Monetary Policy Week in Review - 17 September 2011 (Guest Post)

The past week in monetary policy saw 13 central banks review interest rate levels and monetary policy settings. Those that changed rates were: Belarus +300bps to 30.00%, Kenya +75bps to 7.00%, and India +25bps to 8.25%. Russia and Denmark also adjusted the bands of their deposit and lending rates, while holding their main rates steady. The Banks that held rates unchanged were: Mauritius 5.50%, Mozambique 16.00%, Russia 8.25%, New Zealand 2.50%, Switzerland 0-0.25%, Georgia 7.50%, Latvia 3.50%, Denmark 1.55%, Sri Lanka 7.00%, and Chile 5.25%. Also making headlines in central banking was the announcement from the ECB of joint US dollar liquidity operations as a move to augment European banking system liquidity.

Unsurprisingly, many central banks commented on the impact of global developments on their policy outlook; with the signs of slowing growth in the US and Europe and continued financial market volatility weighing on decisions. However many emerging markets are still experiencing relatively buoyant economic conditions, as indicated in central bank statements in the past week. A selection of key quotes from central bank monetary policy media releases are listed below:

• Reserve Bank of India (increased 25bps to 8.25%): "The monetary tightening effected so far by the Reserve Bank has helped in containing inflation and anchoring inflationary expectations, though both remain at levels beyond the Reserve Bank's comfort zone... a premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions. It is, therefore, imperative to persist with the current anti-inflationary stance. Going forward, the stance will be influenced by signs of downward movement in the inflation trajectory, to which the moderation in demand is expected to contribute, and the implications of global developments."
• Central Bank of Kenya (increased 25bps to 7.00%): "The Committee observed that inflation, exchange rate and money market volatility continued to pose a challenge to the economy. Specifically, the debt crisis in Europe continues to have a significant impact on the economy through the exchange rate volatility. Events in the USA and Europe are expected to continue affecting the exchange rate, inflation and the economic recovery."
• National Bank of Belarus (increased 300bps to 30.00%): "The consistent increase in the cost of borrowed money in the economy is intended to provide a further deterrent effect on customers' demand for credit resources of banks for the period of release on a single course. At the same time, increasing the refinancing rate will be an additional factor in stimulating processes of savings in Belarusian rubles and reduce pressure on the exchange rate"
• Reserve Bank of New Zealand (held OCR at 2.50%): "If recent global developments have only a mild impact on the New Zealand economy, it is likely that the OCR will need to increase. For now, given the recent intensification in global economic and financial risks, it is prudent to continue to hold the OCR at 2.5 percent."
• Swiss National Bank (held rate at 0-0.25%): "The Swiss National Bank will enforce the minimum exchange rate of CHF 1.20 per euro set on 6 September with the utmost determination. It is prepared to buy foreign currency in unlimited quantities. It continues to aim for a three-month Libor at zero and will maintain total sight deposits at the SNB at significantly above CHF 200 billion."
• Banco Central de Chile (held rate at 5.25%): "Domestically, output and demand figures show signs of moderation, in line with projections in the Monetary Policy Report. Labor market conditions are still tight and faster growth in nominal wages is observed. CPI inflation indicators have hovered around 3% y‐o‐y, while core inflation measures remain contained. Inflation expectations are close to the target."
• Central Bank of Russia (held refi rate at 8.25%): "The decision was supported by the assessment of inflation risks and risks to the sustainability of economic growth, including those associated with the uncertainty of the outlook for global economic activity, as well as of current money market conditions and the dynamics of the factors affecting banking sector liquidity. Implemented decision aimed at narrowing the gap between interest rates on the Bank of Russia liquidity provision and absorption operations should contribute to restrain money market interest rates volatility regarding the risks of the shortage of the rouble liquidity in the banking sector."
• Danmarks Nationalbank (held rate at 1.55%): "The interest rate reduction follows Danmarks Nationalbank's purchase of foreign exchange in the market. The short euro market rates have fallen and the spread to the equivalent Danish rates has tended to strengthen the Danish krone."

Looking at the central bank calendar, next week there are a number of European central banks meeting (Hungary, Turkey, Iceland, Czech Republic, Norway), no doubt they will make due reference to the developments in the Euro sovereign debt crisis. Of course, the other key event on the radar is the US FOMC meeting on the 20th - Bernanke announced at Jackson Hole the meeting would be extended to 2 days to allow the FOMC to consider implementing QE3 or QE2.1.

