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ECB Meeting and US and China’s CPI are the Macro Highlights in the Week Ahead

One of the most significant market responses to Russia’s attack on Ukraine is in the expectations for the trajectory of monetary policy in many of the…



One of the most significant market responses to Russia's attack on Ukraine is in the expectations for the trajectory of monetary policy in many of the high-income countries, including the US, eurozone, UK and Canada.  The market has abandoned speculation of a 50 bp hike in mid-March by the FOMC and the Bank of England.  It has also scaled back the ECB's move to 20 bp this year from 50 bp.  Even after the Russian invasion, the market had discounted a 75% chance the Bank of Canada would hike by 50 bp.  But, by the time the BoC met last week, the market had correctly anticipated only a 25 bp hike would be delivered. 

The US warned on February 11 that Russia could attack Ukraine at any moment.  The day before that that warning the Fed funds futures strip implied a little more than an 80% chance of a 50 bp hike and about 162.5 bp of tightening this year.   Now, the December Fed funds futures has 150 bp of tightening discounted this year.  The two-year yield reached a high of almost 1.64% on February 10.  Last week, the yield briefly slipped below 1.26%, its lowest level since February 4, but finished a little above 1.50%.  The US 10-year yield had traded above the 2% threshold on February 25.  It gapped lower last Monday and fell to almost 1.68% on March 1, the lowest since January 24, before rebounding to the 1.90% area.  The US 2-10 curve has flattened sharply from this year's peak near 90 bp on January 7 and slipped below 30 bp on March 3.  

A similar development has been seen in the UK.  On the eve of the US warning, the market had slightly more than a 60% chance of that the BOE would hike 50 bp on March 17.  The has been considerablyy unwound.  At the end of last week, it had been downgraded to about a 20% chance.   The 2-year yield peaked on February 16 just shy of 1.55%.  At the low point last week, it slipped below 0.80% but finished the week at about 1.05%.  The 10-year Gilt inched above 1.60% the same day the two-year yield peaked.  It gapped lower on March 1 and briefly traded below 1.10% before rebounding to finish the week near 1.20%. The UK's 2–10-year curve had flattened from about 35 bp in mid-January to less than five basis points in mid-February.  It made a marginal new high (steepness) for the year of almost 40 bp before finishing last week below 15 bp.  

The focus shifts to the European Central Bank.  It meets on March 10.  Broadly speaking, we see Russia's attack on Ukraine and the subsequent response as sharpening both blades of a scissors.  Growth will likely be weaker and inflation stronger.  Europe is the epicenter, and it complicates the ECB's task.  A shift in policy was not on the table for this meeting.  The focus is on the new economic forecasts and the adjustment to the forward guidance on its asset purchases.   

The forecasts are likely to recognize the contradictory impulses.   In December, the ECB's staff forecast 4.2% growth this year, 2.9% next, and 1.6% in 2024.  This year's growth prospects are likely to be reduced but pushed into next year and maybe a bit into 2024.  ECB's Chief Economist Lane suggested that the rise in oil prices could shave 0.3%-0.4% off growth.  

The ECB's inflation forecast was more controversial.  It projected 3.2% CPI this year, which seems low, even before the war.  Investors learned last week that Eurozone inflation reached 5.6% in February, bolstered by higher energy and food prices.  The core rate ticked up to 2.6% from 2.3%.  The ECB has forecast inflation falling to 1.8% in 2023 and 2024.  This may adjust higher.  

Some central bankers, like the governor of Austria's central bank, seem to still be pushing against the sequencing that ECB President Lagarde had outlined.   The Pandemic Emergency Purchase Program will end this month and to smooth out the transition the pre-existing QE effort (Asset Purchase Program) would double to 40 bln euro a month in Q2.  She had been very clear that the bond buying would end a little before the first hike.  So, the forward guidance on the asset purchases will reveal the beginning of the rate hike window.  

If the ECB wants to have flexibility to raise rates before the end of the year, it will likely have to modify its guidance.  It could do so by signaling that the APP will wind down in Q3.  Given the high degree of uncertainty right now, it might choose instead to reaffirm its commitment to the APP purchases in Q2 and indicate Q3 is under review.  The point is that the ECB will likely alter its outlook for asset purchases in order to give itself the ability to begin adjusting rates in Q4. 

