"Zero or Less"
President Trump, via his Twitter account was giving a guiding hand to Chairman Powell and the rest of the Fed board yesterday. He was calling for the Fed to reduce short term rates to ”ZERO, or less”. President Trump has been criticizing the Fed for several months, claiming that the last hike (December seems like a long time ago) were not needed and that rates should have been cut more aggressively. I have been of the opinion that Trump wants to use the Fed as a scapegoat should the U.S. economy slow.
Yesterday, his focus changed a bit as he suggested “we should then start to refinance our debt” the U.S. could reduce the cost of its debt and lengthen the maturity, reducing interest costs.
According to the Congressional Budget Office (CBO):
Interest payments will rise from $325 billion last year to $928 billion in 2029.
The Federal Government will spend more on interest than on Medicaid in 2020. By 2024, interest expense will match defense spending.
If interest rates go up by 1% the cost will increase by $1.9 trillion over ten years!
The CBO estimates that interest expense would be 3.4% of GDP by 2029, a new record.
It is surprising that a Republican president is so willing to mortgage the future of the U.S. by increasing debt at a time when the economy is doing relatively well.
It is not surprising that President Trump needs to have rates lower to help hold the stock market up and interest costs down.
Why cut rates if they are already negative?
The ECB has an inflation target of 2% over the medium term, Inflation has not hit this target for some time and is at 1% currently.
The market expects the ECB to lower the deposit rate to -.5%, this is the rate the ECB pays to banks. (currently -.04%)
There is an expectation that some sort of support for the banks will be instigated (tiering) to help the banks avoid losing on deposits from clients.
We expect the refinancing rate will be cut which helps mortgage borrowers, look for a .10% cut here as well Quantitative Easing (QE). This is when the ECB buys government and corporate bonds in the hopes of boosting inflation.
The last QE program saw the ECB buy over Euro 2.5 trillion from 2014 to 2018.
The ECB is running out of quality bonds to buy and many of the eligible bonds are trading at negative yields.
The wild card is if the ECB copies the Japanese and the Swiss and starts buying equities!
Our view is that all of the previous QE and rate cuts, have not helped lift inflation and economic activity. We doubt more of the same will change things.
We at Minter are looking for the market to be disappointed by the ECB today. But either way we suggest entering this afternoon, light on trading risk, we prefer to react rather than guess what will happen. There will be opportunities post meeting, especially if we see the Euro bounce.
Current positions: Long gold with stop at 1470 level
Long AUDJPY stop at 73.50
We look for equity markets to hold current levels on expectation of ECB and FED cuts. We fear there may be disappointment and a correction after the Fed meeting next Wednesday.
Gold is back in the range after testing lower. Aggressive central banks will drive a test of the highs.