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OCTOBER 11, 2023

HIGHER THAN EXPECTED

The latest report from the Labor Department indicates that inflation remains a pressing issue for the U.S. economy as wholesale prices surged higher than expected in September, with the producer price index, which measures costs for finished goods, increasing by 0.5%. This exceeded the projected 0.3% rise estimated by Dow Jones. In addition, when excluding food and energy, the core producer price index rose by 0.3%, surpassing the anticipated 0.2% increase. Moreover, excluding food, energy, and trade services, the index still rose by 0.2%, aligning with the estimated figure. Consequently, these findings highlight the persistent challenge of inflation in the U.S. economy.

UNCHANGED LANDSCAPE

The collapse of the FTX crypto exchange, which wiped out customer assets and led to legal woes for its billionaire founder, has not fundamentally altered the unregulated nature of the crypto sector, as cryptos continue to be used by criminals, and they are still vulnerable to hacking. Crypto exchanges like Binance, are also accused of engaging in risky practices similar to FTX, and while FTX’s collapse caused disruption, it did not fundamentally alter the legal and regulatory landscape. Lawmakers in the U.S. are divided on how to address the crypto markets, and although the Securities and Exchange Commission Regulators (SEC) has been attempting to apply traditional financial rules to the crypto sector, this approach is being challenged in court by major exchanges. Furthermore, FTX and Binance’s ability to navigate regulatory limitations by hopping between countries has contributed to the lack of decisive action.

POTHOLED PATH

During the latest National Association for Business Economics (NABE) annual meeting, Federal Reserve officials expressed their belief in finding a monetary policy that can effectively reduce inflation to the target of 2%, without triggering a recession. However, they also acknowledged the existence of potential risks that could hinder this outcome. These risks include external factors that are beyond the control of the Federal Reserve, as well as the possibility of higher inflation, which may require the central bank to impose more restrictions on economic growth than initially anticipated. The key priority for the officials is to concentrate on restoring price stability, while also ensuring a well-balanced labor market. The minutes from the Fed’s September meeting, scheduled to be released later today at 2 p.m. EDT time, are expected to shed further light on these risks and provide insights into the central bank’s approach to achieving a smooth and controlled economic transition.

SHIFTING TRENDS

According to Mortgage Bankers Association Index, the mortgage market experienced an unexpected shift last week as the average rate on 30-year fixed mortgages reached its highest level since 2000. Surprisingly, this prompted a surge in demand for adjustable-rate mortgages (ARMs), even as rates for ARMs actually decreased. Consequently, there was a modest increase of 0.6% in total mortgage applications. This trend suggests that the narrowing gap between ARMs and 30-year fixed mortgages has caused more people to consider at lower-priced properties. Moreover, it is important to note that the recent growth experienced in total mortgage applications, was primarily driven by a meager 0.3% uptick in refinancing requests, which were down by 9% compared to the previous year at this time.

INTERNATIONAL NEWS

Consumer expectations for inflation in the euro area increased marginally in August, reinforcing the notion that the European Central Bank (ECB) cannot yet declare victory over rising prices. According to the ECB’s monthly survey, expectations for inflation in the next 12 months rose to 3.5% from 3.4%, and expectations for inflation three years ahead increased to 2.5% from 2.4%. Moreover, it is worth noting that although there are some economists and investors who do not expect any further rate hikes after the last one, the recent easing of inflation to a one-year low is not enough to rest easy due to other factors such as rising oil prices, a weak euro, and a tight job market, which could apply upward pressure on inflation. In fact, the International Monetary Fund has even lowered its growth forecast for the euro area. Consequently, ECB officials remain vigilant and are prepared to adjust interest rates if necessary.

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