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How to Prepare for Economic Turmoil

How to Prepare for Economic Turmoil

Published

3 years ago

on

Federal Interest rate fed money printing Mnuchin PPP loans interest rates negative Steve Mnuchin, Helicopter Money

The Fallout of COVID-19… So Far

Probably one of the biggest headlines at this time are those concerning the Federal Interest rate. The Federal Reserve decided on Wednesday that interest rates shall remain capped at 0% for the foreseeable future. This news is announced amid the continued increase in unemployment claims, another 1.43 million of which are new this week. This adds to the total of approximately 30 million jobless Americans this year.

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Additionally, the Gross Domestic Product (GDP) saw a 5% decline in Q1, then a 32.9% plunge in the 2nd Quarter. This indicates an almost 35% plummet of annual consumer spending. To put it into perspective, the GDP rarely shrinks by more than 10% every year in any given quarter. It has been this way since the end of WWII when the US began keeping track of it. The areas that declined the most were services with travel, tourism, medical care, restaurants, etc. Businesses reliant upon large groups of customers face the heaviest hits with quarantine. While spending on cars, groceries, and other household goods are up, clothes, gasoline, and other goods are down.

This is significant because it confirms that a full economic recovery will take longer than a few months. Although there was a slight mid-May recovery, the resurgence of the virus ultimately extended the trajectory of the US recovery.

The Individual Consumer

But what exactly does keeping the benchmark interest rates at or near zero mean? The Fed wants to keep the economy at this level for “as long as it takes” to recover from COVID. What this means for the individual is that there are lower Federal interest rates for borrowers.

This benefits the American consumer, however only if your credit score is at 700 or above. Anything below that, your opportunities begin to dry up according to Bankrate’s Chief Financial Analyst, Greg McBride. Banks are unsure of the future of the economy, so lending programs are raising the bar for borrowers. Some aren’t even offering refinancing options at this time.

Credit card rates are also down to four-year lows around 16%. However, according to Bankrate, the Federal Reserve began lowering interest rates over a year ago. Most cards have a variable rate, but this flexibility links credit cards to the Fed’s benchmark rate. Since many are out of work, credit card issuers are shutting down accounts and lowering the credit limit, particularly for those accounts on track to delinquency.

Other interest rates currently down include:

  • Auto loan rates. The Average 5-year new car auto loan rate sank to 4.24%, but higher rates are reserved for riskier borrowers.
  • Student loan rates for new borrowers. Federal interest rates are at an all-time low for borrowers in the 2020-21 year. CARES Act also provides more relief by temporarily restricting interest rates until the end of September.
  • Mortgage rates. Real estate investments shrank at first but bounced back quickly owing to the lowered mortgage rates. New homeowners are diving into the housing market, and this also stirs up business for construction.

Declining Dollar

Okay, so what about inflation? Since the Fed rates are low, more money is in circulation digitally, and the US debt is expanding, isn’t the dollar weakening?

In one way, yes. The dollar’s strength is faltering because it is responding to the US debt. There will most likely be a continual decline in the dollar’s strength, but BlackRock’s Rick Rieder says the decline might not be very sharp or very sudden. The dollar is finally responding to the soaring US budget deficit and growing debt. Congress is currently planning another package valued at $1 trillion+ to bolster the economy, but this will expand the debt too. It will take months, if not years, for the economy to pick itself up and recover. The growing conflict between China and the US, two of the biggest economies, also does not help.

All in all, the rate of inflation fell by 1.9% in the second quarter after an early increase in the year. Because most goods and services’ costs have fallen to incite consumer interest, inflation is expected to remain low until the end of the pandemic. Once regular life is back to normal, economists are concerned about the path inflation will take.

As the year continues, the resurgence of COVID in most of the 50 states means one step forward, more than two steps back. Corporate economist Robert Frick of Navy Federal Credit Union says the longer the pandemic goes on, the worse the damage will be.

How to Prepare for Economic Turmoil

What can you do to protect yourself from this economic crisis? Some people think hoarding their cash is the best idea. After all, you save now to buy later. However, this is not something most economists or financial advisors recommend. This is because the reward for saving is much lower at this time.

The average savings account rate is only 0.06% or lower. While the Fed does not control deposit rates, savings account rates seem to correlate with changes in the target federal funds rate. Since the Federal rate is at 0%...you can get a clear picture of why people might advise against only saving at this time.

Should You Buy Gold?