• HUF - Hungary (Magyar Nemzeti Bank) - expected to hold at 6.00% on the 20th of Sep
• TRY - Turkey (Central Bank of Turkey) - expected to hold at 5.75% on the 20th of Sep
• USD - USA (US Federal Reserve) - expected to hold at 0-0.25% on the 20th of Sep
• ISK - Iceland (Central Bank of Iceland) - expected to hold at 4.50% on the 21st of Sep
• CZK - Czech Republic (Czech National Bank) - expected to hold at 0.75% on the 21st of Sep
• NOK - Norway (Norges Bank) - expected to hold at 2.25% on the 21st of Sep
• ZAR - South Africa (South African Reserve Bank) - expected to hold at 5.50% on the 22nd of Sep

Source: www.CentralBankNews.info

Article source: http://www.centralbanknews.info/2011/09/monetary-policy-week-in-review-17.html

Monetary Policy Week in Review - 30 July 2011

The week in monetary policy saw 8 central banks announcing interest rate decisions. Of those that changed rates were: India +50bps to 8.00%, Nigeria +75bps to 8.75%, and Colombia +25bps to 4.50%. Meanwhile those that held monetary policy interest rates unchanged were: Israel 3.25%, Hungary 6.00%, New Zealand 2.50%, Kenya 6.25%, and the Philippines 4.50%. Other than interest rates, the Philippines raised its required reserve ratio by 100 basis points to 21%, and Turkey dropped its required reserve ratios by 100-200bps to add extra liquidity to the market.

In terms of themes, the week was very much dominated by emerging market central bank activity. India surprised the market by raising rates more than expected in response to a persistent inflation threat against the backdrop of still relatively strong economic growth. Indeed the message was that emerging markets are still facing elevated price levels and inflationary impulse, and many of them are still recording relatively high rates of growth, particularly as compared to developed markets.

A selection of key quotes from the monetary policy statements and media releases are listed below:

• Bank of Israel (held rate at 3.25%): "Forecasters' inflation expectations for the next twelve months remained steady at slightly below the upper limit of the target range. Forecasters' inflation expectations and those derived from the capital market go together with the assessment that the Bank of Israel will continue to increase the interest rate, but at a slower pace than in the first half of the year."
• Reserve Bank of India (increased 50bps to 8.00%): "Considering the overall growth and inflation scenario, there is a need to persevere with the anti-inflationary stance,".
• Central Bank of Nigeria (increased 75bps to 8.75%): "The inflation outlook appears uncertain owing to the expected implementation of the new national minimum wage policy and the imminent deregulation of petroleum products," and that there is "the need for pursuing policies to foster macro- economic stability, economic diversification as well as encouraging foreign capital inflows".
• Reserve Bank of New Zealand (held rate at 2.50%): "Provided current global financial risks recede and the economy continues to recover, the Bank sees little need for the March 2011 'insurance' cut to remain in place much longer. The current very high value of the New Zealand dollar is acting as a drag on the New Zealand economy. If this persists, it is likely to reduce the need for further OCR increases in the short term."
• Philippine Central Bank (held rate at 4.50%): "bank lending has been growing at double-digit rates since January 2011, supported by the strong momentum of domestic economic activity and stable financial conditions... The Monetary Board is of the view that sustained foreign exchange inflows, driven by upbeat market sentiment over the brighter prospects for the Philippine economy, could fuel a further acceleration of domestic liquidity growth which could pose risks to future inflation."
• Central Bank of Colombia (raised rate 25bps to 4.50%): "Since March, the average measures of core inflation has been a slight upward trend in June and reached a level close to the midpoint of the target range (3% + / - 1 percentage point). Inflation expectations at various horizons are also within that range."

Looking to the central bank calendar, next week is set to be dominated by developed market or advanced economy central bank activity (note, the US also meets early in the following week). So it will be an interesting week in terms of how these banks react to whatever happens with the US debt situation...