Ironically, as the ECB secures this flexibility the market is moving in the other direction. Russia's war on Ukraine has seen the aggressive tightening priced into G7 countries, excluding Japan, unwind considerably.  On the eve of the US warning of impending Russian invasion, the swaps market was pricing in 50 bp of hikes in the second half of the year.  Now it may be pricing in around 20 basis points.  The premium Italy pays to borrow over Germany is an important market barometer of pressure in Europe (fragmentation).  That premium steadily increased from around 90 bp a year ago to about 170 bp before Russia attacked.  It finished last week a little above 160 bp.   

In addition to the ECB meeting, the US and China will report February CPI figures.  US inflation likely accelerated.  It is partly food and energy, but not just that, and like we have seen with the seasonal adjustment of nonfarm payrolls, the adjustment of the CPI basket adds a new wrinkle.  The median forecast in Bloomberg's survey is for a 0.8% increase in the headline and 0.5% increase in the core rate.  Given the base effect, it translates to a 7.9% year-over-year rate (from 7.5%) in the headline and 6.4% (from 6.0%) at the core.  The year-over-year comparison becomes a little easier starting this month's CPI.  Recall that in the March through June 2021, the monthly CPI rose by a cumulative 2.8%.  Nevertheless, with the higher energy and food prices, it is reasonable to suspect that inflation has not peaked. Also, the full impact of rising house prices has yet to feed through to the CPI.  

Chinese inflation is a different story.  China was experiencing deflation in the first part of last year. In January and February 2021, China's headline CPI was -0.3% and -0.2% year-over-year, respectively.  It proceeded to rise in the spring and fall, peaking in November at 2.3%.  However, it has fallen off sharply, and stood at 0.9% in January.  It may have slowed a little last month.  Pork prices continue to be a significant drag and the government has begun talking about rebuilding inventories, which could support prices.  Food prices were 3.8% lower than a year ago in January.  Excluding food and energy, China's core CPI has been stable since last July 1.2%-1.3%.  Weak domestic demand, especially for services may be weighing on prices as well.  Inflation may be subdued for the next few months before accelerating later this year.  

China's producer price index is expected to have fallen for the fourth consecutive month in February.  The year-over-year pace peaked last October at 13.5%.  It was at 9.1% in January.  The median forecast in Bloomberg's survey is for 8.6% in February, which would be the lowest since last April.  Although China has tapped some of its strategic reserves, the price of various industrial commodities, including iron ore and coal have risen and we suspect China's PPI may also begin rising again.  Still, our skepticism that China's PPI tells us anything about CPI in the US has indeed been borne out by the data. 

Lastly, we note that US will report January's trade deficit while China reports the January-February's trade surplus.  The US already reported a record goods deficit for January of $107.6 bln.  Good imports rose by 1.7% while exports fell by roughly the same percentage. The US trade balance has deteriorated sharply.  Consider that last year's goods and services trade deficit averaged $71.6 bn a month.  That is a nearly 50% (48%) increase from the two years before the pandemic (2018 and 2019).   

China's trade report is more difficult to read.  Due to the Lunar New Year holiday, the January and February trade balances will be reported together. However, the underlying signal should not be lost in the noise.  China's monthly trade surplus was nearly CNY365 bln (~$56.4 bln) in 2021, which nearly double the 2018 pace when it averaged almost CNY195 bln (~$29.3 bln).  

Chinese officials emphasize the flexibility that has been introduced to the yuan.  The yuan reached four-year highs this past week, but it has appreciated less than 0.6% this year and that is after appreciating 2.7% last year.  The 6.7% it gained in 2020 merely recouped its losses from 2018 and 2019.  China has not provided enough flexibility of the yuan to absorb the pressures coming from the trade surplus and the portfolio capital inflows.  