There are mixed opinions about gold. The gold price balanced around $1,950 per oz on 7/30 during the day. Overnight it rose to a high of $1991, and gold saw significant gains on the morning of 7/31 as reports that the U.S. PCE price index rose 0.2% in June. What the market heard from the Federal Reserve means there could be an even brighter future for gold. The Fed is not currently thinking about raising rates, therefore the loose monetary policy is not going to change anytime soon. Commerzbank, as a result, believes that the gold price will keep climbing.

Gold Federal Interest rate

In the last recession back in 2012, gold prices stalled as stocks climbed. The difference back then was the fiscal deficit which constricted from 7-8% to slightly over 2% of GDP by 2015. Also, the dollar remained above a floor of 80 on the Dollar Index ever since. But, the deficit now is expanding significantly. Because of the pandemic, according to Morgan Stanley’s Jim Caron, the deficit will likely soar to 18% of GDP this year. Consequently, some are warning that inflation will hit, particularly because gold is rising.

However, inflation doesn’t hit all at once. While the gold price is at an all-time high, government bonds are at lows, and the GPD fell by 33% annualized for the last quarter. As a result, we will probably be in recovery for a while. Kelly Evans of CNBC says that the crisis can go one of two ways:

  1. Either higher inflation, which “would immediately cap the rally in bonds and stocks.”
  2. Or, “[a] gradual recovery and a turn towards fiscal tightening, which would cap the rally in gold.”

Her reasoning is that the last time inflation was a major concern, citizens called for fiscal restraint and voted accordingly. This could occur again, but if this push comes too early, Evans believes that gold, silver, and stocks will struggle as a result of the halted recovery.

What’s Next?

Because no one knows the exact trajectory of the economic fallout, all you can focus on is your own wallet. Aside from keeping in good health, keeping your job (or getting one), and making sure you have enough money to survive, there are other steps you can take to protect and grow your assets.

The value of gold is most likely going to expand higher, and so too will silver as a result. Precious metals like gold and silver are highly liquid and easy to store. It is a great hedge against inflation, which investors turn to when inflation kicks in. So be ahead of the curve and consider adding precious metals to your financial plan now.

This is particularly crucial if you are buying stocks on the dip. Always keep diversification in mind since it’s always good to avoid putting all your eggs in one basket. Gold is a great asset class divergent from stocks, bonds, and others. Since it does not often react the same way to extraneous factors like stocks and bonds, gold is a great asset to hold onto.

The post How to Prepare for Economic Turmoil appeared first on ValueWalk.

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International

New Zealand dollar pares losses as RBNZ pauses

RBNZ holds benchmark rate at 5.5% The New Zealand dollar has posted small losses on Wednesday. In Europe, NZD/USD is trading at 0.5901 in Europe, down…

Published

26 mins ago

on

October 4, 2023

By

  • RBNZ holds benchmark rate at 5.5%

The New Zealand dollar has posted small losses on Wednesday. In Europe, NZD/USD is trading at 0.5901 in Europe, down 0.11%. Earlier, NZD/USD fell as much as 0.50% before paring these losses.

The New Zealand dollar is trying to find its footing in what has been a dismal week. NZD/USD is down 1.6% this week and fell to a one-month low earlier today. Still, the kiwi has shown little reaction to the Reserve Bank of New Zealand’s decision to pause rates for a third time.

The pause in rate hikes was expected and the monetary statement didn’t contain anything new. The statement said that interest rates had cooled economic activity and reduced inflation “as required”, adding that interest rates would need to remain restrictive to ensure that inflation falls back within its 1%-3% target range.

The message from the RBNZ was rather dovish and signalled that the tightening cycle is over. Policy makers don’t want to spell out that rates have peaked, as they would lose credibility if inflation moved higher and the RBNZ was forced to raise rates. The takeaway from the meeting is that the RBNZ appears content to wait for restrictive policy settings to filter through the economy and dampen inflation, which is running at a 6% clip. This stance won’t provide any relief for the struggling New Zealand dollar.

US Treasury yields continue to move higher as the selloff in global bond markets has gained momentum. This has helped boost the US dollar as more attractive yields on Treasury bonds have dampened risk appetite. The yield on 30-year Treasuries touched 5% on Tuesday, its highest level in over a decade.

The Federal Reserve has signalled that it is unlikely to lower rates anytime soon, given the strong US economy. Atlanta Fed President Raphael Bostic said on Tuesday that the Fed should hold rates at elevated levels “for a long time” in order to bring inflation back down to the 2% target. Bostic said he favoured a single rate cut in 2024, late in the year.

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NZD/USD Technical

  • NZD/USD is testing resistance at 0.5917. The next resistance line is 0.5947
  • There is support at 0.5888 and 0.5833

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International

A Promising player in the energy revolution

In recent years, the demand for sustainable energy sources has intensified, leading…
The post A Promising player in the energy revolution appeared first…

Published

27 mins ago

on

October 4, 2023

By

In recent years, the demand for sustainable energy sources has intensified, leading to a surge in the global lithium market.

