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Recent Interest Rate Cuts, Already Showing Economic Improvements

By Glenford S Robinson

The U.S. economy begins to show improvements after numerous interest rate cuts by the Federal Reserve. Some notable economic indicators such as the CPI, PPI, and Retail Sales Reports have shown improvements from previous readings. This is a good sign suggesting that the U.S. economy could finally be picking up speed after recent quarters of slow growth.  

The Consumer Price Index (CPI) for October, rose 0.4%, beating forecasts of 0.3% and a previous reading of 0.1% in September. The CPI measures changes in the price of goods and services in regards to the consumer. The CPI functions as a key economic indicator for measuring changes in purchasing trends and inflation.

A higher than expected CPI reading should be perceived as positive for the U.S. economy and bullish for the USD, while a lower than expected reading should be perceived as negative for the U.S. economy and bearish for the USD. When the USD exhibits strength, other currencies will show weakness and vise-versa, as most countries peg their currencies to the USD. Countries Peg their currencies to the USD to maintain stability of their currencies. The current CPI reading suggests that U.S. economic growth has picked up because inflation accompanies economic growth and expansion. The Bureau of Labor Statistics released the CPI on Wednesday, November 13, 2019 at 8:30 AM, New York Time.

The inflation rate equals the current CPI value minus the previous CPI value, divided by the previous CPI value, multiplied by 100 for converting to a percentage.

When the economy begins to expand, the inflation rate will also begin to rise. Therefore, the Federal Reserve must be extremely careful when cutting interest rates because cutting interest rates too much could cause inflation to rise too quickly.

Cutting interest rates too much could also cause most stock market investors to fall in a state of irrational exuberance, where investors egg each other on to buy more and more stocks, so the stock market rises irrationally or without solid fundamental reasons. This phenomenon explains the characteristics of a stock market bubble. And yes, we all know bubbles burst at some point; don’t we? The bubble bursts when the inflated price of the asset return back to its intrinsic value.

In regards to the stock market, the inflated high price of a particular stock would return back to its average price range. For example, doggie-bone stock normally trades at $10 per share as a result of its underlying fundamentals before irrationally exuberant investors got a holed of it; however, after these investors got a holed of doggie-bone stocks, the value bubbled up to $20 per share, then weeks later, news broke that the Federal Reserve plans to raise interest rates to slow down the over-heated economy. Wow! Now, panic sets in and panic-stricken investors now begin running for the hills, unloading boat-loads of doggie-bone stocks as they embark their way up the heavily wooded dry shrubby hills. Yes, a bubble busting stock market crash has taken hold. Naturally, investors often follow each other especially the ones who get caught up in irrational exuberance.

So, if one panic-stricken investor begins to buy-up doggie-bone stocks, then others will follow suit; therefore, if one of these investors begins to run for the hills, then the others will also follow. The take-away point of this story explains to investors that they should learn how to recognize an asset bubble, so they can avoid them. One way of doing so is consulting with a professional investment advisor.

A very familiar example of an asset bubble was Bitcoin. The Price of one Bitcoin bubbled-up to almost $20,000 dollars per coin, but came crashing down to below $3,000 per coin in 2018 to 2019. Yes, we all remembered when everyone was talking about the rising prices of Bitcoin. I was glued to CNBC Squawk Box like a coffee drinker’s lips glued to a cup of coffee. You know what you were doing! Don’t lie.

The U.S. Core Consumer Price Index (CPI) for October, rose 0.1% from 0.1% in September, posting a 0.2% reading, matching forecast of 0.2%. The Core CPI measures changes in the price of goods and services, excluding food and energy. The Report measures changes in price in regards to the consumer. The indicator functions as a key tool for measuring changes in purchasing trends and inflation. Thus, giving it very high importance.

A higher than expected Core CPI reading should be perceived as positive for the U.S. economy and bullish for the USD, while a lower than expected reading should be perceived as negative for the U.S. economy and bearish for the USD. The 0.2% increase in the Core CPI reading indicates that U.S. economic growth has picked up because inflation accompanies economic expansion. This is why inflation must be closely watched and maintained at 2%, a responsibility of the Federal Reserve. The U.S. Bureau of Labor Statistics released the Core CPI on Wednesday, November 13, 2019 at 8:30 AM, New York Time.

The Producer Price Index (PPI) measures changes in the price of goods sold by manufacturers. It plays the role of a leading indicator of consumer price inflation, and accounts for the majority of overall inflation. The U.S. Bureau of Labor Statistics and Department of Labor released the PPI Report on Thursday, November 14, 2019 at 8:30 AM, New York Time.

A higher than expected reading of the PPI Report should be perceived as positive for the U.S. economy and bullish for the USD, while a lower than expected reading should be perceived as negative for the U.S. economy and bearish for the USD.

The PPI Report for October, released on Thursday, November 14, 2019 at 8:30 AM, beats forecast of 0.3% by posting a reading of 0.4% well above the previous reading of -0.3%. This shows that inflation has slightly begun to rise, and inflation happens to be a byproduct of an expanding economy. In recent months even though the economy was expanding, this expansion had drastically slowed. However, with positive inflationary numbers of both CPIs and now the PPI, we are now beginning to see improvements in the economy. Growth has now begun to pick-up, again.

US Retail Sales for October rose 0.3% from previous September readings of -0.3%, beating market forecast of 0.2%. Motor vehicle sales and higher gasoline prices contributed to the improvements, while sales in big ticket household items and clothing declined.

Retail Sales measure changes in the total value of sales at the retail level. The Report acts as the leading indicator of consumer spending and provide information on overall economic activity.

A higher than expected Retail Sales reading should be perceived as positive for the U.S. economy and bullish for the USD, while a lower than expected reading should be perceived as negative for the U.S. economy and bearish for the USD. The U.S. Census Bureau released the Retail Sales Report on Friday, November 15, 2019 at 8:30 AM, New York Time.

US Core Retail Sales for October rose 0.1% but missed forecast of 0.4%, posting a reading of 0.2%. Core Retail Sales measures changes in the total value of sales at the retail level in the U.S., excluding automobiles. The Report carries a very high level of importance in indicating consumer spending and functions as a pace indicator for the U.S. economy.

A higher than expected Core Retail Sales reading should be perceived as positive for the U.S. economy and bullish for the USD, while a lower than expected reading should be perceived as negative for the U.S. economy and bearish for the USD. The U.S. Census Bureau Released the Core Retail Sales Report on Friday, November 15, 2019 at 8:30 AM, New York Time.

Gold prices fell by 0.3% to $1,468.1 an ounce approximately 10:30 AM London time on Friday, while the EUR/USD currency pair advanced to above 1.1050, from the low 1.10s, as increased USD selling pressures, induced by positive market-loving Brexit political developments, unfolds in the UK. White House economic advisor Larry Kudlow statement on Thursday that the US and China were close to reaching a trade deal also contributed to market movements.

The recent interest rate cuts by the Federal Reserve seem to have already jumpstarted the economy confirmed by the recent improvements in economic indicators such as the CPI, Core CPI, PPI, Core PPI, Retail Sales, and Core Retail Sales Reports.

Recent U.S. Interest Rate Cuts, Already Showing Economic Improvements

Disclosure

The Mstardom Finance trading team currently trades the EUR/USD currency pair, utilizing long, short, and hedging strategies.  

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