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Inflation and Mortgage Rate Rise as U.S. Economy Picks Up Steam, Despite Moderate Levels of Volatility and Lackluster Retail Sales Numbers

By Glenford S. Robinson

The U.S. Economy still continues to display modest levels of volatility. The recent rise in inflation to 2.1% and the recent rise in mortgage rates show that despite the presence of volatility, the U.S. Economy still continues to expand at a steady pace.

The Phase-one US-China trade deal on Friday and the Brexit-inspired, British-election-win by Boris Johnson’s conservative party, also contributed to some levels of market volatility. In fact, more volatility will be expected, now that there could be a possible Brexit in January of 2020. Lackluster Retail Sales numbers in November further added to the multitude of volatility inducing factors that have continued, to caused volatility in financial markets. 

The CBOE Fear Index otherwise known as the Volatility Index (VIX) dropped by 1.31 or 9.4% on Friday from 13.94 to 12.63. What does all this mean? Well, simply put, the VIX measures the fear level of stock investors. So, when investors see or perceive positive economic growth, they will be less likely to protect their stock investments through the purchasing of Put Options, because they perceive that the stock market will go up or continue to go up. However, if stock investors perceive that the stock market will go down, they will begin to buy Put Options, thereby increasing the VIX or Fear Index.

So, we can see here that the Stock Market or the S&P 500 (SPX) is inversely proportional to the Fear Index. If a stock investor buys a Put Option to protect or figuratively indemnify shares of a stock, this investor is essentially buying an insurance policy to protect her stock investments.  Put Option sellers essentially sells insurance policies to investors, not literally but figuratively. The VIX or Fear Index is directly proportional to the amount of Put Options bought.  A high Fear Index means investors believe that the stock market may most likely continue to fall, while a low Fear Index means investors believe that the stock market may most likely continue to rise. This happens to be the current sentiment of stock market investors. This is the reason why the stock market has continued to trended higher.

The VIX or Fear Index fell 9.4% this past week, telling us that Investors are currently not buying Put Options or insurance policies for their stock investment positions. Investors therefore, feel very confident that the stock market will continue to rise. This explains why the stock market has trended so high lately, despite moderate volatility caused by trade tensions and Brexit uncertainty.

A VIX level of 12.63 does not necessarily mean that the Fear Index will always be low whenever the VIX level reaches 12.63.  This value assumes a low level as a result of the average VIX levels over the past year or 52-Week Range. The current 52 Week Range for the VIX sits between 11.03 and 36.20.

Another example of the current ebb and flow nature of the economy showed in the Business Inventories, Report. The current Business Inventories Report for October came in 0.1% higher than the -0.1% reported the previous month, matching forecasts of 0.2%. This result further confirms that the economy will still continue to see subdued levels of volatility. This volatility so far has held the economy and financial markets in a manageable equilibrium state; therefore, ruling out the advent, of any pending recession in 2020.

The economy will not enter into a recession anytime soon because there is currently no over extension of credit as there was in the Subprime Mortgage Crisis leading up to 2008; there is currently no innovation that has caused investor irrational exuberance; the Federal Reserve has done a very good job in maintaining economic equilibrium by adding liquidity to financial markets and subtracting liquidity from financial markets when necessary.

The Federal Reserve knows firsthand, that it cannot allow financial markets to operate independently without government intervention. So, the Fed has been busy contributing to economic stability by adding liquidity to financial markets. As recently as December 9th 2019, the Federal Reserve Bank of New York added $81.4 billion in liquidity to financial markets and cut interest rates numerous times in recent months. The contribution that the Fed has provided and continues to provide will be enough to ride out this wave of moderate volatility caused by trade war and Brexit induced uncertainties.

Brexit could possibly occur in January, which could cause a global economic shock, but global economies will be able to withstand this possible shock because there is currently no other significant negative factor that could compound the negative effects of Brexit on global economies. There are no too-big-to-fail banks or insurance companies filing for bankruptcy, there are no credit-default swaps, no subprime mortgage bubble, no IPO-induced internet bubble and neither is there any current economic bubble waiting to burst by the realization of investor irrational insanity. 

Equity investors seem to be investing rationally at the moment. Don’t know how long this will last, but things look good so far. Although the current VIX or Fear Index got me a little concerned. Investors seem to be closing their eyes and buying stocks, pushing the S&P 500 and the stock market to new highs, ignoring nuisance developments such as trade deal agreements and Brexit politics. Last Friday’s US-China phase-one trade deal, didn’t move market much at all. No one seemed to care, they just continue jumping into the stock market and buying stocks, pushing the stock market higher. 

The Business Inventories Report measures changes in the value of unsold goods held by manufacturers, wholesalers, and retailers. A higher than previous reading can indicate a lack of consumer demand. Therefore, a higher than expected reading should be perceived as negative for the U.S. economy and bearish for the USD, while a lower than expected reading should be perceived as positive for the U.S. economy and bullish for the USD. The Census Bureau released the Business Inventories Report on Friday, December 13th 2019 at 10 AM, New York Time.