As electric vehicles (EVs) gain popularity, lithium-ion batteries have become instrumental in meeting the growing energy storage needs. Argentina Lithium & Energy Corp. (TSXV:LIT) is a Canadian mineral exploration company with a strategic approach and a strong commitment to sustainable practices. This is one company that is well-positioned to capitalize on the rising demand for lithium.The Stellantis investmentIn a significant move that underscores the growing importance of lithium in the automotive industry, the company recently secured a substantial US$90 million investment from Stellantis. This investment not only validates Argentina Lithium’s potential but also highlights the pivotal role lithium plays in the transition to a carbon-neutral future.What makes this investment significant

Stellantis, formed through the merger of Fiat Chrysler Automobiles and Groupe PSA, is one of the world’s largest automotive manufacturers. Their decision to invest such a significant amount in Argentina Lithium & Energy potentially helps secure a future supply of lithium in a rapidly growing market. This investment will not only provide Argentina Lithium with the necessary capital to explore and advance its projects but also highlights the industry’s recognition of Argentina’s lithium potential.Expansion of lithium projectsWith the infusion of funds from Stellantis, Argentina Lithium & Energy can accelerate the advancement of its lithium projects. The company’s projects are all located in the prolific Lithium Triangle region of Argentina, which holds immense promise because of its abundant, and in many cases, high-grade lithium resources. This investment will expedite the exploration process and potentially fast track the path to future lithium project development and production.

Management’s take

Speaking on this investment, Argentina Lithium President and Chief Executive Officer Nikolaos Cacos said in a news release: “We are delighted to have Stellantis as a partner in the exploration and future development of our lithium projects in Argentina. Together, we share a vision to build a sustainable lithium mining operation for the future. We look forward to a strong and successful relationship with Stellantis and we are committed to working towards delivering a sustainable lithium product that will contribute to the electrification of transportation and the protection of our atmosphere.”

Meeting the rising demand for EVsAs the world shifts towards sustainable transportation alternatives, EVs are expected to dominate the automotive sector. Lithium-ion batteries are the preferred power storage component for EVs, making lithium a vital component in the energy revolution. The investment by Stellantis in Argentina Lithium & Energy Corp. can potentially help ensure a stable supply of lithium, enabling the automotive giant to meet the soaring demand for EVs while reducing their carbon footprint.Embracing sustainable practicesThe company recognizes the importance of exploration and mining operations that prioritize environmental sustainability and social responsibility. The company is committed to minimizing its ecological footprint and engaging with local communities to ensure mutual benefits..For your considerationArgentina Lithium & Energy Corp.’s partnership with Stellantis through a US$90 million investment is a testament to its potential as a key player in the global lithium market.

The company’s stock shot up 113 per cent on this news.

Argentina Lithium & Energy Corp. stock chart – April to September 2023.

As the demand for lithium continues to surge, the company’s commitment to sustainable practices and strategic projects in Argentina’s lithium-rich regions position it favorably among industry leaders. With this significant investment, Argentina Lithium & Energy Corp. is working to contribute significantly to the advancement of the clean energy transition while offering an appealing investment opportunity for those looking to support the growth of sustainable technologies.

Join the discussion: Find out what everybody’s saying about this stock on the Argentina Lithium & Energy Corp. Bullboard, and check out the rest of Stockhouse’s stock forums and message boards.

This is sponsored content issued on behalf of Argentina Lithium & Energy Corp., please see full disclaimer here.

The post A Promising player in the energy revolution appeared first on The Market Herald Canada.

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International

Strategic Ambiguity Leaves Intervention Question Unanswered, but US Dollar has Steadied

Overview: Dramatic yen price action around the JOLTS
report yesterday after the dollar pierced the JPY150 level spurred speculation
of BOJ intervention….

Published

56 mins ago

on

October 4, 2023

By

Overview: Dramatic yen price action around the JOLTS report yesterday after the dollar pierced the JPY150 level spurred speculation of BOJ intervention. Although there has been no confirmation, the strategic ambiguity is helping steady the yen and the dollar more broadly today, even though US yields remain firm. Final PMI readings were a better than the flash estimates and this may also be facilitating the consolidative tone. Most promising, from a technical point of view, is the recovery in sterling, which after taking out yesterday's low is now trading above yesterday's high. Among the G10, only the yen and New Zealand dollar (RBNZ held as widely expected) are slightly softer. Most emerging market currencies are also firmer, including the Polish zloty, where the central bank may cut rates later today. 

