean a rate hike is imminent.  Bailey himself drew a distinction between the minimum and the necessary conditions.  The latter have not been met.  Still, the first hike looks nearly discounted for around the middle of next year, and after the stronger than expected rise in August CPI (nine-year high), the market appears to be pricing in more than one rate hike next year. The first hike maybe 15 bp to unwind the last cut (March 2020) before resuming the more traditional quarter-point moves.  

While the Bank of England will likely be in the first wave of high-income central banks to raise interest rates, the Bank of Japan is understood to be a laggard.  Although Japanese growth was stronger than expected (Q2), deflationary forces tightened their grip.  The GDP deflator was -1.1%, the most in a decade.  Some board members may want to do more, but Governor Kuroda, whose term extends to April 2023, does not seem to be so inclined. 

The Liberal Democratic Party of Japan holds its leadership contest on September 29, and it will, in effect, be choosing the next prime minister. The lower chamber of the Diet's session ends on October 21, and an election is expected to be held around then. The LDP is reportedly preparing for a large supplemental budget (~JPY30 trillion).  Maybe some contours of it will be shaped by the new prime minister.  The vaccine and administrative reform minister Kono appears to be the favored candidate, and he, for example, has talked about building a sustainable infrastructure that is resistant to natural disasters.  

Sweden's Riksbank is going to be a laggard in this cycle too.  It is more comfortable than the Norges Bank in keeping its key rate at zero.  The economy is recovering well.  The composite PMI has been above 60 every month this year.  The economy expanded by 0.9% in Q2 after a quarterly expansion of 0.8% in Q1.  It will be one of the stronger economies in Europe this year. August inflation, reported last week, was stronger than expected.  The headline stands at 2.1%, up from 1.4% in July, but the Riksbank pays more attention to the measure that uses a fixed interest rate for mortgages.  That accelerated to 2.4% from 1.7%.  The underlying rate, excluding energy, nearly tripled from 0.5% to 1.4%.  The base effect is playing a role here, pointing to upside risks in September through November reports.

This year, the Swedish krona is among the weakest currencies, posting a 5.25% loss through the end of last week.  Only the Australian dollar (~-5.4%) and Japanese yen (~-6.1%) are off more among the majors. After underperforming last year (~6%), Sweden's OMX 30 Index is among the best this year, up nearly a quarter.  Sweden's 10-year yield has risen about 20 bp this year to 0.22%.  

The Swiss National Bank meets on September 22. It, too, will be lagging in the next monetary cycle. Unlike Japan, however, it slayed the deflation dragon.  At 0.8%, the EU harmonized measure of inflation is the highest since April 2019.  However, the OECD's measure of purchasing power parity puts the Swiss franc as the most over-valued currency (~18.2%).  Last week, the Swiss franc was the weakest of the major currencies, falling almost 1.6% against the dollar, putting it at five-month lows.  The euro is trading above its 200-day moving average against the franc (~CHF1.0900) for the first time in two months.  

That brings us back to the Federal Reserve. In our understanding, the market has been anticipating this meeting since the spring to provide further guidance that the Fed will reduce the pace of bond purchases.  Chair Powell promised that to minimize the chances of a 2013-esque "taper tantrum," ample notice to investors will be given.  We have argued that the acknowledgment in the July FOMC minutes that a majority favor tapering this year does not reach the threshold of ample notice.  Nor did the fact that Powell repeated it in Jackson Hole.  

While it seemed reasonable to expect the tapering prospects will be mentioned in the FOMC statement, it does not need to lock in a specific start.  Instead, we.  We suspect that the Fed may want to confirm the beginning of the process at a meeting, which seems to reduce the chances that tapering will begin as early as next month.  At the same time, it does not materially matter to most market segments if the tapering starts in November or December.  

When the tapering process is over may be more important than when it begins. Powell has been clear that tapering is not tightening and that the criteria for a rate hike are different than the threshold to start tapering.  Nevertheless, barring a new and significant negative shock, the Fed will raise rates sometime after tapering is completed.  The market continues to price in a hike before the end of 2022.  

Here is the math behind this observation.  The Fed funds futures contract settles at the effective average of Fed funds over the course of the month.  This is different than the target rate.  Recall that the average rate was threatening to drift toward zero, which dragged down other money market rates. In June, the Fed responded by tweaking (technical adjustment) the interest on deposits at the Fed and the rate on reverse repo operations.  This lifted the average effective Fed funds rate to 9-10 bp.  However, it has been drifting lower again and steadied around eight basis points since late last month.  