Meanwhile, hopes of interest cuts have faded and China's 10-year yield edged higher in the first four sessions last week before slipping slightly ahead of the weekend.   It had bottomed near 2.67% on January 4 and retested the year's high near 2.85% last week.  It settled near 2.82%, the highest weekly close of the year.  As a consequence of the decline in US yields and the rise in China's, it premium over the US has begun widening again.  It had fallen from around 150 bp in mid-December to less than 80 bp by early February.  It finished the week almost at 105 bp.  However, the lowly GDP target set by the NPC of 5.5%, which seems optimistic, may require more monetary support.

(Due to travel plans, there will be no note tomorrow on the price action.)


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Tesla Japanese rivals debut concept vehicles in latest challenge

Japanese automakers will unveil their latest all-electric concept vehicles at Japan Mobility Show 2023 in Tokyo.



Most Japanese automakers have been slow to enter the all-electric vehicle market, which doesn't bother Tesla's CEO Elon Musk one bit. The lack of a serious challenge by the Japanese auto industry, including in the luxury market, has allowed Tesla  (TSLA) - Get Free Report to dominate deliveries in the global market by hundreds of thousands of vehicles.

Toyota currently only offers one all-electric vehicle, the bZ4X, which retails for about $42,000 and has a 252-mile range. The company's luxury affiliate Lexus does not have an EV on the market yet.

Related: Mounting financial woes force rival of Tesla and BYD into bankruptcy

Subaru's only contribution to the EV industry is the Solterra SUV, which retails for about $45,000 and has a 220-mile range.

Nissan, on the other hand, was an innovator in the EV industry with its launch of the Leaf in 2010. The vehicle was the first mass-produced electric vehicle in the world and the top selling EV on the market in its first four years. However, the company's luxury brand Infiniti may not have an EV on the market until 2026.  

Some of the leading Japanese luxury automakers, led by Nissan's Infiniti, Toyota's Lexus and Subaru, will reveal their latest battery electric vehicle concepts at the Japan Mobility Show 2023 in Tokyo beginning Oct. 24. The show will be open to the general public from Oct. 28 through Nov. 5 after a couple of press and special invitation days.

Subaru Sport Mobility Concept sportscar model.


Subaru reveals electric sportscar concept

Subaru  (FUJHY) - Get Free Report said it will showcase the company's vision of future mobility and communicate its efforts to strengthen its bond with society, as company president Atsushi Osaki on Oct. 25 unveils the Subaru Sport Mobility Concept sportscar model at the show.

"This concept model expresses the enjoyment that Subaru offers in the age of electrification, embodying the pleasure of going anywhere, anytime, and driving at will in everyday to extraordinary environments. Driving with peace of mind allows us to embark on exciting new adventures. This is a battery electric vehicle (BEV) concept that evokes the evolution of the Subaru Sport values," the company said in an Oct. 10 statement.

Subaru's other all-electric showcase at the show will be its first all-electric vehicle, the Solterra ET-HS SUV.

Toyota  (TM) - Get Free Report also arrives at the show for an Oct. 25 unveiling of its Lexus lineup of battery electric vehicle concept models, as part of its goal to transform into an all-electric brand by 2035. Lexus is expected to debut a sports car that it has teased for a year, as well as a sports hatchback, Electrek reported.

After viewing the Lexus concept models, guests are invited to try out the company's "Lexus Electrified VR Experience" virtual reality driving simulators, the company said in an Oct. 11 statement. The exhibit will allow visitors to experience a future world of driving where electrification and artificial intelligence technologies help cater to individual customer needs and connect with society. Guests have the opportunity to fully engage in a VR-exclusive setting, enabling them to encounter the personalized driving experience and enhanced lifestyle that Lexus delivers.

Infiniti unveils its Vision Qe Concept vehicle. 


Infiniti unveils its first electric vehicle 

Nissan's  (NSANY) - Get Free Report luxury brand Infiniti on Oct. 24 will debut its first all-electric model, a new concept Vision Qe electric vehicle at the Japan Mobility Show that it expects to be ready to sell to the public in 2026.  Infiniti will also showcase other new models at the show as well. 

