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3 macroeconomic updates πŸ—ΊοΈ- 6th of July 2023

3 macroeconomic updates πŸ—ΊοΈ- 6th of July 2023
Photo by Christine Roy / Unsplash
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1. Inflation πŸ“‰

CPI seems to be trending downwards from the previous y/y record of 4.9%. As of the 13th of June, it currently stands at 4%. This seems to be the working effect of high interest rates, as it still stands at 5.25%.

The demand for goods and services is (usually) inversely related to the interest rate. When interest rates are high, it is more expensive to borrow money, for both businesses and consumers. This discourages people from buying things which may lead to a decrease in demand and, as a result, a decrease in inflation.

For example, imagine that you are thinking about buying a new house by taking up a loan. If interest rates are high, you will have to pay more interest on your loan, which will make the house more expensive. This may make you decide to hold off on buying the house, which will reduce the demand for houses and lead to a decrease in inflation.

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2. Interest rates πŸ“ˆ

In our last macroeconomic post, the Federal Fund Rates stood at 5.25%, this was unchanged after the next FOMC meeting held on 14th of June 2023. However, the FED is planning two more rate hikes this year.

The next FED meeting will take place on the 26th of July. According to the CME FedWatch Tool, as of this writing, there is a 0.887 probability that the FED will increase the interest rates by another 0.25% or 25 basis points.

As usual, the same effects as written in the previous macroeconomic post applies.

Effects on the global economy:

  • Appreciating currencies: When the US raises interest rates, it can lead to an appreciation of the US dollar, as investors can hold US dollars through money market funds and gain interest. This increases the demand of the dollar which will cause it to strengthen against other foreign currencies as indexed by the DXY. This can negatively impact other countries' currencies1.
  • Capital outflows: Higher US interest rates can lead to capital outflows from other countries, which can create instability in those nations1.
  • Risk-off shocks: Global risk-off shocks can be highly destabilizing for financial markets and may trigger severe recessions2.

Effects on US risk assets:

  • Bond prices: When interest rates rise, bond prices tend to fall, as investors can earn higher yields elsewhere3.
  • Stock prices: Higher interest rates can lead to higher borrowing costs for companies, which can negatively impact their earnings and stock prices3.
  • Real estate: Higher interest rates can lead to higher mortgage rates, which can reduce demand for real estate and negatively impact prices3.
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3. Market Liquidity πŸ“‰

Market liquidity is the ease with which an asset can be bought or sold without affecting its price. When market liquidity is high, it is easier to buy and sell assets without causing their prices to fluctuate too much. This can make it easier for investors to take on risk, as they are less likely to lose money if they need to sell their assets quickly.

On the other hand, when market liquidity is low, it is more difficult to buy and sell assets without affecting their prices. This can make it more difficult for investors to take on risk, as they may be forced to sell their assets at a loss if they need to sell them quickly.

Conclusion
Inflation is still high at 4%, and the FED plans to hike interest rates twice in the second half of the 2023. Market liquidity has been continuing to decrease since the 22nd of March 2023.

My >60% cash and cash equivalents position is unchanged. I will be closely watching the markets and plan to deploy cash into risk assets whenever a pivot occurs. Stay safe while investing πŸ™