On October 7, U.S. stock fell sharply, with the U.S. Department of Labor reporting previously announced unemployment rate fell to 3.5%, lower than expected 3.7%, and non-farm employment increased by 263,000, which increased the possibility of the Federal Reserve hike rate , which many investors are worried that this will push the U.S. economy into recession.
Feder Officials may still think inflation is too high. CME Fed Observation Tool expects that when Fed policymakers meet from November 1 to -2, the possibility of the Fed hike for the fourth consecutive rate hike is more than 81%. In the latest issue where multiple Fed directors continue to send hawkish messages, New York Fed Chairman John Williams said more rate hikes are needed to deal with inflation. Bill Sterling, global strategist at
GW&K Investment Management, said the latest jobs data consolidated another massive 75 basis point rate hike in November because “the labor market is still too hot for the Fed’s comfort zone.” This seems to be both good and bad news, “The market has accepted the good news from the strong labor market report and turned it into a more vigilant Fed, so there may be a higher risk of recession next year.
All of the above signs suggest that the dollar may strengthen further, but it is not really good news for Americans. In fact, a strong dollar poses a risk to corporate profits in the U.S. As corporate income comes from economic activity, slowing growth will reduce those revenues.
Feder headquarters
In the U.S., the Fed is raising interest rates by increasing the cost of borrowing capital to slow economic demand. These actions are specifically aimed at the demand to reduce historically high inflation rates, which is becoming a problem according to a recent Gallup survey. For example, back in August, Most U.S. adults say that rising prices are causing financial difficulties for their families.
These austerity actions by the Federal Reserve will slow the growth of U.S. corporate income. Meanwhile, a stronger dollar will weaken the Federal Reserve. As mentioned earlier, the Federal Reserve is currently raising interest rates and reducing balance sheets to calm economic activity to reduce inflationary pressures. In a currency vacuum, the Federal Reserve rate hike will work as expected and may lead to a controllable economic downturn. As shown, the current gap between asset prices and corporate profits is at the largest deviation on record.
However, the Fed's policy tools are blunt tools and are affected by other catalysts such as strong dollar, higher borrowing costs and inflationary pressures. As shown, the economic environment has tightened significantly while the Fed is trying to tighten monetary policy. The current disconnection between U.S. stock markets and potential profitability have brought bad future results for investors.
strong dollar is likely to exacerbate the problems of investors and the Fed. Not only that, the strong dollar is likely to exacerbate the problems of investors and the Fed. Although investors have a glimmer of "hope" that the Fed may suspend interest rate hikes , but it is very likely that they will not do so. As the Federal Reserve may further tighten the currency, the strong dollar may become the "nail" to eventually pierce the dollar asset bubble.
What makes the US economy even more trouble is that more traders and analysts believe that the US dollar will collapse due to the excessive debt level of the United States, and the US debt crisis will also occur from the strong dollar. As of October 8, the total US federal debt has reached $31.13 trillion. Since breaking through $31 trillion on October 5, the total US federal debt has increased by $130 billion in less than three days. Today's US economy is inseparable from debt for almost a moment.
The Peterson Foundation estimates that higher interest rates may increase the US federal interest expenditure in the past decade by 1 trillion dollars. Immediately afterwards, the foundation's CEO Michael Peterson said in a statement: "As both U.S. debt and interest rates are growing, many concerns about the growing debt path in the United States begin to emerge." That is to say, as U.S. debt and interest rates increase, there are constant concerns about who the U.S. economy borrows from.
In this regard, in is known as the most visionary Wall Street commodity king, billionaire Jim Rogers , whether the US debt economic model can continue to take the initiative in the future is in the hands of one of the few major buyers in the world, that is, the main central bank in the world. At the Fed level, US bonds can be almost negligible because US Treasury bonds supported by the Fed alone have no liquidity. What's more, the Fed expects this round of balance sheet reduction cycle to last until the end of 2023, which means that the Fed will no longer pay for US debt as it used to be.
However, the current problem is that as the US dollar continues to strengthen and the sharp depreciation of currencies in many countries around the world, the central banks of many countries will inevitably reduce the holdings of US dollar assets such as US bonds and instead increase their holdings of assets such as domestic bonds, which will lead to US bonds being no longer favored. The recent phenomenon of long-term and short-term U.S. Treasury yields continue to rise, which shows that the yield is inversely proportional to the price of U.S. Treasury, which shows that the global selling of U.S. Treasury has been continuing.
data shows that the euro has depreciated by 12% against the US dollar this year, while the yen has depreciated by about 21%. A weak currency against the US dollar is usually beneficial to a country's exports because it makes exports more price-competitive. However, weak currencies make imported goods more expensive. Given the surge in inflation, especially energy prices, a stronger dollar is wreaking havoc on Europe and Japan. This leads to the possibility that Europe and Japan will further short US Treasury bonds. The chart below shows a strong negative correlation between the 10-year Treasury yield and the euro and the yen.
According to data released by the Japanese Ministry of Finance on October 7, , Japan's foreign exchange reserves decreased by a record $54 billion in September, and foreign exchange reserves were $1.238 trillion, the lowest level since the end of March 2017. The reason is that global market turmoil has weakened the value of foreign bonds and prompted the dollar to sell intervention to prevent a sharp decline in the yen. This directly proves that Japan is selling record U.S. Treasury bonds.
In fact, data shows that the 1.238 trillion US dollars of international reserve currently held by Japan is mainly in the form of US debt, and only about 135.5 billion US dollars of deposits are deposited in Bank for International Settlements (BIS). In this regard, the US financial website Zero hedging analysis believes that it is not ruled out that Japan will sell US Treasury bonds significantly in order to maintain the long-term value of the yen. After Japan has contributed to the plunge in US bonds, there is a possibility of clearing up US bonds. Totan Research, a Japanese think tank, said that if a similar phenomenon occurs, it means that Japan may be brewing the Pearl Harbor incident at this time.
This is based on the perspective that Japan is the largest holding of US bonds, and combined with the aforementioned Fed's radical interest rate hike, analysts' concerns about the risks of the US economic recession. is not difficult to understand. A new poll from the United States shows that half of Americans believe that the United States will no longer be a global superpower within ten years and will experience a "full collapse of the US economy."
Jim Rogers warned more than once that the United States is the world's largest debtor country, and debt is everywhere, and sooner or later it will have to pay the price. (End)