Asia-Pacific equities fell sharply, with Japan and South Korea off more than 2% (which may help explain the won leading the losing emerging market currencies, off more than 1%). It is the third consecutive losing session for the MSCI Asia Pacific Index. Europe's Stoxx 600 is slightly firmer after losing more than 1% on Monday and again yesterday. US index futures are straddling little changed levels. Benchmark 10-year yields are higher. The 10-year JGB is at new highs, slightly above 0.80%, while European yields are mostly 2-3 bp higher. The 10-year US Treasury yield is pushing above 4.80%. Gold is consolidating after falling to almost $1815 yesterday, the lowest level since March. November WTI could not sustain yesterday's modest upticks and has come back heavier today. It is holding above yesterday's low near $87.75. Demand destruction concerns is offsetting OPEC+ expected confirmation of current output.

Asia Pacific

Neither Japan nor Australia's final service and composite PMIs change the fundamental picture, though they were better than the initial projections. At 53.8 rather than 53.3 flash reading (down from 54.3 in August), Japan's service PMI matches the lowest since January. The composite reading is at 52.1 rather than the preliminary estimate of 51.8 (52.6 in August). It averaged 52.3 in Q3 after 53.1 in Q2. Australia's services and composite PMI rose back above 50 in September after spending July and August below the boom/bust level. September services PMI stands at 51.8 (50.5 flash estimate and 47.8 in August). The final composite estimate was 51.5 up from preliminary estimate of 50.2 and 48.0 in August. It is the best since May. It averaged 49.2 in Q3 after 51.6 in Q2. 

Japanese officials have pushed back against idea that there is an "intervention level" and instead have encouraged the market to focus on volatility. Still, despite yesterday's dramatic swing there still is not confirmation of material intervention, One-week yen vol embedded in the options market jumped to 9.4% yesterday and almost 9.8% today before pulling back to below 9%. It reached the lowest level in around 18 months last week around 6.5%. It was near 22% when the BOJ last intervened in Oct 2022. Three-month implied vol is near 9.9%. The low last week was close to 9%. The year's low was set in mid-June near 8.8%. It was closer to 13.4% in September 2022 and spiked to 14.8% October 21, 2022, when the BOJ intervened.

The dollar pushed above JPY150, where options for almost $800 mln expire today and $1.5 bln expire on Friday. After spiking to JPY150.15, the highest close from 2022, the dollar dropped to about JPY147.45 and many suspect intervention. It may not be known for sure until the end of the month report is released. Last year, the BOJ did not intervene outside of Japan's time zone. It may have checked rates, though there are no reports that it did. With US yields making new highs and the BOJ buying JGBs today, it still does not seem like an opportune time to intervene and the relatively modest vol suggests intervention would not receive much sympathy within the G7 and the EBS volume at time of the "intervention" seemed light. Still, the market has been spooked and the greenback is in a narrow range of about 30 pips on either side of JPY149.00. The Australian dollar was sold a little through $0.6290 yesterday to draw near last November's low near $0.6270. Yesterday's low is holding today, and the Aussie is hovering around $0.6325 in quiet dealings. But it is barely entering the Bollinger Band, where the lower end is found around $0.6320. A break could signal another 1% loss on the way to last October's low around $0.6170. Surprising no one, the Reserve Bank of New Zealand maintained its overnight cash rate target at 5.50% where it has been since May. The New Zealand dollar peaked at the end of last week near $0.6050, the highest since mid-August but sold off Monday and Tuesday to briefly trade below $0.5900. Follow-through selling today took it to almost $0.5870. The year's low was set in early September near $0.5860. The US dollar remains firm against the offshore yuan. It reached CNH7.33 yesterday and is holding below it today. It is trading near CNH7.3150. It was near CNH7.2950 when the mainland holiday began. 

Europe

The final September EMU services PMI confirmed the first improvement since April. The pace of contraction in services slowed to 48.7 (48.4 flash estimate) from 47.9 in August. Last September it was at 48.8. The same is true of the composite PMI. It now stands at 47.2, rather than 47.1 initial estimate and 48.1 in September 2022. The new news was not so much about the minor revisions to the German (where the services PMI rose above 50 after dipping below it in August) and French flash estimate (44.1 composite from 43.5 preliminary estimate and 46.0 in August), but modest improvement in Italy (composite at 49.2 vs. 48.2) and Spain (50.1 composite, up from 48.6). Separately, the Eurostat reported that retail sales fell by a dramatic 1.2% (volume terms) in the eurozone in August, the biggest decline this year and more than twice what the median forecast in Bloomberg's survey projected.

