U.S. Bond Market Prices Drop, While Consumer Prices Rise

By Jason Galanis

Investors have mixed economic emotions as of late. Just like most market participants, I, Jason Galanis, am shocked about the steep decline of U.S. bond prices combined with the strong spike in consumer prices.

Wednesday saw U.S. Treasuries fall, right as data showed a slight rebound in U.S. consumer prices that occurred in September. The news undoubtedly caused an effect: it quelled some bets that assumed the Federal Reserve may postpone their projected plans to raise interest rates by next year.

Jason Galanis

Jason Galanis: “CPI is up and bond prices are down, does this make economic sense?”

It’s the global slump that’s making people worry about the Fed’s next move. Not only do disinflation worries bother the United States, but it’s also bothering Europe. Both worries amid the global slump have made U.S. policymakers assume that the Fed will stick with their near-zero interest rate in order to keep supporting the rather modest economy recovery.

Though, it looks like the markets may get their answer regarding that matter soon: The Federal Open Market Committee is expected to meet by next Tuesday and Wednesday.

In other related news, the U.S. Department of Labor recently broke news concerning the Consumer Price Index, otherwise known as the government’s inflation gauge. According to their statement, the CPI ‘edged up a little – 0.1 percent – last month.’ This movement came after the CPI saw a 0.2 percent drop back in August.

Of course, the inflation-related news spurred the selling of Treasuries. The selling sent the then-current benchmark yields to their highest point in a week—rising to as much as 2.25 percent. 30-year yields settled well around 3 percent in early trading this week.

The sudden increase was immediately contrasted against the 16-month low seen last week—as low as 1.865 percent. The hard drop was attributed to the concerns about the lack of global economic growth and the sudden purchasing of Treasuries buying to stifle short exit bets held against them.

The aforementioned CPI report also buffed Treasury Inflation-Protected Securities, where their principal and interest payments were handily adjusted against the projected CPI. The yield gaps between the aforementioned TIPS and standard Treasures widened considerably, leaving their lowest known levels since 2011.

Sluggish Global Growth Threatens U.S. Economy by Jason Galanis

By Jason Galanis

The global economy has been sluggish over the past few weeks. I, Jason Galanis, believe is is finally weighing down the U.S. economy.

Deflation in Europe, economic slowdown in China and various other emerging markets are just some happenings in the global economy that are contributing to the slowdown—and, they’re also threatening to drag down the U.S. economy with them.

The global slowdown is more or less looming over the United States economy, especially in a time where the Federal Reserve plans to dial back several of their initiatives that helped bolster the economy back into somewhat good recovery over the past few years.

Jason Galanis

Jason Galanis: “Is sluggish world economy going to severely impact the U.S. economy?”

Much of the recovery happened in the job market and in the housing market—somewhat. Over the past few months, the overall job growth within the country has been strong; however, the housing market is still recovering, where some markets have strong showings, while others aren’t as good. Either way, it’s enough for consumers to exercise caution in the housing market.

Despite that, many economic experts say the U.S. economy’s growth is rather good. But, just as many experts say that the U.S. can’t keep growing its economy on its own—it’ll also need some help from the rest of the world.

Experts say that the United States can’t ‘grow on its own in the medium to long term’ if the rest of the world doesn’t contribute. While, theoretically, that could work, much of the world’s economy is experiencing significant slowdown.

Besides the issues in Europe and China, volatile stock markets, falling commodity prices and declining production output/demand in emerging markets are harming the United States’ economic growth. Not only that, tensions with the Russia-Ukraine crisis and the Ebola virus crisis are also playing a role in potentially stifling the economy.

Even as the ‘growth engine of the world’s economy,’ the United States can’t gain any more momentum (in economic growth) if other regions aren’t performing as well. The global economic rut, more or less, presents a challenge to the United States if the recent news is to go by.

Moody’s Cuts Russia Credit Rating Amid Slow Economic Growth by Jason Galanis

By Jason Galanis

Economic concerns in Russia have resulted in a move by Moody’s Investors Services this past Monday. Moody’s has downgraded the country’s credit rating from its previous Baa1 level to Baa2. I, Jason Galanis, believe further moves could be imminent as well. Since, they have projected a ‘negative outlook’ for the rating after administering the evaluation.

The evaluation was similar to evaluations made by other credit rating agencies, Fitch Ratings Ltd. and Standards & Poor’s. Fitch retained a rating much in line with Moody’s, while Standards & Poor’s rating remained a grade above the former. Standards & Poor’s notably lowered Russia’s credit grade to BBB- back in April.

Jason Galanis

Jason Galanis: “Could Russian credit rating downgrades continue?”

Along with the credit degradation, the ruble weakened 0.7 percent against the dollar.

The economic concerns come at a time when Russia has spent $13 billion on foreign reserves over the past month, which played a role in helping slow a weakening ruble.

