Wednesday Recap: Going Steady

12/11/2019

Going Steady

The Fed left interest rates unchanged on Wednesday, and chairman Powell reinstated his belief that the labour market can improve further despite unemployment being at a half-century low.

“Even though we’re at 3.5% unemployment, there’s actually more slack out there,” Powell said. “And the risks of using an accommodative monetary policy’’ to boost the labour market are “relatively low.’’

What this means is that the Fed has said it is no mood to give us a rate hike and reverse the past three rate cuts its made this year.

But, (and there is almost always a but) Powell suggested that the key challenge for the US economy that inflation is too low for the long term health of the economy. We’ve said before that interest rates are often inversely related to the rate of inflation in an economy. The fact that Powell is worried about inflation means that a rate hike is not coming at least until inflation rises to a healthy level for the long term economic health of the country.

It seems like Powell wants to be for unemployment what Volcker was for inflation.

President Trump may not have everything, but at least he’s got the weaker dollar he longed for. Fed’s last meeting today erased the gains the dollar made this year, and the currency depreciation is likely to make US exports more attractive in international markets.

With the result of “phase one” deal only days away, it is likely that the weakened dollar creates an incentive for China to agree to increase its purchases of US farm goods.

S&P 500 gained 9.11 points, to close at 03141.63, Nasdaq gained 37.87 to close at 8654.05, and the Dow rose by 29.58 points, to close at 27911.30.


“Not QE”

In today’s meeting, the FED also suggested that it is willing to extend its reserve management related purchases of Treasuries to other coupon-bearing securities if needed.

“We’re not at this place, but if it does become appropriate for us to purchase other short-term coupon securities, then we would be prepared to do that if the need arises,” he said at his post-decision news conference Wednesday. The Fed is “willing to adapt” its strategy on bill purchases, Powell said.

The yield on U.S. two-year Treasuries fell as much as 4.7 basis points to 1.61% in the aftermath of the Fed’s Wednesday announcements, while the spread between two- and five-year securities flattened by 1.1 basis points, reaching 2.1 basis points.

So far, the FED maintains that this is, in fact, NOT QE, but is willing to adopt “alternative measures” to inject cash into the economy. I wonder if there’s a word for that process?


Aramco IPO

Oil giant Saudi Aramco has gone public, and shares are trading freely on Tadawul – Saudi Arabia’s exchange.

Shares rose by 10% in Riyadh on Wednesday, touching their upper limit as investors in the middle east flocked to get a piece of the offering.

The IPO has been a fairly long project for the country and the economy, and the trading debut marks the end of Aramco’s IPO journey. Despite a successful IPO, the crown prince is still somewhat disappointed because the IPO missed the 2 trillion mark.

This is a world record, and despite offering only 1.5% of total shares, Aramco has successfully beat Alibaba’s $25 billion listing in 2014.

The Saudi Exchange is an interesting one, because it has an upper limit to how high the shares can trade on a single trading day, and that number is 10%. So even if there is excess demand that is pushing the share price above 10%, the exchange won’t allow that.

Shares rose from 32 riyals to close at 35.2 riyals, highlighting a 10% gain. With this gain, the market has valued Aramco at a whopping $1.877 trillion. At 37.5 riyals, one can expect the crown prince to be happy because that’s when the valuation of the company will hit the $2 trillion mark.

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