• AUD - Australia (Reserve Bank of Australia) - expected to hold at 4.75% on the 2nd of August
• GBP - UK (Bank of England) - expected to hold at 0.50% on the 4th of August
• CZK - Czech Republic (Czech National Bank) - expected to hold at 0.75% on the 4th of August
• EUR - Eurozone (European Central Bank) - expected to hold at 1.50% on the 4th of August
• JPY - Japan (Bank of Japan) - expected to hold at 0.10% on the 5th of August

Source: www.CentralBankNews.info

Article source: http://www.centralbanknews.info/2011/07/monetary-policy-week-in-review-30-july.html

Top 5 Graphs of the Week - 24 Jul 2011

This week we check in on the current inflation and monetary policy situation for the key developed economies and emerging markets, with a particular focus on the outlook for inflation and interest rates, and the likely consequent outlook for developed vs emerging market equities. Overall it's looking like the monetary policy outlook may become more friendly to emerging markets than developed markets, but of course that could all change if certain key risks materialize...

1. BRIC Inflation

Inflation has been a key issue in emerging markets this year, creating a unique set of risks e.g. policy tightening, overheating and hyperinflation, social unrest, exported inflation, etc. These risks have only expressed to a limited extent so far. Within the BRIC economies the most recent data (Brazil 6.71%, Russia 9.4%, India 8.72%, China 6.4%) has shown some hope of a peak in inflation or a tapering off, but the risk of further inflation remains as the BRIC economies remain relatively strong, and with commodity prices easing only somewhat. So the key focus for inflation risks is whether the recent string of monetary policy tightening moves is enough...

2. BRIC Interest Rates

Looking at the BRIC central banks, focusing on interest rates, total interest rate moves since policy rates bottomed out are as follows: Brazil +375 basis points, Russia +50bps, China +125bps, India +325bps. Each of the banks are playing a delicate and fraught balancing act with the risks of further inflation on the one hand and the risks of scuttling growth or even hard landing on the other hand. For now the balance is probably about right, but we're approaching territory where any further upside impetus on the inflation front is likely to force the central banks' hands to more aggressive tightening. Of course this will be bad for equities, with emerging market equities being held firmly back by this monetary policy tightening, but on the other hand, if inflation shows signs of peaking or even turning then emerging market equities should start to factor in an end to monetary policy tightening.

3. Developed Market Inflation

While developed markets have not been growing as fast as emerging markets, thanks in part to rising commodity prices, general price normalization, and demand normalization, inflation has clearly recovered in developed markets. Since their lowest figures in 2009 to the most recent readings inflation has increased as follows US +570bps, EU +340bps, Japan +290bps, UK +310bps. However each of those economies still remain at least 100bps away from the peak inflation figures of 2008. That will most likely not last. In fact, without a significant drop in commodity prices or a return to recession (a non-zero probability given some of the recent weaker readings and the Euro and US debt risks), inflation will almost certainly return to pre-crisis levels, and policy makers could easily miss the boat.

4. Developed Market Interest Rates

With the exception of the ECB, the monetary policy response to rising inflation has been to ignore it and focus on the growth side of things. This stance probably makes sense for the period of about 2-years after the crisis due to the depth and severity of it all. But abnormally low rates are not sustainable, low rates lead to greater risk appetites and ultimately higher inflation. The only saving grace is that governments like the US, UK and Japan all seriously need to do some decent fiscal tightening to get their government finances in order; this may (or may not) contain some aspects of inflation, but ultimately these banks need to start on a slow progression back to normality. So on balance the monetary policy outlook for developed markets is likely more bearish for equities than the outlook in emerging markets.

5. Monetary Policy Week in Review

Diving back down to the detail in the here and now, the past week in monetary policy saw the Banco Central do Brasil increase its Selic rate by 25 basis points to 12.50%. Meanwhile those that held rates unchanged were: Canada at 1.00%, South Africa at 5.50%, Turkey at 6.25%, and Egypt at 8.25%. Common themes in the media releases were a pretty keen focus on the risks coming from the EU and US debt situations, and Brazil possibly signaled an end to its tightening cycle. Next week there's a few interesting monetary policy decisions due; Israel, India, New Zealand and the Philippines are among those reviewing policy settings, with India the only one expected to move, with consensus seeing another +25bps.

Summary

So we saw inflation tracking along in emerging markets, showing a brief history of accelerating inflation, and although upside inflation risks remain, there are some signs that inflation may be peaking in at least some of the BRIC economies. Accordingly the monetary policy outlook for emerging markets could well become more accomodative, or at least no more tighter, and this could possibly brighten the outlook for emerging market equities.