Another proof that the economy has turned around is the Consumer Price Index (CPI) year over year Report, reported in November. The CPI measures changes in the price of goods and services in regards to the consumer. It is the best way to measure purchasing trends and inflation. A higher than expected 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. CPI Report released on Wednesday, December 11, 2019 beat forecasts of 2.0% by posting an impressive 2.1%, beating out a previous reading of 1.8%. Recent Interest Rate cuts have finally induced economic growth and a slight rise in inflation often accompanies economic growth and expansion. Therefore, the increase in inflation proved that the U.S. economy has experienced growth and expansion over the past year and continues to do so. The U.S Bureau of Labor Statistics & Department of Labor released the CPI Report on Wednesday, December 11, 2019 at 8:30 AM, New York Time.

Mortgage rates have benefitted from the recent improvement of the U.S. economy. The 30-year Mortgage Rate came in at 3.98% from a 0.01%-increase from 3.97%. The Mortgage Bankers Association (MBA) released the 30-year Mortgage Rate on Wednesday, December 11, 2019 at 7:00 AM, New York Time.

The Mortgage Bankers Association Application measures changes in the total number of new applications for mortgages backed by the MBA during the week reported. The MBA Application Report released on Wednesday, December 11, 2019 beat the previous mark of -9.2%, with a new mark of 3.8%. A higher than expected 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 current MBA application confirms that U.S. economic growth has indeed picked up steam. With a growing economy, consumers can now afford to buy homes. In addition, lower mortgage rates also contributed to the increase in mortgage application.

U.S. Retail Sales in November rose less than expected, rising by only 0.2%, missing forecasts of 0.5% and a previous reading of 0.4%, as consumers focused their spending, only on nondiscretionary items. This reading could cause economist to forecasts slower economic growth for the final quarter of 2019. Low manufacturing numbers in past months due to trade war could’ve caused consumers to cut back on retail spending. The GM strike, could probably be looked at as a culprit also, for the decrease in retail sales because those GM workers who walked off their jobs at the General Motors Automobile Plant missed the chance of a paycheck. We will see if Retail Sales Numbers improve next month on January 16th 2020 when the new Retail Sales Report is made available, now that the US and China has agreed to a phase-one trade deal and GM employees have dropped their picketing signs and have since returned back to work.

The Retail Sales Report measures changes in the total value of sales at the retail level in the U.S. It functions as a leading indicator of consumer spending, which accounts for overall economic activity. A higher than expected 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, December 13, 2019 at 8:30 AM, New York Time.

Now comes the Core Retail Sales Report. What can it tell us about the state of the U.S. economy in November? Well, the Core Retail Sales also increased less than expected, increasing by only 0.1%, missing forecasts of 0.4% and a previous reading of 0.3%.

Core Retail Sales measures changes in the total value of sales at the retail level, excluding automobile. It functions as a key economic indicator of consumer spending and serves as a pace indicator for the U.S. economy. A higher than expected 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.

So, simply put, the low number of the core Retail Sales Report tells us that the economy progressed at a slower pace in November. This slow pace could’ve also been caused by the “Thanks Giving-Holiday,” where people just simply spend money on essential items such as food and waited until Black Friday to spend on discounted items, essentially using less money to buy more goods. The Christmas and New-Year holiday should see improvements in consumer spending, provided that the underlying factors causing the reduction in Retail Sales numbers happens to be short-lived.

The stock market closed, mixed on Friday, as investors digest the development of a phase-one trade deal between the US and China. Beijing confirmed that an agreement with the U.S. included a phased rollback of tariffs, but provided no further detail. The Dow Jones industrial average rose 3 points, ending the week at 28,135, while the S&P 500 ended the week unchanged at 3,169. The Nasdaq gained18 points or 0.2% to 8,735. European stocks closed higher on Friday, after the US-China trade deal announcement and Boris Johnson’s conservative party win.

On the Brexit Front, Prime Minister Boris Johnson’s Conservative Party won the British election in landslide fashion, setting off an epic buying frenzy of U.K. stocks by investors. Foreign Currency investors also joined the parade, sending the British Pound to a high of 1.3515 against the dollar, a feat hasn’t been seen since May 9th of 2018, when the currency hit a high of 1.3607 against the dollar.

Euro-dollar currency investors also got into the act, pushing the Eurozone currency to a high of 1.1200, a mark hasn’t been seen since August 13th of 2019, when the EUR/USD hit a daily high of 1.1228 against the dollar. Wow! Such exuberance! I love exuberant investors. When they run to the hills, I simply run to the beach. It works, every time. Hey, got to feed the family!

Investors figure that election results will calm Brexit Jitters, because a significant flow of capital will begin to pour back into the British economy. The electoral win by Johnson sets the stage for British lawmakers to trigger a long-awaited split from the European Union. The British now appears confident that they will once and for all be able to leave the European Union by the end of next month, finally removing the continued uncertainty that has plagued business and investors’ sentiment for the last three years.

Inflation and Mortgage Rate Rise as US Econonomy Picks Up Steam, Despite Moderate Levels of Volatility and Lackluster Retail Sales Numbers

Disclosure

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

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Information in this video, and in our articles published on Mstardom.com, may contain forward-looking statements, which could involve high risks and uncertainties. Markets and instruments profiled in our videos and in our published articles, are for informational purposes only and should never be taken as professional investment advice or recommendations to buy or sell in these assets. You should do your own in-depth research before making any investment decisions. Mstardom Finance does not guarantee that the information presented in our videos and articles is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is timely in nature. Investing in Open Markets involves a high degree of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.

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