What happens if Fed cuts interest rate by 50bps?

The Fed meet is to be held on 31st July 2019. Most of the experts expecting for 25bps rate cut but some more analysts expecting a rate cut for 50bps. Now what will happen if Fed cuts the interest rate by 50bps? Here we see:

Inflation:

The Fed members are very much worried about the inflation rate which is much below the expected target of 2%.  So no need of rate cut and if there is a higher rate cut then the inflation will grow higher which the Fed doesn’t want to happen.

What are the key factors influencing Forex Markets?

 

 

Bond Markets:

The long term bond yields are not satisfactory for the investors as the short term bond yields gives better returns than long term yields. The investors are not in a mood to pay higher premium for long term yields. This also makes the investors that a rate cut will occur.

How bond market related to economy?

Employment rate:

The employment rate had a growth and is much more than expected by the analysts. It is not a worry even if the Fed is announcing 50bps point cut.

How Non-Farm payroll plays an important role for the economy?

Economy:

The economy is strong for U.S when comparing to other countries. If the Fed has a bigger rate cut a threat for financial market bubble may be visible. Moreover the debt will increase and move for a beginning of recession phase.

Why monetary policy important for a country?

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Will gold peak $2000?

The gold prices are strong gradually increasing on global factors like Brexit deal, Trade War, Middle East tensions and World Economic growth.  The following factors will influence the gold to touch $2000:

Demand:

The World Gold Council’s 2019 figures show that total demand was increased by 7% YoY.

Central Banks bought 145.5 tonnes, which is up 68% YoY. The reason in increased demand for gold is for diversification and for safe, liquid assets.

ETFs added 40.3 tonnes with an increase of 49% YoY. But gold coin and bar investment fell by 1% and appliances usage of gold fell by 3%. Indian jewellery demand boosted up 5%.

Why gold prices are shooting up?

 

Stock Markets:

Investors stopped investing in Stock markets and diversified to gold. Trump is also one of the reason for diversification. He sacked FBI director Comey, the stock market fell nearly 0.85% at the same time gold increased by 1%.

How to trade in markets? What to be followed?

Global Factors:

The trade war is a key factor for increasing the demand for gold. After Trump and Xi had not met a deal for tariffs the gold have fallen down. But still the negotiations are going on. Iran’s drone has been shot by U.S recently. This also spurred the gold market. The uncertainty in Brexit deal also makes the investors to turn towards gold. Overall, the global economy is in bad shape inclusive of U.S. The raising inflation is the biggest worry for U.S and so expecting a Fed interest rate cut in July 2019. If fed cuts interest rate the gold will raise up.

What happens to gold on trade war?

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Will U.S replicate 2008?

Will U.S replicate 2008?

It’s hardly a decade over!!! Will there be another Lehmann Brothers collapse? The answer will be yes. Why?

Economy:

The US economy under Trump is doing just fine. The president has overseen a slow but steady economic expansion.  But this only benefited the wealthy Americans not the average labours. In a poll 48% of Americans believe economy is going towards bad shape. Even the GOP’s signature economic Policy achievement, the Tax Cuts and Jobs Act, did little to boost wages and business investment.

 

However, the economy isn’t contracting, so things could be a lot worse. And it’s possible they might get that way. Wall Street banks are already preparing for the US economy to slow down in 2019. Economists do believe the tax bill helped boost overall economic growth — for a little while, at least. The economy was growing at about 2.2 percent a year since the end of the recession in 2009, and then hit 4.2 percent in the second quarter of 2018, right after the tax cuts went into effect. The third quarter was also strong, with a 3.5 percent increase. By the end of 2018, however, annual economic growth fell to 2.6 percent.

What is Economy? Why is it important?

Stock Markets and Trade War:

After Trump has become President in 2017 the stock market was started moving up and in January 2018 the DOW has breached 25,000 points and many stocks have shown good growth. The investors had also good returns for their money. But before the end of 2018 the stock markets has faded and investors lose their investments. Trump also picked stock market as a favourite tool to measure the economic growth.

Again in January 2019, the DOW reached 25,000 points and did some favour for investors. Now the investors  and analysts are expecting a crash in stock markets as the markets are overvalued and the trade war which has been emerged between U.S and China. Initially, after Trump sworn in as President he promised to upend free trade, which he blamed for the loss of well-paying manufacturing jobs.

He definitely disrupted international trade, but his restrictions have done more harm than good. Over the past year, America has placed about $200 billion in tariffs on Chinese goods, in part to make Chinese products more expensive so Americans don’t buy them. The administration has also placed steep tariffs on all imported steel, angering other major US trade partners.

What is market analysis? How it helps traders?

The idea was to level out the trade deficit with China and make China buy more US goods, but, as expected, China responded by slapping its own tariffs on American imports.