Despite the deteriorating sentiment that weighs on the ruble, Moody’s cut isn’t seen as a ‘critical move’, according to the chief economist for Russia’s Bank of America Corp. Though a downgrade, it actually helps maintain Russia’s investment grade status. How long that will last remains to be seen.

Reserves are draining in the country, particularly since penalties have blocked [Russian] companies from accessing western debt markets. That has played a role in increasingly deepening Russia’s economic issues. On top of that, oil trades have hit four year lows.

And, to add to an increasingly dismal outlook, Russia’s foreign reserves have already had nearly $60 billion expended on various measures aimed to bolster the economy in some way. As recent as last week, the Bank of Russia sold over $2 billion of those reserves, according to an officially issued statement via their website.

Moody’s analyst Kristin Lindow explained the reasoning behind the downgrade. She said that ‘the downgrade was driven by Russia’s growing and subdued medium-term growth prospects.’ The gradual ongoing of the country’s international reserves essentially, according to Lindow, contributed to Russia’s weakened creditworthiness.

US Dollar Recovers After Big Sell-Off by Jason Galanis

By Jason Galanis

Treasury yields have decreased over the past month, and I, Jason Galanis, believe this have forced investors to search for an immediate safe haven for their invested funds. The Treasury bond market situation is one of many concerns that have made the financial market’s trip into the fall season decidedly messy.

Despite that, the dollar saw a modest recovery in Europe. The plucky greenback regained footing in Europe this past Tuesday, right after it sunk to a month low in its ongoing match up with the yen. The market’s messy conditions also have caused some parties to lobby for a stronger dollar to compete side by side with several currencies, including the euro and yen.

Jason Galanis

Jason Galanis: “US dollar again on the rise.”

Those wishes were a little unfounded—this Monday, the dollar fell about 1 percent in US trading. Some economic experts were quick to define the situation as a ‘risk off’ one, which would encourage investors to look into riskier, higher yield investment before retreating to a lower yield one.

Which, in this case, would mean to look to the euro if looking at the bond spreads. According to those experts, the bond spreads were ‘in favor of the euro.’

That brings us back to the recovery of the dollar in Europe. The initial moves that the dollar made there bought the greenback up 0.3 percent, against 107.108 yen and 0.9521 Swiss francs. However, it was still lower than it had been a day earlier.

Side by side with the plucky currency, the dollar pushed the euro about 0.5 percent lower. While dealers mentioned that larger option expiries would hold up at a modest $1.27, the aforementioned currency proved its worth in a way. Although a small drop, it held close to the initial $1.27 projection: around $1.26 in anticipatory deals in Europe—a close enough estimate. The coming weeks will reveal whether the dollar will keep holding up against currencies like the euro.

Other currencies, like the pound sterling, took a hit. The sterling, in particular, fell unexpectedly; it fell 2.1 percent in comparison to the previously expected 1.0 percent rise.

Russian Economy Stagnates, Why Not Focus on Commodities? By Jason Galanis

By Jason Galanis

Years after Russia forwent commodities as their primary growth sector, I, Jason Galanis, believe Russia now faces significant challenges in their economy—their economy may be more stagnant than anticipated.

In light of the annual VTB Russia Calling investor conference earlier this month, various investors and business leaders haven’t heard much different regarding the Russian economic situation. Some market analysts described it as ‘more of the same.’

Jason Galanis

Jason Galanis: “How detrimental has Russia’s choice to not focus on the commodities sector for economic growth?”

One market observer, Central Bank governor Elvira Nabiullina, commented that ‘Russia’s problems are structural issues.’ Another, Sberbank CEO Herman Gref, commented that ‘companies [just] aren’t investing.’

It seems as if Russia’s steadfast instance of remaining monopolistic, yet open is what’s causing it to stagnate. The government is said to primarily depend of various state-owned gas and oil companies, such as the notable Rosneft and Gazprom, which has caused nearly half of the economy to sustain no competition.

Of course, observers and experts say nothing will change unless movements are made to ‘fix’ the underlying issues that may be causing the Russian economy to stagnate—that is, the core issues with both corporate and political governance.

On an ironic note, the shrinking markets, despite the open economy, may be one problem that could be fixed. Amidst the talk at the Russia Calling conference, some experts have suggested that ‘they would deepen and widen the local debt market to keep money going into Russia without solely relying on government banks.’

It’s a solution that highlights the fact that much of the movements in the Russian economy are being controlled by ‘the personal or political decisions from a select few.’

The issues with civil war in Eastern Ukraine, along with their response to such issues, more or less have caused human activity to stagnate in Russia as well. A tightening market and tightening policies have caused natives to move—and those who can’t move remain unable to stimulate the economy due to rising inflation rates.

It’s a situation where ‘stubborn’ might be the word to describe the state of Russia’s economy. Whether Russia officials, including famously steadfast President Vladimir Putin, will budge regarding their fast stagnating country remains to be seen.