Evans: One or two rate increases are absolutely reasonable

The US economy is performing "very well", with its continuing growth creating preconditions for one or two interest rates rises this year, according to Fed Chicago chief Charles Evans.
In an interview, Evans scattered fears of weaker inflation, which led analysts to forecast only one, or even none, raises in interest rates by the end of this year.
We may see one or two raises, Evans said. In December, Evans publicly opposed the rise in interest rates on the part of the Fed. Since then, we have seen two interest rates rises - one in April and one in June.
Evans, however, said the US economy was extremely strong, and its performance made him confident that inflation would hold or even cross the target of 2% while the unemployment rate would remain at its low levels. The growth of the world's largest economy is expected to range between 2.5% and 3% this and next year.

Nothing new from the Fed. How did the markets react?

Fully expected, the Fed kept the interest rate unchanged, with Powell emphasizing the good state of the US economy. This was taken as an impulse to preserve the policy rate of the interest rate reserve.
This negatively affected the US indices and sent the dollar upwards, initiating a decline in metals and raw materials.
The Dow Jones blue chip index lost 81 points, with its most lost components being the industrial Caterpillar and 3M lost 3.4 and 2.3%.
The broad S&P 500 declined by 0.1%, with the industry declining by more than 1%. The Nasdaq Technology reduced its value by 0.5%.
Global financial markets continue to focus on a US-led trade war, especially after the White House administration announced on Wednesday that President Donald Trump offered a higher 25 percent duty for Chinese goods totaling $200 billion.
The euro fell slightly by 0.1%, to 1.16505 dollars.

The Fed will most likely raise interest rates despite emerging markets

Emerging markets, which are facing serious difficulties because of the Fed's interest rate increase, are not expected to gain sympathy from the federal reserve.
Developing countries' currencies were severely affected by sales due to investors' fears that their economies would not cope with higher US interest rates. This has prompted the central banks of India and Indonesia to call the Fed for careful action while Brazil warned of challenging times.
However, there are not many signs that the problems of emerging markets will change the policy of the Fed. Analysts are expecting at least two more interest rises this year, except for almost full-rate interest rates next week.

Long positions in the dollar are modern again

The bets on the dollar are again up-to-date after weakening the tension between the US and China and the postponement of the trade war.
In addition, the expectations are that the Fed will raise the interest rate at its next meeting in June, after failing to do so in May.
The dollar index added 2% since the beginning of the month to date, according to FactSet statistics.
The net long positions of speculators for the week until May 15 are again on a positive territory, for the first time since mid-March, just before the first quarter of Fed's interest rates hike for the year.
Better expectations are already evident in the spot market, where the dollar is booming, against the backdrop of the improvement in the interest rate differential, according to Jane Foley, Rabobank's chief currency strategist.
Investors are monitoring outgoing data for further evidence of the market sentiment and the future direction of green money.
In the first two weeks of May, leverage accounts held net long positions in dollars for the first time since January, according to Stephen Gallo, head of the Forex Trading Unit at IMO.
The US dollar is experiencing exceptionally strong growth, according to Mark Chandler, global strategist at Brown Brothers Harriman. This is a function of rising interest rates and the gradual rise in confidence that the Fed will raise interest rates three times this year, not twice as expected, the expert added.
The next Fed meeting on interest rates is on June 12-13. Futures indicate a 95% chance of raising interest rates by 25 basis points next month.

Powell: The process of normalizing the policy of the Fed is without prejudice to the financial markets

The Fed has made it clear to the markets that it intends to raise the interest rate gradually, and investors are probably not surprised by the actions of the Central Bank, said the head of the Federal Reserve, Jerome Powell.
The process of normalizing the Fed's policy is taking place without damage to the financial markets, and the expectations of traders regarding the future policy of the Central Bank seem to be in good agreement with the expectations of the Fed's management, he said at a conference organized by the International Monetary Fund (IMF) and the Swiss Central Bank.
According to Powel, if the situation in the economy meets expectations, the markets are probably not going to be surprised by Fed's actions.
The Fed raised the rate six times since December 2015, each time by 25 basis points. The last time the rate was raised in March 2018 - up to 1.5-1.75% per annum, and the leaders of the Federal Reserve made it clear that they expect two more hikes this year.
The gradual increase in the rate helped to maintain the Fed's stimulating policy, which supported the growth of employment and economic recovery in the US, and also contributed to a gradual increase in inflation.