The newly designed Infiniti EV sedan is expected to have a longer wheel base with shorter overhang, new headlight and taillight design, single light strip across the width and a rear resembling a Porsche. The company has said it plans to produce its first electric vehicle at its Canton, Miss., factory, along with a new crossover EV.

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The Myth Of The Invincible Dollar

The Myth Of The Invincible Dollar

Authored by Michael Maharrey via,

I write a lot about the national debt.

And most people…



The Myth Of The Invincible Dollar

Authored by Michael Maharrey via,

I write a lot about the national debt.

And most people don’t care.

That’s because there’s a widespread belief that the dollar is invincible.

It isn’t...

The prevailing attitude is that the US government can borrow and spend indefinitely. After all, it hasn’t caused a problem so far. But a long fuse can burn for a long time before it finally reaches the powder keg.

I don’t know how long we have before the debt bomb explodes, but I do know we get closer and closer every day. And sadly, very few people care enough to address the problem.

The recent government shutdown drama is a case in point.

A stopgap spending deal swept the shutdown threat out of the headlines, but it’s still there lurking in the shadows of the halls of Congress. If lawmakers don’t figure something out by Nov. 17, the government will be forced to shut down.

There isn’t much talk about a shutdown right now, but when people do discuss the possibility, they almost always focus on the mythical crisis that shuttering the federal government might cause. That sidesteps the real problem — out of control government spending.

Conventional wisdom is that Congress needs to do whatever it takes to avoid a shutdown. If that means maintaining spending at current levels or even increasing spending, so be it. The handful of intransigent members of Congress who want to hold out for spending cuts are always cast as the bad guys in this kabuki theater.  As economist Daniel Lacalle put it in a recent article published by Mises Wire, “The narrative seems to be that governments and the public sector should never have to implement responsible budget decisions, and spending must continue indefinitely.”

But the whole government shutdown charade is merely the symptom of a much deeper problem. The US government is over $33 trillion in debt. In fact, the Biden administration managed to add half a trillion dollars to the debt in just 20 days.

It’s hard to overstate just how bad the US government’s fiscal situation has become. We have a trifecta of surging debt, massive deficits, and declining federal revenue, and the federal government’s spending addiction is at the root of the problem. Lacalle summed it up this way.

The problem in the United States is not the government shutdown but the irresponsible and reckless deficit spending that administrations continue to impose regardless of economic conditions.”

In August alone, the Biden administration spent over $527 billion. In fact, the federal government has been spending an average of half a trillion dollars every single month.

And there is no end in sight. There is no political will to substantially cut spending. Meanwhile, the federal government is always looking for new reasons to spend even more money. With war raging in the Middle East, there is already a proposal to send aid to Israel and possibly add more aid to Ukraine to that deal.

As Peter Schiff said in a recent podcast, the US can’t afford peace, much less war.

Lacalle summarizes the current fiscal condition of the United States government. It’s not a pretty picture.

In the Biden administration’s own projections, the accumulated deficit between 2023 and 2032 would be over 14 trillion US dollars, assuming that there would be no recession or employment decline. Public debt has risen above 33 trillion US dollars, and the budget deficit in a period of growth and strong job creation is over 1.7 trillion US dollars. As of August 2023, it costs $808 billion to maintain the debt, which is 15% of the total federal spending, according to the U.S. Treasury. Interest rates are rising at the same time as the government rejects all budget constraints. This is a monetary timebomb.”

And as Lacalle pointed out, the government keeps spending no matter what’s happening in the economy. According to government people and their academic support staff, there is never a good time to cut spending.

When the economy grows and there is almost full employment, governments announce more spending because it is ‘time to borrow,’ as Krugman wrote. When the economy is in recession, governments say that they need to spend even more to save the economy. In the process, government size in the economy increases, and record tax receipts are fully consumed in no time because expenditures always exceed revenues.”

The constant borrowing and spending is fueled by the myth that borrowing doesn’t really matter, and the rise in popularity of Modern Monetary Theory (MMT) put that myth on steroids.

MMTrs claim that spending doesn’t matter. As Lacalle notes, they even go as far as to claim that the world could “run out of dollars” if the federal government took significant steps to rein in deficit spending causing a “monetary meltdown.”