Assume for the sake of the argument that in the first 14 days of December 2022 that the Fed funds effective rate is still eight basis points.  The FOMC hikes by 25 bp at the conclusion of the meeting at the end of next year, which lifts the effective rate to 33 bp, then ((14 days at 8 bp) + (17 days x 33 bp)/31).  That would produce an average effective rate of almost 22 bp.   The contract settled last week with an implied yield of 24 bp.

Recall that in the June projections, two Fed officials thought two hikes in 2022 would be appropriate.  So in our scenario of the Fed finishing its tapering around mid-year, we should also monitor the September 2022 Fed funds futures contract.  Next September's meeting concludes on the 21st.  Again, assume the Fed funds averages eight basis points through the Fed meeting and then 33 bp afterward ((21 x 8) + (9 x 33)/30).  A hike fully discounted in the September contract implies a yield of 15.5 bp.  The contract settled last week at 13.0 bp.  

Ironically, the Fed's assessment of the economy sketched in the first part of the FOMC statement may recognize, as the Beige Book did, that activity eased a bit in recent weeks.  Economists have also been caught leaning the wrong way, which is reflected in the data surprise indices.  Indeed, weaker than expected August jobs growth made some participants have second or third thoughts about Fed tapering.  Then the slower pace of consumer inflation offered further encouragement that the Fed could "delay" tapering. The surprisingly strong retail sales report (key signal was the strongest in five months) and Philadelphia Fed manufacturing survey (matching a four-month high) should put to rest such talk.  

Given that nearly everyone and their sister recognize the likelihood that the Fed provides a clearer signal of its intention to reduce the pace of its bond-buying before the end of the year, the dot plot is another communication channel that could spur a market reaction.  The summary of economic projections (dot plot) was launched in 2012, and Fed Chairs have consistently tried explaining the limitations of the exercise. Nevertheless, many market participants take the median view to represent "the Fed view."    

The reaction function of the market may be driven by two components.  The first are the forecasts for the Fed funds rate itself.  In June, seven officials thought a hike next year would be appropriate, and, as we have noted, two thought two hikes would be needed.  We think that the risk is that a couple of more officials now see a 2022 hike.  The second dot of particular interest is the one for inflation forecasts.  And remember, the Fed targets the headline PCE deflator (what it means to call the core rate the "preferred" measure escapes me).  In June, the median forecast put this year's inflation at 3.4% before falling to 2.1% next year and 2.2% in 2023. It stood at 4.2% in July.  This year's inflation forecast then will likely be revised higher, and the reversion to mean may be seen taking somewhat longer.  The Fed has not specified the period the "average" of the "average rate of inflation" refers to, but we note that 3-year and 5-year averages converge at 1.80%.  

The Dollar Index bottomed, and the Bannockburn World Currency Index (GDP-weighted) topped with the weak August jobs report on September 3.  Arguably the market has been pricing in a hawkish outcome to the FOMC meeting.  Could the meeting mark a near-term dollar top?  


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Huge Dock Worker Protests In Italy, Fears Of Disruption, As Covid ‘Green Pass’ Takes Effect

Huge Dock Worker Protests In Italy, Fears Of Disruption, As Covid ‘Green Pass’ Takes Effect

Following Israel across the Mediterranean being the first country in the world to implement an internal Covid passport allowing only vaccinated citize



Huge Dock Worker Protests In Italy, Fears Of Disruption, As Covid 'Green Pass' Takes Effect

Following Israel across the Mediterranean being the first country in the world to implement an internal Covid passport allowing only vaccinated citizens to engage in all public activity, Italy on Friday implemented its own 'Green Pass' in the strictest and first such move for Europe

The fully mandatory for every Italian citizen health pass "allows" entry into work spaces or activities like going to restaurants and bars, based on one of the following three conditions that must be met: 

  • proof of at least one dose of Covid-19 vaccine

  • or proof of recent recovery from an infection

  • or a negative test within the past 48 hours


It's already being recognized in multiple media reports as among "the world's strictest anti-COVID measures" for workers. First approved by Italian Prime Minister Mario Draghi's cabinet a month ago, it has now become mandatory on Oct.15.