Trump’s protectionist trade agenda ended up hitting American farmers the hardest. A total of 84 farms in the Upper Midwest filed for bankruptcy between July 2017 and June 2018. Farms that produce corn, soybeans, milk, and beef were suffering due to low global demand and low prices, according to economists, and Trump’s trade war is making the problem even worse.

What is trade war? Will trade war come to an end?

Bond Market and Unemployment rate:

The 10-year US bond yield has fallen below the 3-month bond yield. In simple terms, this means that long-term bonds are offering lower returns than short-term bonds and is seen as an indication of economic uncertainty. The yield inversion has raised fears that the US economy may be headed for a recession.

Will bonds benefit investors? Will yields affect growth of the country?

The US unemployment rate has been on a steady downward trend since the end of the Great Recession, dropping from 9.8 percent in January 2010 to 4.8 percent when Obama left office. Under Trump, unemployment hit a low of 3.7 percent in September, though it has started to tick up in recent months.

In September, the black unemployment rate fell to 6 percent for the first time, setting a new record that suggests progress is being made toward closing a longstanding employment gap between black and white workers. The black unemployment rate has since ticked up to 6.8 percent, but that’s still low by historical standards.

What is GDP? How it affects the economy?

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What is Non-Farm Payroll and its importance?

What is Non – Farm Payroll(NFP)?

NFP represents the total number of paid U.S. workers, excluding proprietors, private household employees, unpaid volunteers, farm workers, and the unincorporated self-employed.

This measure accounts for approximately 80 percent of the workers who contribute to the Gross Domestic Product (GDP). Thus, it is the benchmark statistic used to determine the condition of the labor market. The nonfarm payroll statistic is released monthly, on the first Friday of the month, by the U.S. Bureau of Labor Statistics as part of the Employment Situation Report on the state of the labor market.

Why was the data named as Non-Farm Payroll?

The Bureau of Labor Statistics was founded in 1884. It began tracking industrial workers’ wages and eventually expanded to track unemployment and other aspects of the nonagricultural economy. Betsey Stevenson, an economist at the University of Michigan and former chief economist at the Department of Labour, said in the 1920s and ’30s, The Bureau of Labor Statistics ramped up its data collection as economic upheaval and industrialization spread. The Bureau of Labor Statistics statisticians utilized data from state unemployment insurance and New Deal government programs — programs that generally didn’t cover farm work and farmworkers.

Why it is important?

The importance of this data arises from the fact that the U.S. is the world’s largest economy and the U.S. dollar is considered as the reserve currency. Countries around the world peg the value of their currencies to that of the reserve currency. Many commodities like oil and gold are also priced at U.S. dollars.

The NFP report, therefore, often moves all of the financial markets, including forex, equities, interest rates, treasuries, and commodities. The impact often felt immediately after the announcement of the data. At times, it moves the market in a dramatic manner. Over time, the impact has reduced a little bit but the nonfarm payroll does generate a great deal of attention. This data generally creates important monthly trends.

The average hourly earnings (M/M) number, which forms a part of the report, measures the change in earnings a business or company will pay for labor on a monthly basis. This number is important because an increase in earnings will lead to consumers spending more, which will lead to raised inflation, and in turn will lead to interest rates being increased in the US. Again, this will draw funds away from emerging markets, as the higher yields offered in the US will be more attractive for investors.

How Forex trading impacted due to NFP?

When a strong economic report is released, the U.S. dollar gains against other currencies. On the other hand, a weak nonfarm payroll report indicates weakness in the U.S. labor market. This, in turn, puts pressure on the U.S. dollar and it weakens against other world currencies.

Which are the currency pairs that are affected due to NFP?

EURUSD, GBPUSD, NZDUSD, AUDUSD, USDCAD, USDCHF, USDJPY and AUDJPY.

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What is Currency Manipulator Watchlist?

Currency manipulator watch list is a list of expected currency manipulator countries which is of US government importance to ensure free and fair trade practices.

That brings us to the next questions who will be called as a currency manipulator.

In today’s market currency value is determined through market forces of demand and supply but there are countries like China who are indulged in controlling currency value artificially by controlling foreign exchange purchase and sell policies in their country.

If you want to know why would one do the so here China has kept its currency value very low to promote cheaper export to other countries

Three criteria’s for listing by the U.S mentioned below:

  1. Where one country constitutes a major part of their Trade deficit like  China, India
  2. Any country is purchasing US $ in excess of $20 Billion and the net purchase is in excess of 2% of GDP.
  3. Having a current account surplus of 2% of US GDP.

 

Japan, alongside China, Germany, Switzerland, India, and South Korea, was placed in the bi-annual currency watch list in October last year.

While Switzerland and India have not been mentioned in the latest list, the US has added Ireland, Italy, Malaysia, Singapore, and Vietnam to the list, with China continuing to figure in it.

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