Over to developed markets, flirtations with deflation were quite short-lived as the past year or so has seen significant reinflation, and unless fiscal tightening is particularly onerous, and as long as another slowdown is avoided, the inflation outlook for developed economies might be for further upside. Accordingly, the monetary policy outlook for developed economies is, or at least should be, for tightening and higher interest rates, which may take some of the shine of developed market equities.

So for the emerging market vs developed market equity allocation, a keen eye should be fixed on the developing inflation and monetary policy outlook, for today; this is a macro-driven market.

Graph Sources:

1. Trading Economics www.tradingeconomics.com

2. Central Bank News www.centralbanknews.info

3. OECD Statistics stats.oecd.org

4. Central Bank websites

5. Central Bank News www.centralbanknews.info

Article Source: http://econgrapher.blogspot.com/2011/07/top-5-graphs-of-week-24-jul-2011.html

Monetary Policy Week in Review (Guest Post)

The past week in monetary policy was dominated by Asian central banks, with the central banks of Japan, Indonesia, Thailand, and South Korea all announcing interest rate decisions. The only banks to adjust interest rates were Thailand +25bps to 3.25%, and Kenya, which dropped its discount window rate -175bps to 6.25%. Meanwhile those that held interest rates unchanged were: Japan 0.10%, Indonesia 6.75%, Latvia 3.50%, South Korea 3.25%, and Chile 5.25%. Elsewhere in monetary policy and central banking, Brazil's central bank announced further policy measures to curb speculation on its currency, the Real.

While inflation remained a threat for most of the central banks who reviewed monetary policy settings during the week, for many the focus was squarely on the downside risks to both domestic and global growth. Indeed a couple of the banks pointed specifically to the tail risks in the form of the European sovereign debt crisis. For those that held rates unchanged, for the most part the messaging was positive, with some viewing inflationary pressures as somewhat contained, while many presented a positive outlook on their domestic economy.

As per usual, following is a selection of key quotes from central bank monetary policy statements and media releases from the past week:

• Bank of Japan (held interest rate at 0.10%): "Japan's economic activity is picking up with an easing of the supply-side constraints caused by the earthquake disaster. After declining sharply following the earthquake, production has recently shown clear signs of picking up with the easing of supply-side constraints."
• Bank Indonesia (held interest rate at 6.75%): "Bank Indonesia views that the current BI Rate level is still in line with the effort to maintain stronger economic activities supported by stability, amid domestic excess liquidity and continued large capital inflows... Meanwhile, inflation is estimated to be under control and could be lower than earlier forecasted if there is no Government policies regarding energy prices while the supply and distribution of basic foods are well maintained."
• Bank of Thailand (increased interest rate 25bps to 3.25%): "In light of the continued risks to inflation amid robust domestic demand, the MPC deemed it necessary to continue increasing the policy rate to maintain economic stability and anchor inflation expectations... Inflationary pressure remained high due to elevated energy prices and continued upward adjustments in the prices of prepared foods."
• Bank of Korea (held interest rate at 3.25%): "The Committee expects the high level of inflation to continue in the coming months, driven largely by demand-side pressures resulting from the underlying uptrend in economic activity and by inflation expectations."
• Banco Central de Chile (held interest rate at 5.25%): "Domestically, output, demand and labor market figures are progressing with strength, showing signs of moderation in line with the baseline scenario in the last Monetary Policy Report. Annual CPI inflation indicators have hovered around 3%, while measures of core inflation remain bounded. Private inflation expectations show a decline, although some of them remain above the target."

As for next week the Reserve Bank of Australia (19th of July), and the Bank of England (20th of July) will release the minutes from their most recent monetary policy meetings, meanwhile the following central banks are scheduled to review interest rates:

• Canada (Bank of Canada) - expected to hold at 1.00% on the 19th of July
• Brazil (Banco Central do Brasil) - expected to increase rate 25bps to 12.50% on the 20th of July
• South Africa (South African Reserve Bank) - expected to hold at 5.50% on the 21st of July
• Turkey (Central Bank of the Republic of Turkey) - expected to hold at 6.25% on the 21st of July

Source: www.CentralBankNews.info

Article source: http://www.centralbanknews.info/2011/07/monetary-policy-week-in-review-16-july.html

Top 5 Economics Graphs of the Week - 14 May 2011

This week we look at Euro Zone GDP and break out the economic growth results from Germany and France, and gauge how the Euro economies are progressing through the recovery. We also have a brief review of the inflation data from the US, and wrap up with a review of 12 monetary policy decisions of various central banks from around the world over the past week.