The UK's final services PMI is at 49.3 rather than the initial estimate of 47.2 and 49.5 in August. It has not risen since April. The composite PMI stands at 48.5 (46.8 flash and 48.6 in August). It averaged 49.3 in Q3, down from a 53.9 average in Q2 and 51.3 average in Q1. The UK economy seemed to have hit an inflection point. The composite moved above the 50 boom/bust level in February and peaked at 54.9 in April and has fallen since and pushed back below 50 in August. Recall that the economy contracted by 0.5% in July, more than twice the decline expected (median forecast in Bloomberg's survey was -0.2%). August's monthly GDP estimate will be reported next week (October 12) amid renewed recession fears. 

The euro found support after the US JOLTS report slightly below $1.0450. It found support slightly above it today. Since pushing below $1.05 in the US afternoon on Monday, the euro has not been able rise back above it. A move above the $1.0550 area may be needed to stabilize the tone. The $1.04 area is the next technical objective. There are options for nearly 2 bln euros that expire Friday at $1.0450. Sterling's drop yesterday to almost $1.2050 met the (38.2%) retracement objective of sterling's recovery from September 2022 record low near $1.0350 to the mid-July high around $1.3140. That retracement was $1.2075. The next important technical area is $1.20, which also corresponds to the measuring objective of the head and shoulders pattern. Sterling made a marginal new low today near $1.2035 before bouncing back and trading above yesterday's high (~$1.2100). A potential bullish key reversal is unfolding but the close is critical. To confirm the one-day reversal pattern, sterling must close above yesterday's high. Lastly, after cutting the reference rate by 75 bp last month (to 6.0%), Poland's central bank is expected to deliver another quarter-point cut today. Since last month's rate cut, the Polish zloty has been among the worst performing emerging market currencies, falling by about 3.7% against the dollar and around 1.3% against the euro. 

America

Although many observers have downplayed the JOLTS report, its unexpected strength reported yesterday, helped lift US interest rates and the greenback. Job openings jumped by 7.7% in August, the largest increase since July 2021, to 9.61 mln. The median forecast in Bloomberg's survey was for a small decline. Moreover, the July series was revised higher (to 8.92 mln from 8.83 mln). The focus stays on the US labor market with the ADP estimate due today, Challenger lay-offs tomorrow, and the monthly payroll report on Friday. The median forecast in Bloomberg's survey has crept up to 170k (187k in August). A slowing of job growth was supported to herald the pullback in the US consumer and slow the economy in Q4. August factory orders and another look at durable goods orders are also on tap, but they will likely be overshadowed by the ISM services, which has been running stronger than the services PMI, where the final reading is also due today (50.2 vs 50.5 in August, the lowest since January.

We argued in our monthly outlook that the weak link may not be the US economy or dis-inflation but the financial sector. Remember when banks complained that the low rates squeezed interest income. Since February and March, the increase in rates has weakened bank shares. KBW's two bank share indices (one for large banks and one for regional banks) have been trending lower since late July. Yesterday, they both gapped lower. The regional bank index fell to its lowest level since late June, while the large bank index is at its lowest level since mid-May. Last week's Fed report (H.4.1) showed a small increase in both discount window borrowings ($3.193 bln vs. $3.078 bln) and the Bank Term Funding Program to a new record ($107.715 bln vs. $107.599 bln). 

The US dollar's surge against the Canadian dollar extended to CAD1.3735 yesterday, which is about where the trendline off the 2020, 2022 and 2023 highs intersected yesterday. Last week's low was set before Canada's July GDP (flat vs. median forecast in Bloomberg's survey for 0.1% after -0.2% in June) and before US income, consumption and deflator was almost CAD1.3415. The greenback's surge has carried it to its highest level since March and through the upper Bollinger Band (~CAD1.3710). It is consolidating in a narrow range of about CAD1.3695-CAD1.3725 today. A close below CAD1.3660 would confirm the greenback's upside momentum has stalled. That said, the next important chart area is CAD1.3800-15 and then the year's high set on March 10 near CAD1.3860. The greenback's surge and risk-off has overwhelmed the Mexican peso too. The greenback pushed above MXN18.00 for the first time since early May and closed above the 200-day moving average (~MXN17.8245) for the first time since September 2022. Follow-through buying today lifted the US dollar a little above MXN18.2150 before the reversing lower to approached MXN18.00. A break of MXN17.80 would stabilize the technical tone. One take away is that this is not a peso move but a dollar move. For example, the peso and Brazilian real fell by roughly the same amount (-1.6%). Latam currencies, which have been the market's darlings this year, accounted for the five of the six weakest emerging market currencies yesterday, with the South African rand joining them.

 


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