Protests have been quick to pop up across various parts of the country, particularly as workers who don't comply can be fined 1,500 euros ($1,760); and alternately workers can be forced to take unpaid leave for refusing the jab. CNN notes that it triggered "protests at key ports and fears of disruption" on Friday, detailing further:

The largest demonstrations were at the major northeastern port of Trieste, where labor groups had threatened to block operations and around 6,000 protesters, some chanting and carrying flares, gathered outside the gates.

    Around 40% of Trieste's port workers are not vaccinated, said Stefano Puzzer, a local trade union official, a far higher proportion than in the general Italian population.

    Workers at the large port of Trieste have effectively blocked access to the key transport hub...

    As The Hill notes, anyone wishing to travel to Italy anytime soon will have to obtain the green pass: "The pass is already required in Italy for both tourists and nationals to enter museums, theatres, gyms and indoor restaurants, as well as to board trains, buses and domestic flights."

    The prime minister had earlier promoted the pass as a way to ensure no more lockdowns in already hard hit Italy, which has had an estimated 130,000 Covid-related deaths since the start of the pandemic.

    Meanwhile, the requirement of what's essentially a domestic Covid passport is practically catching on in other parts of Europe as well, with it already being required to enter certain hospitality settings in German and Greece, for example. Some towns in Germany have reportedly begun requiring vaccination proof just to enter stores. So likely the Italy model will soon be enacted in Western Europe as well.

    Tyler Durden Sat, 10/16/2021 - 07:35

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    Tracking Global Hunger & Food Insecurity

    Tracking Global Hunger & Food Insecurity

    Hunger is still one the biggest – and most solvable – problems in the world.

    Every day, as Visual Capitalist’s Bruno Venditti notes, more than 700 million people (8.8% of the world’s population)..



    Tracking Global Hunger & Food Insecurity

    Hunger is still one the biggest - and most solvable - problems in the world.

    Every day, as Visual Capitalist's Bruno Venditti notes, more than 700 million people (8.8% of the world’s population) go to bed on an empty stomach, according to the UN World Food Programme (WFP).

    The WFP’s HungerMap LIVE displayed here tracks core indicators of acute hunger like household food consumption, livelihoods, child nutritional status, mortality, and access to clean water in order to rank countries.

    After sitting closer to 600 million from 2014 to 2019, the number of people in the world affected by hunger increased during the COVID-19 pandemic.

    In 2020, 155 million people (2% of the world’s population) experienced acute hunger, requiring urgent assistance.

    The Fight to Feed the World

    The problem of global hunger isn’t new, and attempts to solve it have making headlines for decades.

    On July 13, 1985, at Wembley Stadium in London, Prince Charles and Princess Diana officially opened Live Aid, a worldwide rock concert organized to raise money for the relief of famine-stricken Africans.

    The event was followed by similar concerts at other arenas around the world, globally linked by satellite to more than a billion viewers in 110 nations, raising more than $125 million ($309 million in today’s dollars) in famine relief for Africa.

    But 35+ years later, the continent still struggles. According to the UN, from 12 countries with the highest prevalence of insufficient food consumption in the world, nine are in Africa.


    Approximately 30 million people in Africa face the effects of severe food insecurity, including malnutrition, starvation, and poverty.


    Wasted Leftovers

    Although many of the reasons for the food crisis around the globe involve conflicts or environmental challenges, one of the big contributors is food waste.

    According to the United Nations, one-third of food produced for human consumption is lost or wasted globally. This amounts to about 1.3 billion tons of wasted food per year, worth approximately $1 trillion.

    All the food produced but never eaten would be sufficient to feed two billion people. That’s more than twice the number of undernourished people across the globe. Consumers in rich countries waste almost as much food as the entire net food production of sub-Saharan Africa each year.

    Solving Global Hunger

    While many people may not be “hungry” in the sense that they are suffering physical discomfort, they may still be food insecure, lacking regular access to enough safe and nutritious food for normal growth and development.

    Estimates of how much money it would take to end world hunger range from $7 billion to $265 billion per year.

    But to tackle the problem, investments must be utilized in the right places. Specialists say that governments and organizations need to provide food and humanitarian relief to the most at-risk regions, increase agricultural productivity, and invest in more efficient supply chains.