Fed kept interest rates unchanged

The Fed kept the interest rate unchanged yesterday, but signaled that the inflation target was reached. Thus, the reserve, though disappointing investors expected an increase in interest rates at this meeting, opened its way to a June increase in interest rates.
The dollar initially declined, but subsequently recovered its losses. The euro returned at trading levels below 1.2000, with the pound continuing with its exceptionally strong impairment. Early this morning, a pound is exchanged for 1.3595 dollars.
The renewal of the Fed's inflation target is a major step after nearly six years in which consumer price growth in the world's largest economy is below the target of 2%.
The Fed also commented on the weak recent data on the labor market, saying labor market activity was slowing down, but it has performed well over the past few months.
In any case, at the next meeting on June 12-13, the Fed is expected to raise interest rates by 25 basis points after not doing so yesterday. Or, the market has bet almost 100%, that we will see a rise next month, unless something really dramatic happens.

The US dollar ran out of its range

The US dollar has overtaken its trading line from the past nine weeks to a basket of currencies.
Nevertheless, green money recorded its best weekly performance since November 2016.
For the week, the dollar index added 1.41%, ending at 91.343 points.
The main catalyst behind the rise of the dollar was the rise in interest rates on 10-year US bonds. They passed the 3% levels for the first time in more than four years. Investors have shrunk their positions in US bonds as a result of fears about rising inflation and the prospects for further interest rates.
In the rest of the news, consumer confidence rose to 128.7 points, exceeding analysts' average expectations, while orders on durable goods grew to 2.6% or against the previous reporting period.
The US GDP also turned out to be above average expectations at 2.3%. Investors, however, continue to worry about the poor performance of consumer spending.
Another major reason for the appreciation of the US dollar against other major currencies was the difference in the Fed's expected policy and other banks around the world that would most likely not be as aggressive to interest rates.

US dollar with weekly growth against all major currencies

Over the past week, we have witnessed something that is happening relatively rarely - the dollar has appreciated against all major currencies.
A major part of the appreciation of green money relative to other currencies was predetermined by the rise in interest rates on US bonds, to which the dollar is extremely dependent.
Investors have renewed expectations for further interest rates to be raised by the Fed during the year. The rising demand for more risky assets, on the other hand, has led to further strength for the US currency.
For the last week, the dollar index ended at 90.075 points, or an increase of 0.64%.
Late last week, Fed officials hinted at a further gradual rise in interest rates based on strong economic growth figures.
Fed San Francisco head John Williams said that inflation will rise this year to Fed targets of 2% and will remain above those targets a few years.
In order to protect the US economy from overheating, it is necessary for the Fed to continue raising interest rates, Williams said.
On the other hand, the leader of the Chicago Fed, Charles Evans, said it might be more appropriate to raise interest rates gradually.

Fed with more confidence in inflation

The stenogram of the previous Fed meeting indicates that the monetary policy committee is even more confident about rising inflation.
This more aggressive tone of the part of the Fed, led market participants to expect the reserve to be far more aggressive in terms of interest rates this year. Or, expectations for three interest rises rose.
This result, however, did not initiate a significant rise in the dollar initially, relative to other major currencies.
Inflation is likely to continue rising steadily this year.
The Fed's January meeting was the last, under the leadership of President Janet Yellen.
The issue of US inflation and its increase has gradually begun to dominate investor moods in the first month of Jerome Powell's reserve management.
This coincided with a record low unemployment rate and an acceleration in the growth of hourly pay, the latest sign of inflation in the world's largest economy.
The US economy is also expected to feel the positive effect of the Trump administration's tax reform, which is expected to be $1.5 trillion relief for companies and Americans.
But this may cause the Fed to be far more aggressive in its normalization efforts, commented market observers.

Gold with a third consecutive drop

Gold prices dropped for a third consecutive trading session yesterday after the dollar pushed from its three-year minimum in the past week. Investors await the protocols of the Fed meeting later this week for more clarity about the future policy of the reserve.
The spot price of gold fell 0.6%, or its biggest daily decline in two weeks. The noble metal traded at levels of $1 339 per ounce.
Gold futures fell 1.2% to $ 1,340.40 an ounce, marking its biggest daily decline since November 2017.
The dollar index, following the US dollar's performance against a basket of six major currencies, rose 0.5 percent to 89.544 points. It dropped to 88,253 points last week, which was its lowest value since December 2014.
The US currency has shown signs of deprivation after some investors bought the dollar after its record sales last week.
Last week was the best gold for more than five months when the metal added 2.4% to its value as a result of rising US inflation and declining tensions.
The spot price of gold is expected to find strong support at a level of $1,326 per ounce.