1. EU GDP
The euro area (EA17) reported Q1 GDP growth of 0.8% q/q, up from 0.3% in Q4 2010, bringing annual GDP growth to 2.5%, up from 2.0% in Q4 2010. Meanwhile the EU27 also recorded quarterly GDP growth of 0.8%, up from 0.2% in Q4 2010, bringing annual growth to 2.5%, up from 2.2% in Q4 last year. The worst performing economies on a quarterly basis were Portugal (-0.7%), Cyprus (0%), Italy (0.2%) and Latvia (0.2%). While the best performing economies on a quarterly basis were Lithuania (3.5%), Estonia (2.1%), and Germany (1.5%), with 1% growth rates in Belgium, France, Austria, and Slovakia. Thus for now, growth is relatively strong in the Euro region, in spite of the fiscal challenges on the fringe, but there are risks to the outlook.

2. German GDP
Germany reported Q1 GDP growth of 1.5% q/q, up from 0.4% in Q4 2010 (market consensus around 0.9%). On an annual basis the German economy expanded 4.8%, faster than the 3.8% recorded in Q4 last year (market consensus around 4.2%). Germany continues to prove its worth as a key growth engine in the EU, benefiting from a strong manufacturing and export base, as well as a sound financial system and strong government balances. Philipp Rosler, economics minister in Germany, said "Germany is the growth motor among the industrial nations - and not just in Europe".

3. France GDP
The French economy grew 1.0% in the first quarter of this year, faster than the 0.3% recorded in the previous quarter. On an annual basis GDP expanded 2.2%, up from 1.4% in Q4 2010. The French economy is slowly gathering pace, with the manufacturing and services sectors strong, yet much of the growth this quarter came from changes in inventories. Household spending and fixed capital formation also contributed positively, while net exports were a negative. French finance minister Christine Lagarde noted that Q2 GDP is likely to be weaker, but is still comfortable with a 2.0% growth target for 2011.

4. US Inflation
The US reported annual headline inflation of 3.2% in April, up from 2.7% in March as the CPI rose 0.4% m/m. Core inflation crept up to 1.3% in April from 1.2% the previous month, with core CPI up 0.2% m/m. Accelerating nflation around the world at the moment is larely a product of rising commodity prices - especially energy commodities. In the near term there may be some more moderation in commodities prices, but I don't see oil falling far and fast in the near term. What was a mild concern was the incidence of broader 'second round' inflation effects, with core inflation steadily rising. That said, while both headline and core inflation are rising, neither are accelerating at a historically excessive rate, core is still relatively low compared to the last 10 years.

5. Monetary Policy Review
The past week saw 12 monetary policy decisions. Those that increased interest rates were: Azerbaijan +25bps to 5.25% Poland +25bps to 4.25% Norway +25bps to 2.25% Peru +25bps to 4.25% and Chile +50bps to 5.00%. Meanwhile Ghana was the only country that eased policy, cutting rates 50bps to 13.00%. Those that held rates unchanged were: Indonesia 6.75% South Africa 5.50% Latvia 3.50% and South Korea 3.00%. Besides interest rate changes two economies lifted reserve requirements: Uruguay lifted its required reserve ratios 300bps to 15%, while China increase its RRR by 50 basis points to an average 21% for large banks.

Summary

A look at euro region GDP results showed the economic recovery is still strongly on track for the most part, but with due divergence and weakness at the periphery. While there remains downside risks to the outlook from economies like Portugal, Ireland and Greece, the outlook is still strong with the key economies like France, and especially Germany growing strongly. Elsewhere, the US saw an acceleration of inflation in April, but not yet at a worrying pace. On the monetary policy front the theme of emerging market tightening continued, and saw increasing involvement of developed economies in the monetary policy normalization process.

