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3 macroeconomic updates πŸ—ΊοΈ - 5th June 2023

3 macroeconomic updates πŸ—ΊοΈ - 5th June 2023
Photo by Christine Roy / Unsplash
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1. Inflation πŸ“ˆ

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. As of May 10, 2023, the United States Consumer Price Index (CPI) YoY was 4.9%1. I took data from the United States because it is still the largest economy in the world by GDP, amounting to around US$25.46 trillion in 2022. Inflation is still high and therefore the FED will likely increase interest rate to bring it down further.

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2. Interest rates πŸ“ˆ

As of the 3rd of May 2023, the Federal Fund Rates stands at 5.25%. That number represents the minimum cost of borrowing businesses and consumers have to face.

Interest rates can have a significant impact on the global economy and US risk assets. Here are some ways in which interest rates can affect the economy and investments:

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“‰

Low market liquidity can have a significant impact on US risk assets. Risk assets are financial securities or instruments that are not risk-free and are likely to fluctuate in price, such as equities, commodities, high-yield bonds, real estate, and currencies2.

Market liquidity refers to how easily assets can be bought or sold, and when it dries up, it can be disruptive3. Low market liquidity can exacerbate market swings and make it harder for investors to execute buy and sell orders at a desired price4. This can lead to increased volatility and uncertainty in the market, which can negatively affect US risk assets.

Low market liquidity can also increase borrowing costs for governments and corporations, worsening financial conditions3. This can lead to a decrease in investor confidence and a decrease in demand for US risk assets.

Conclusion
With high inflation, high interest rates and low market liquidity, the market is likely to crash leading to lower prices in risk assets. When prices fall, it may lead to a better buying opportunity. Ideally with low inflation, low interest rates and high market liqudity. Basically inversed conditions. This is why I currently have >60% of my current portfolio allocation in cash and cash equivalents.