    Tyler Durden Fri, 10/15/2021 - 23:30

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    China Coal Prices Soar To Record As Winter Freeze Spreads Cross The Country

    China Coal Prices Soar To Record As Winter Freeze Spreads Cross The Country

    One week ago we discussed why the "worst case" scenario for China’s property crisis is gradually emerging; to this we can now add that China’s worst case energy crisi



    China Coal Prices Soar To Record As Winter Freeze Spreads Cross The Country

    One week ago we discussed why the "worst case" scenario for China's property crisis is gradually emerging; to this we can now add that China's worst case energy crisis scenario is also about to be unleashed as cold weather swept into much of the country and power plants scrambled to stock up on coal, sending prices of the fuel to record highs.

    Electricity demand to heat homes and offices is expected to soar this week as strong cold winds move down from northern China, according to Reuters with forecasters predicting average temperatures in some central and eastern regions could fall by as much as 16 degrees Celsius in the next 2-3 days.

    Shortages of coal, high fuel prices and booming post-pandemic industrial demand have sparked widespread power shortages in the world's second-largest economy. Rationing has already been in place in at least 17 of mainland China's more than 30 regions since September, forcing some factories to suspend production and further disrupting already broken supply chains.

    On Friday, the most-active January Zhengzhou thermal coal futures closed at a record high of 2,226 per tonne early. The contract has risen almost 200% year to date.

    China's three northeastern provinces of Jilin, Heilongjiang and Liaoning - also among the worst hit by the power shortages last month - as well as several regions in northern China including Inner Mongolia and Gansu have started winter heating, which is mainly fuelled by coal, to cope with the colder-than-normal weather.

    Meanwhile, even though Beijing has taken a slew of measures to contain coal price rises including raising domestic coal output and cutting power to power-hungry industries and some factories during periods of peak demand, so far all measures have failed with coal surging by 40% in just the past three days. Beijing has also repeatedly assured users that energy supplies will be secured for the winter heating season, and went so far as to order energy firms to "secure supplies at all costs." Well, the energy firms heard it, because on that day, thermal coal closed at 1,436 yuan. Two weeks later it is some 800 yuan higher.

    Unfortunately for Beijing, the power shortages are expected to continue into early next year, with analysts and traders forecasting a 12% drop in industrial power consumption in the fourth quarter as coal supplies fall short and local governments give priority to residential users.

    Earlier this week, we reported that China undertook its boldest step in a decades-long power sector reform when it allowed coal-fired power prices to fluctuate by up to 20% from base levels from Oct. 15, enabling power plants to pass on more of the high costs of generation to commercial and industrial end-users. read more

    Steel, aluminium, cement and chemical producers are expected to face higher and more volatile power costs under the new policy, pressuring profit margins.

    Meanwhile, the latest Chinese "data" on Thursday showed factory-gate inflation in September hit a record high; but since thermal coal is the one commodity that correlates the closest to PPI, absent a sharp drop in coal prices in the next few weeks, expect the next PPI print to be far higher. Meanwhile as the power crisis leads to further shutdowns in domestic production, some banks - such as Nomura - have gone so far to predict that China's GDP is set to shrink in coming quarters.

    China, which laughably aims to be "carbon neutral" by 2060 even as its president announced he will skip the COP26 UN Climate Change Conference in Glasgow, has been "trying" to reduce its reliance on polluting coal power in favor of cleaner wind, solar and hydro. But coal remains the source for some 70% of China's electricity needs.

    Of course, China is not the only nation struggling with power supplies, which has led to fuel shortages and blackouts in many European countries. and threatens to send US heating bills up as much as 50% this winter. he crisis has highlighted the difficulty in cutting the global economy's dependency on fossil fuels as world leaders seek to revive efforts to tackle climate change at talks next month in Glasgow.

    China will strive to achieve carbon peaks by 2030, Vice Premier Han Zheng said in a video message at the Russian Energy Week International Forum, according to state-run news agency Xinhua late on Thursday. He also said that China and Russia are important forces leading the energy transition and they should cooperate and ensure smooth progress of major oil and gas pipeline and nuclear power projects.

    Translation: Russia better save that nat gas and not ship it to Europe as China will soon be needed even BCF Russia an provide. As for China


    Tyler Durden Fri, 10/15/2021 - 22:50

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