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FEBRUARY 13, 2024

SURGE BEYOND EXPECTATIONS

The recent surge in consumer prices report indicates a challenging path to achieving desinflation, as the unexpected uptick in the consumer price index (CPI) for January demonstrates persistent inflationary pressures. The CPI saw a higher-than-expected 0.3% increase, surpassing economists’ 0.2% prediction. Over the past year, prices rose by 3.1%, exceeding the anticipated 2.9%, and excluding food and energy prices, the core CPI surged by 0.4% in January and by 3.9% over the year, well above forecasts. The significant rise in prices, mainly due to soaring shelter and food costs, triggered a sharp decline in stock market futures and a surge in Treasury yields. These developments are closely monitored by the Federal Reserve as it weighs its approach to monetary policy in 2024, aiming to guide inflation back to its 2% target. However, with potential for inflation to remain elevated due to the cost of shelter and other factors, the long-term outlook remains uncertain, leading to some speculation about the potential need for more aggressive measures to mitigate inflationary pressures in the future. This unforeseen inflationary spike, particularly in categories such as shelter and food costs, poses significant obstacles for steering inflation back to the Federal Reserve’s 2% target. The repercussions of these higher-than-expected prices are evident in stock market reactions and a notable surge in Treasury yields, intensifying broader economic apprehensions. As policymakers grapple with the task of guiding inflation towards its target, it becomes increasingly apparent that the journey towards desinflation may prove more arduous and uncertain than originally envisioned. Successfully navigating the complexities of this process is crucial to mitigating the potential economic ramifications and restoring stability to financial markets.

NEW ETF APPLICANT

Franklin Templeton has made moves to enter the Ethereum ETF race, putting the financial services company in league with other major players in the financial sector, including BlackRock, Fidelity, Ark, 21Shares, Grayscale, VanEck, Invesco, Galaxy, and Hashdex, who have also filed applications for similar ETFs. The Securities and Exchange Commission (SEC) is currently reviewing these ETF proposals, and expectations for approval before May are uncertain. Franklin Templeton has made branding changes to signify its growing involvement in the cryptocurrency space, and has even launched a bitcoin ETF too. Nonetheless, it has not gained as much traction as those from industry leaders such as BlackRock and Fidelity. Moreover, the crypto market has seen positive movements in the prices of ether (ETH) and bitcoin (BTC), with ETH rising by 5.5% in the last 24 hours and BTC reaching $50,000 for the first time since late 2021.

CONFIDENCE SOARS

Recent survey results from Bank of America (BofA) reveal that many fund managers are increasingly confident in the economic recovery, as they have notably increased their investments in U.S. tech stocks to the highest levels since August 2020. This upsurge in tech stock stake comes amid a decline in cash levels, a trend that has historically preceded stock market gains. Moreover, the findings indicate that most respondents predict that large-cap tech companies will drive equity markets. In addition, the findings from the survey also revealed crowded trades involving long positions in popular companies such as the “Magnificent Seven,” as well as investors shorting China equities. Nonetheless, despite these optimistic trends, a record of 46% respondents expressed concern that global fiscal policy is overstimulating, suggesting a cautious sentiment among investors. Furthermore, the survey highlighted concerns about geopolitical tensions, potential economic setbacks, and the risk of a U.S. election fallout as key market risks. Additionally, investors also identified U.S. commercial real estate is at risk of causing financial problems.

POSSIBLY TURBULENT

This year, the U.S. could be facing a considerable challenge as it attempts to refinance or sell $929 billion in commercial and multifamily real estate debt, representing a 40% increase from previous estimates. The total debt supported by U.S. commercial real estate now stands at about $4.7 trillion, raising worries among regulators and investors alike. Commercial-property prices have undergone a significant decline of 21% from their early 2022 peak, with office prices experiencing the most substantial drop at 35%. Approximately $441 billion of commercial-property debt is due this year, including around $234 billion in securitized debt and $168 billion in loans from nonbank lenders. However, uncertainties continue to mount, especially with 25% of office loans scheduled to mature in 2024 and property values on the decline, driven by an increasing number of vacancies resulting from the rise in remote and hybrid work arrangements. Nevertheless, it is worth noting that despite growing concerns about declining building values and a rise in loan defaults, the decision by the Federal Reserve to halt interest rate hikes is expected to lead to more finalized deals.

INTERNATIONAL NEWS

The European Central Bank (ECB) is currently working on reducing the excess liquidity in the Eurozone’s financial system. This effort is leading to increased borrowing costs for banks in the region. The ongoing trend reflects the ECB’s move to reverse its years of easy monetary policy and decrease its government bond holdings. Despite the significant amount of excess liquidity in the European banking system—currently at around €3.5 trillion—the higher demand for reserves due to stricter regulations and larger bank balance sheets has led to an increase in borrowing costs. This trend is particularly challenging for banks in Italy and Spain. These banks could face higher borrowing costs as they may need to compete harder for reserves. This discrepancy might also result in a wider gap between repo rates in different countries, as banks in cash-rich countries could face challenges in funding if banks in cash-poor countries intensify their competition for reserves. Overall, the situation presents a potential risk for the stability of the banking system in the Eurozone.

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