It is so ludicrous that it should not even have to be discussed. The world does not run out of dollars if the United States government cuts its imbalances. Global dollar liquidity is a result of central bank swaps between monetary institutions. There is no such thing as a global dollar liquidity crisis because of a United States surplus, as we saw when it happened in 2001. Furthermore, the idea that the dollar supply is created only by government deficit spending is insane. This distorted view of the economy places government debt at the center of growth instead of private investment. It tries to convince you that a deficit is always positive and that the only creation of currency must come from unproductive spending, not from productive investment credit growth. Obviously, it is wrong.”

But no matter how loudly contrarians sound the warning, people in the mainstream continue to shrug their shoulders at the mounting debt and ever-growing deficits. They seem to believe that since it hasn’t mattered yet, it won’t matter ever.

The dollar’s status as the global reserve currency enables the US government to get away with a lot. As Lacalle explains, global demand for dollars is still high. The dollar index (DXY) is rising because the monetary imbalances of other nations are larger than the United States’ challenges.

This has lulled Americans into a false sense of security. A lot of Americans, including most in positions of power, seem to think the US can do whatever it wants when it comes to borrowing and spending.

Lacalle makes a sobering point — “All empires believe that their currency will be eternally demanded, until it stops. ”

When confidence in the currency collapses, the impact is sudden and unsurmountable. Global citizens may start to accept other independent currencies or gold-backed securities, and the myth of eternal U.S. debt demand vanishes. Unfortunately, governments are always willing to push the limits of fiscal responsibility because another administration will face the problem. The United States’ rising debt and deficit irresponsibility means more taxes, less growth, and more inflation in the future. Government debt is not a gift of reserves for the private sector; it is a burden of economic problems for future generations. Sound money can only come from fiscal responsibility. Currently, we have none.”

The bottom line is the dollar is not invincible.

The fuse is burning.

Tyler Durden Sun, 10/15/2023 - 07:00

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Nigerian gov supports AI initiatives with $290K in grants

The recently introduced Nigeria Artificial Intelligence Research Scheme is designed to facilitate the widespread utilization of AI to drive economic advancement.



The recently introduced Nigeria Artificial Intelligence Research Scheme is designed to facilitate the widespread utilization of AI to drive economic advancement.

The Nigerian Minister of Communications, Innovation and Digital Economy, Dr. Bosun Tijani, revealed on Friday, Oct.13, that the Federal Government intends to grant a sum of $6,444 (5 million naira) each to 45 artificial intelligence (AI) focused startups and researchers. This figure makes a total of $289,980 (225 million naira) being given out for the purpose of AI.

This information was disclosed by the minister in a post on X. The recently introduced Nigeria Artificial Intelligence Research Scheme is designed to facilitate the widespread utilization of Artificial Intelligence to drive economic advancement.

As outlined on the scheme's official website, the focal areas encompass Agriculture, Education and Workforce, Finance, Governance, Healthcare, Utility and Sustainability. To be eligible for the grant, applicants are required to form a consortium, comprising a startup or tech company, a researcher from a Nigerian university, or a foreign researcher, as stated by the Ministry.

Applicants should present a research proposal in line with the Federal Ministry of Communications, Innovation and Digital Economy's AI focus areas. Furthermore, they must provide a comprehensive project proposal that highlights the project's potential economic impact in Nigeria.

In addition, a proven track record of excellence in research or entrepreneurship is a requirement. Finally, applicants are expected to publish at least one peer-reviewed article within one year of grant receipt.

In August, the Nigerian government extended an invitation to scientists of Nigerian heritage, as well as globally renowned experts who have worked within the Nigerian market, to collaborate in the formulation of its National Artificial Intelligence Strategy.

Related: China sets stricter rules for training generative AI models

The application period commences on Oct.13, 2023, and concludes on Nov. 15, 2023. All submissions should be made through the specified online platform. The Ministry has indicated that a panel of AI specialists will assess the proposals. Those who make it to the shortlist will receive email notifications and be invited for interviews.

Magazine: ‘AI has killed the industry’: EasyTranslate boss on adapting to change

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