Sources:
1. EuroStat epp.eurostat.ec.europa.eu
2. EuroStat epp.eurostat.ec.europa.eu
3. EuroStat epp.eurostat.ec.europa.eu
4. Bureau of Labour Statistics www.bls.gov
5. CentralBankNews.info www.centralbanknews.info

Article Source: http://www.econgrapher.com/top5graphs14may11.html

U.S. Inflation Monitor, Part 2: A Broader View

In the second installment of this two-part article on U.S. inflation (see first part, on CPI and PPI, here), we look at a few other data points -- specifically, commodities, TIPS, and import and export prices. The point of this wider look is to gain a better gauge of where inflation is coming through and to garner any clues as to the traction inflation has. This is important for investors, as inflation has a critical impact on wealth, valuations, and prices. A keen awareness of the key inflation trends can help investors position themselves appropriately to both gain protection as well as profits.

http://seekingalpha.com/article/258968-u-s-inflation-monitor-part-2-a-broader-view?v=1300457214

Reserve Bank of Australia Holds Cash Rate at 4.75%

The Reserve Bank of Australia did what was expected and signaled this time around, leaving the cash rate at 4.75%, pausing again on its stop-start path to monetary policy normalization. The RBA increased the cash rate in November by 25bps, in spite of sending somewhat contradictory signals to the market. However for now it looks like this pause will also persist for a few months...

"Following the Board's decision last month to lift the cash rate, and the subsequent increases by financial institutions, lending rates in the economy are now a little above average. The Board views this setting of monetary policy as appropriate for the economic outlook."

The RBA in its announcement noted the positive impact on national income of having the terms of trade at its highest level since the 1950's, and of course the positive impact of high commodity prices on private investment. However the other part of the Aussie economy is pretty much chugging along behind the scenes at the same pace of other stricken developed economies like the US, UK, and New Zealand. I.e. the non-mining part of the economy is kinda US-like, but if the mining part of the economy can flow through to the rest of the economy then the Australian economic outlook should be relatively favorable.

"The exchange rate has risen significantly this year, reflecting the high level of commodity prices and the respective outlooks for monetary policy in Australia and the major countries. This will assist, at the margin, in containing pressure on inflation over the period ahead. Over the next few quarters, inflation is expected to be little changed, though it is likely to increase somewhat over the medium term if the economy grows as expected."

In summary, the Australian economy is relatively well placed at the moment. It is - as a whole - doing better than most developed economies thanks to its booming mining sector (thanks emerging markets), and with luck the economic recovery (though technically Australia didn't have a recession) should become more broad-based over time. On the inflation front it's basically an economic growth story - if the growth comes through then so will inflation. So for now it is the right move for the RBA to hold rates steady, and it will likely hold-off raising rates again until about Q2-Q3 next year, but of course the key dependency is the econ growth path.

Sources
Econ Grapher Analytics www.econgrapher.com
Reserve Bank of Australia www.rba.gov.au
Trading Economics www.tradingeconomics.com

Article Source: http://www.econgrapher.com/7dec-rba.html

Brazil Raises Interest Rates 75bps to 9.5%

Brazil stepped up its policy stimulus exit today, increasing the selic rate 75bps to 9.5%, the decision was unanimous. The move was only expected by half of economists surveyed, and most of those expecting an increase were looking for 50bps. In its announcement the BCB noted that the move marks a continuation of the policy adjustment process (having previously raised the reserve requirements in February):

"Brasília - Continuing the adjustment process of the monetary conditions to the forward-looking scenario of the economy, in order to ensure the convergence of inflation to the targets path, the Copom unanimously decided to increase the Selic target to 9.50 percent, without bias."

The main driver of the move is concerns over inflation and overheating as the Brazilian economy has made a strong recovery from the crisis. Throughout the recession inflation in Brazil has remained around 4-5%, meanwhile growth is now starting to pick up; helped by rising commodity prices and wealth catch-up effects in the developing economy. The move is almost certainly likely to result in more capital (hot money) inflows into brazil as many other central bank rates are closer to 0-1%, resulting in a large potential carry trade yield pick-up. The BRL (Brazilian Real) has jumped about 2% since the announcement, with the USD BRL rate trading around 1.73 and the carry trade has helped the BRL rally about 20% over the past year.


Overall this is a positive move in terms of anchoring inflation expectations, and removing policy stimulus before overheating becomes a significant problem. There is likely to be more tightening yet, as inflation picks up and the economic recovery in Brazil strengthens.