US indexes with new records, Fed hinted at a December rate hike

Fully expected, Fed retained interest rates yesterday after the two-day meeting of the Monetary Policy Committee. This led to a rise for US indices, with the S&P 500 broad index closed up by 0.16%, to 2 579.36 points.
The Dow Jones blue chip index rose by 140 points at one point, but eventually ended with an increase of 57 points to a level of 23,435 points.
Technological Nasdaq lagged behind its performance, down by 0.2 percent to 6,716.53 points, driven by a 1.3 percent decline in Apple's stock.
Fed responded to the average market expectations and kept the interest rate unchanged. Only 1.5% of analysts forecasted higher interest rates. But the Fed has left the door open for December's interest rate hike. Expectations for this are already nearly 100%, according to CME's FedWatch.

Oil with highest price since July

US indexes rose to new historical records, with oil and copper also rising, rising raw materials index. US government bonds fell after Yellen confirmed the FED's position of a gradual rise in interest rates.
Meanwhile, oil has continued to rise and reached a new two-week high as a result of mounting tensions in Iraq that are expected to affect supply. US crude oil rose by 0.8 percent to 51.86 dollars a barrel.
The US reporting season is gaining momentum, with leading US financial institutions reporting the results.
The S&P 500 index ended with an increase of 0.2% yesterday to a new historic peak.

Investors forget quickly

Investors tend to forget quickly. Or at least most of them... It seems as if everyone has forgotten what the Fed's several asset redemption programs have brought after the financial crisis.
Generally speaking, up to around 300% for the broad US S&P 500 index.
The question arises why investors are not afraid of the announcement in the start of a reduction in the Fed's balance sheet. Or the opposite of incentive programs.
At its meeting last week, the Monetary Policy Committee, fully expected by investors, kept the level of interest unchanged. From there, however, they said they are planning to start off with a cut of the record $45 trillion balance.
US indices are at levels close to their record in history.
In addition, there are still many ambiguities on the horizon. And they are related to the dangers of a military conflict between the United States and North Korea, the imminent rise in the US debt ceiling, the political uncertainty of the elections in Germany and Washington, etc.
We can not avoid the warning of the Nobel Prize winner, Robert Schiller, who said the US indexes were very similar to the situation before the last 13 collapses, historically.
What will happen, though, if Trump fails to "deliver" the promised reduction in tax rates? Will it not turn into the "black swan" that will trigger a new, more serious adjustment for the indexes in over 20%?
This is yet to be seen very soon, probably this autumn...

The Fed secretly targets bearish market?

Although it is independent, the Fed may secretly want to cause a "bearish market", or a drop in stock markets, which is a hit in the back for the President Trump. Trump does not stop tweeting about the new index records that make Americans richer.
According to Peter Schiff, CEO of Euro Pacific Capital, Yellen's support for the markets may disappear during Trump's term.
"I do not know if the Fed has a lot of love for President Trump," Schiff said, adding that the Fed supported the stock markets during Obama's two mandates.
"Perhaps the Fed will be glad to see a bearish market, which is likely to fall on Trump," said Schiff, according to which the market can easily make a correction by 20%.
As one of the "black swans" that could initiate such a correction, Schiff points to a dent in the euphoria associated with the new president, who helped launch the indexes to new records.
With respect to the two consecutive quarters of growth in US companies with double digits, Schiff pointed to the difficulties in the profits of US retail chains.
Of course, all investor glances will be focused on consequences of Fed's decision, made this week and commentary on the Federal Reserve regarding its future policy. The latter will most likely have a strong impact on the financial markets and will give more clarity to investors, what to expect in the months to the end of the year.

The Fed kept interest rates, slowing down the pace of increase

Fed kept interest rates unchanged, which was widely expected by analysts. However, what became clear from Janet Yellen's statement was that the reserve would likely slow down the pace of interest rate hikes.
What the Fed said about its record-breaking balance was that it would begin to decline "relatively soon". And though it is not clear when it will happen, according to market observers, most probably in the autumn.
The Fed's balance sheet has a record value of $4.5 trillion, and its reduction in practice will mean withdrawing liquidity from the market. Or totally opposed to the redemption of assets, which triggered strong growth for US indices.
The Fed started with its gradual rise in interest rates in 2015, and after just two increases to the beginning of this year, we witnessed two more this year. This led to interest rates between 1 and 1.25%.
Despite the rise in interest rates, the dollar fell against the rest of the major currencies. The dollar index fell by 8% since the beginning of the year.
Market participants are divided in two on whether we will witness another increase in interest rates this year. Half of the respondents are of the opinion that we will see another interest rate rise in December, while the other half think we will see no more increases this year.