The outlook for the Brazilian economy is reasonably strong, and it is likely to see growth about 5.5% this year, and around 4% in 2011. For inflation: the most recent central bank survey saw consensus inflation forecasts for 2010 at 5.41% and 4.8% for 2011 (both above the 4.5% target); and the estimate for the selic rate is 11.75% at the end of 2010. Thus the overall outlook for the Brazilian economy is good, but there are still some potential risks around overheating, global risk spillovers (e.g. sovereign debt), and if capital flows get too carried away that could create some vulnerabilities.

Sources
Econ Grapher Analytics www.econgrapher.com
Banco Central do Brazil www.bcb.gov.br
Trading Economics www.tradingeconomics.com

Article Source: http://www.econgrapher.com/30apr-brazil.html

Reserve Bank of Australia Continues Tightening

The RBA (Reserve Bank of Australia) increased its benchmark interest rate 25 basis points to 4.25%, making it the 5th increase this tightening cycle. The move was a close call and was only predicted by about half (13 of 23) of economists surveyed by Bloomberg.


Jumping straight to the last paragraph of the RBA's media release; indications are that there will be more rate hikes to come:

Interest rates to most borrowers nonetheless have been somewhat lower than average. The Board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today’s decision is a further step in that process.

Australia continues to lead the charge on monetary policy tightening as the strength of the Australian economy, and near-trend inflationary conditions, make it difficult to argue for historically loose monetary policy rates.

The outlook for the Australian economy is reasonably buoyant, indeed the comments in the monetary policy decision media release certainly paint a bright picture:

Australia’s terms of trade are rising, adding to incomes and fostering a build-up in investment in the resources sector. Under these conditions, output growth over the year ahead is likely to exceed that seen last year, even though the effects of earlier expansionary policy measures will be diminishing.

The rate of unemployment appears to have peaked at a much lower level than earlier expected. The process of business sector de-leveraging is moderating, with the pace of the decline in business credit lessening and indications that lenders are starting to become more willing to lend to some borrowers.

Credit for housing has been expanding at a solid pace. New loan approvals for housing have moderated over recent months as interest rates have risen and the impact of large grants to first-home buyers has tailed off. Nonetheless, at this point the market for established dwellings is still characterised by considerable buoyancy, with prices continuing to increase in the early part of 2010.

But obviously Australia isn't the only economy experiencing a strong recovery and a resurgence of inflationary pressures. There's some emerging market economies for example that are arguably better positioned than Australia growth-wise, and who face greater inflation risks. So the question is: Who's next?

Sources:
Econ Grapher Analytics www.econgrapher.com
Reserve Bank of Australia www.rba.gov.au
Australian Bureau of Statistics www.abs.gov.au

Article Source: http://www.econgrapher.com/6apr-rba.html

Playing the prediction markets

This article provides an introduction to both utilising implicit predictions in binary options, as well as some pointers on trading. Prediction markets provide an interesting venue for gauging the probability of an event based on the trading of both informed and uninformed participants.

As an investor, trader or someone with a general interest in things like economics related events you can use predict markets to help get an idea of the probability of the event occurring. You can then take it a step further and take potentially profitable positions if your view on the probability contrasts with the markets’ view of the probability.

Prediction Markets and Binary Options
So what are prediction markets? Prediction markets generally involve the trading of binary options. You may know what options are (the right but not the obligation to purchase a given thing), and the benefits of using them (nonlinear payoff profile i.e. fixed premium/cost vs variable profit). But binary options work a little differently, the standard binary option pays $1 if a specified event occurs by or on a specified date – otherwise it pays $0.

For example ipredict has a contract on the US Fed increasing interest rates by November (here): “FED.INCR.NOV10”. This contract pays $1 if the Fed increases interest rates on or before the 4th of November 2010.

You can both sell and buy binary options. So using the previous example, if you believe the probability of the US Fed increasing rates on or before the 4th of November is greater than 0 then you would buy contracts (e.g. if you bought a contract at $0.50 and the Fed increased rates before expiry you would receive $1).

Likewise if you believed that there was no way the Fed would lift rates this year then you could sell short the contract. So for example if it were trading at $0.50 then you would sell a contract for $0.50 and on expiry if the event did not happen you would get to keep the $0.50. But of course the converse is true, if the event did occur then you would have to pay $1 to the holder of the contract, but this would be offset by the $0.50 you sold it for.

How to Read the Market Predictions
So by now you probably can already answer this question, you gauge probabilities based on the price. If the price is $0.50 then on average the market is pricing in a 50% chance of the outcome.

To look at an example, on ipredict there is a suite of contracts on the RBNZ (Reserve Bank of New Zealand) interest rate decision on the 11th of March. At the time of writing the approximate prices of the contracts were as follows:

OCR.NC.11MAR10 Price $0.9650 …therefore probability = 96.5%
OCR.25.11MAR10 Price $0.0300 …therefore probability = 3.0%
OCR.OTH.11MAR10 Price $0.0050 …therefore probability = 0.5%

So at the moment you can see the market is overwhelmingly expecting no change to the Official Cash Rate on the 11th of March. You can see how the probability aspect works with this suite too by noting that all outcomes (all mutually exclusive and exhaustive) add up to 100%.

How to Make Money Playing Prediction Markets
So now, down to business! I bet most of you have already started plotting how to make money, but this section sets out the basic strategies for making money by playing the prediction markets.

1. Positioning
The first way is what I call positioning. Basically you find contracts where you’ve got a strong opinion on the outcome and position yourself to profit from that view. For example with the Fed rate increase contract, if you believe there’s about a 70% chance of it happening then you would buy it all the way up to $0.70 (possibly higher).

The key things to think about are: a) risk and reward profile e.g. if the price is $0.70 then your profit if it happens is $0.30 ($1-$0.70=$0.30), but if it doesn’t happen you lose the $0.70 you paid to buy the contract. This is a sub-1 trade; the ratio of profit divided by loss is 0.43. When you play sub-1 trades you need to get it right to make money.

A 10+ (ratio) trade on the other hand gives you a higher margin for error, but at the same time is the result of the market ascribing the outcome a low probability. For example if the price is $0.05 the proftit-loss ratio is 20, so in trading for an expected breakeven you could afford to be wrong 19 times out of 20 if the position size is the same on all trades. But again, the probability according to the market is 5% so you need to study up and try and foresee what the market doesn’t.

2. Trading
Another way of making money is utilising the fact that prices are determined in a liquid market with at least some informed participants. So as new information is revealed the price will change. For example if the price of the US fed rate increase contract is like $0.20, and then an inflation report comes out showing a huge upside surprise then the price could rise to, just for example, $0.30. In that case you could close out your position at a $0.10 profit.

You can play these sort of trades quite speculatively around interest rate announcements e.g. if you have a tightening bias you could buy a later contract e.g. April, as a play on any hints for a sooner increase coming from a sooner interest rate announcement. Anyway there are all sorts of usual market trading strategies you can use for actively buying and selling binary options.

3. Arbitrage
Sometimes arbitrage opportunities will open up in suites of contracts or between similar contracts. There will be times when you get quasi-arbitrage from contracts that have very similar payoff profiles, but might be structured slightly differently.

Anyway the easy way to arbitrage between contracts where there is more than one out come and you have mutually exclusive and exhaustive contracts is as follows:
a) Bid side: add up the bids, if the total is greater than $1.00 then sell an equal amount of all of the contracts.
b) Ask side: add up all the asks, if the total is less than $1.00 then buy equal amounts of all contracts in the suite.

Example: a suite of 3 contracts has the “ask” as follows; $0.9005, $0.0890, $0.0075, the total of the “asks” is $0.9970, so you could buy all the contracts for $0.9970 and receive $1 at expiry/event date, thereby netting $0.0030 (or $0.30 for 10 contracts, or $3.00 for 100 contracts, etc – to illustrate).

Summary
So there you have it, you can use prediction markets (aka binary options) to get a reading on the views of a market of informed and uninformed participants of certain events happening. But more importantly you can use these markets and instruments to make profits by taking positions on certain outcomes you have knowledge about, or by actively trading in the market, or even through arbitrage.


Article Source: http://www.econgrapher.com/binaryoptions.html


Notes:
I have only used this provider: www.ipredict.co.nz But I am aware that there are other providers out there, and a quick google search should reveal them. Also note this is not to be construed or relied upon as advice. I have no association with ipredict, but I do trade on the platform and from time to time I do take long and short positions in contracts that trade on that platform.