Did the bullish market for the dollar ended?

The US dollar fell sharply against other major currencies in the first half of the year. Investors, however, still have to be careful about declaring the end of the bullish market for green money, some experts say.
US interest rates are still far above those in other developed countries, so many experts recommend investors to prefer bonds outside US in their portfolios.
Consensus forecasts are still for a strong dollar this year, following expectations of further interest rates. And while Janet Yelllen made a step back in her last speech, investors are still expecting a further rise in interest rates this year.
The dollar has risen after Trump's election victory last November, following the expectation that the tax and health reforms planned by the new president will benefit the world's largest economy.
And while healthcare reform is difficult to implement, in the way Trump originally promised, very soon, most likely in August or September, we can expect to see more clarity about tax changes.
The latter may be highly positive for the US dollar and trigger a strong appreciation of the dollar against other major currencies.

Traders do not trust the Fed

The Fed raised the interest rate this month by continuing to claim to raise it once more during the year. It seems, however, that traders do not really believe the Fed, at least judged by one graphics.
Interest rates on two-year bonds are traditionally those that respond quickly to the Fed's decisions and expectations of future interest rates.
Although the Fed signaled a further rise in interest rates this year, interest on 2-year bonds did not make any changes. That means, that investors do not believe that we will see any such action from the reserve.
Here is what happens on the graphics provided by Societe General:

Or as we see - absolutely nothing.

The dollar rises after Dudley's comments

The dollar has appreciated against other major currencies, following comments by New York head of state, William Dudley, in support of the future policy of the reserve, on raising interest rates.
Green money rose by about 0.4 percent after Dudley said he was convinced of the economic recovery and strong performance in the labor market, which would eventually trigger inflation. Prior to the expert's statement, trading on the foreign exchange markets was relatively weak.
The statements of the official representatives of the reserve can continue to be at the heart of the investor's interest, as well as that of Stanley Fischer, in Amsterdam.
Dudley's comments come less than a week after the Fed's interest rate hike, when it hinted at another increase by the end of the year.
Meanwhile, some analysts start talking about two more Fed interest rises by the end of the year.
The dollar appreciated against all major currencies, with the highest appreciation against the African rand. To this, the US dollar rose by 1.9%.
The Canadian dollar proved to be the most stable currency against the dollar, to which the US currency appreciated by only 0.1% despite the continuing decline in oil prices.
The election victory of Emmanuel Makron's party has failed to support the euro seriously. The single currency fell to levels of 1.1143 against the dollar.

The most important of the Fed's decisions

Fully expected, the Fed raised the interest rate on Wednesday by 25 basis points to 1.25%, hinting for another raise by the end of the year.
In her statement, Janet Yellon confirmed her expectations of reaching a 2% inflation rate as well as further stability in the labor market.
At 4.3%, US unemployment is below the long-term stable levels.
Perhaps the more significant news, however, has come in the direction of the plans of the reserve, on reducing the record $4.5 trillion of bond yields.
In the first place, the Fed will invest in redemption of bonds at the expiration of their date of payment if it receives more than 6 billion in interest per month. From then on, the border will be raised by $6 billion a quarter to reach 30 billion a month after one year.
Ultimately, the goal is to reach a balance well below the recent years, but greater than before the financial crisis.
This, however, is a fairly wide margin for market participants, given the fact that the balance sheet was $800 billion before the financial crisis, and is currently close to $4.5 trillion.

Fed on its way to $2 trillion mistake? (2)

Some experts say that this way of thinking is not particularly good overall. Because the Fed's balance sheet consists largely of mortgage bonds expiring in terms of whether people will choose to pay their debts. As a result, the Fed may lose control of an important tool in its policy if a large percentage of Americans decide, surprisingly, to close their mortgage loans.
The question arises as to why the Fed will try to reduce its balance?
The very act, threatening future economic development and by itself, can have a destructive impact on the economy, which eventually leads to new stimulus measures, recession and a new balance.
Some experts argue that with its current record balance, the Fed will have difficulty reacting to future shrinking of the economy in the direction of its monetary policy. Changing the latter policy itself may, however, jeopardize the stability of the economy.
Overall, it can be said that the option of maintaining a neutral balance-sheet policy may be the better option for the Fed. What will happen, however, is yet to be seen.