Central Bank Interest Rates

Here is a key macro indicator almost nobody is talking about. Debt service ratios (DSR) measure the amount of disposable income which is used by non-financial corporations and households to service their outstanding debt payments. In other words: how much of your salary is spent to cover your credit card and mortgage debt, or how much of corporate earnings are used to pay interest (and eventually principal) on outstanding loans and bonds. This is a crucial metric because it efficiently visualizes the pass-through of monetary policy tightening on the private sector. After all, the process by which raising interest rates is supposed to slow the economy works as follows: 1) Higher interest rates increase the borrowing cost for the private sector; 2) As a result, households and corporates slow down spending, hiring and consumption; 3) Ultimately, that's how the economy does what Central Bankers wanted when they started hiking: it slows down. Increasing debt service ratios (DSR) are a key indicator that the private sector is getting hurt by higher interest rates, and therefore that the economy might soon be slowing down. So: where are we today with debt service ratios? I looked at some of the major economies in the world and found that: - Australia, Canada, China, Korea, Norway and Sweden are under pressure Their DSRs are high in absolute terms and higher than their 20-year average, and the trend is also negative as they keep increasing over time. Unsurprisingly, these economies are already struggling a bit. - Europe and the UK are having a very slow pass-through so far Although that might change soon given the refinancing cliffs in Europe and the nature of the mortgage market in the UK - In the US, the big Fed hiking cycle has so far led only to a modest increase in the debt service ratio The US DSR increased to 15% (the US historical norm) with a very mild ongoing negative trend: households and corporates were smart to lock in low rates for long, and so the pass-through of Fed hikes has been quite slow so far. Keep monitoring the Debt Service Ratios: a key macro variable almost nobody is talking about, yet one which could give important indications about where different economies are going. Which economies do you think are the most exposed here? P.S. Enjoyed this macro analysis? Follow me (Alfonso Peccatiello) so you don't miss any post and stay updated on the launch of my Macro Hedge Fund! P.P.S. FREE TRIAL to my Institutional Macro Research? Join the biggest institutional investors in the world reading it every day - send me a DM and I'll set you up!

…It has begun. Over the last year, I have made the strongest possible case for the Fed to be proactive. Rates should have been cut this week – indeed, the rates should have been cut in January. We have seen this movie before. The Fed was very late to take inflation seriously in 2021. They brushed it off as “transitory”. However, it seemed obvious that inflation was surging. Real-time shelter inflation was increasing at a double-digit rate. Shelter has the largest weight in the CPI. Shelter operates with a lag. Hence, it was easy to forecast the surge. The Fed was forced to react after the damage was done. The same mistake has been repeated – despite many warnings. The recent CPI print was 3% year-over-year (YOY). Nearly two thirds of this print was driven by one component – shelter. Shelter inflation is reported at 5.2% YOY. This number is far from reality. For example, Apartmentlist.com rents are running -0.8% YOY - a full 6% below the official CPI number. Suppose we believe the real-time shelter inflation is 2%, not 5.2%. This means the real-time CPI would be 1.8%. If you believe shelter is 3%, then real-time CPI would be 2.2%. These numbers are well within the Fed’s target. The Fed prides itself on making data-driven decisions. However, it is unwise to make decisions based on stale data. The shelter inflation happened in the past. Keeping rates high will not impact what happened last year. It is always best to look at forward-looking indicators for policy decisions. ·      My yield curve indicator has been inverted for 20 months. It is 8 of 8 with no false signals since the 1960s. The maximum historic lead time has been 23 months (before the great recession). Ignore it at your own risk. ·      The Sahm Rule has been triggered. This indicator is not necessarily predictive because employment moves with the business cycle – but it is useful in telling us whether we are in a recession or not. We know that hiring has slowed and unemployment has risen – though the absolute rate is still relatively low. ·      Retail sales are highly correlated with personal consumption expenditures. Retail Sales are flat. Many do not realize that Retail Sales are not inflation adjusted. Taking inflation into account recent sales growth as well as YOY sales are negative. ·      There is considerable evidence that COVID-era savings have been drawn down. A recent release from Philadelphia Fed carried the headline: “Share of Delinquent Credit Card Balances Reaches Series High”. (The same report shows an alarming plunge in mortgage originations.) People are paying 20%+ interest on a card because their savings have run out. Indeed, if people are cutting back on fast-food expenditures, you know this is serious.  Drawing down the savings has fueled consumption expenditures over the past two years. That source of growth has ended. Now the Fed will have to play catch-up and cut by at least 50bp in September. Any recession is a self-inflicted wound. 

A historic moment in the World Markets - The Bank of Japan ends 8 years of negative interest rates, making a historic shift with the first rate hike in 17 years! This has officially ended the world’s only negative rate regime A quick explainer of why this happened - Some backdrop- - If you deposit money in an Indian Bank today u get 6% interest yearly, so if you Deposit Rs 100, you get Rs 6 as interest - But not in Japan! They had negative interest rates! - They had -0.1% rate, so if u kept 100 Yen, after 1 year you would get back 99.90 Yen - You are paying money to the bank basically to park money! Feels weird right? Let me explain 3 things – #1 - Why the negative interest rates? - Interest rates are central Bank tools to control inflation. It is called Monetary policy - Japan was stuck in a deflationary (falling prices of goods and services) phase for many decades. - They also entered a recession from 1995-1998 - Elongated deflation - falling prices in their goods and services, fewer earnings for companies, fewer wages, less employment, and a big impact on the economy (20 years of no growth + aging population) - Post many monetary policy measures, they entered -ve interest rates in 2016 – so that Banks can lend more and force people to spend more over saving so that the economy can be re-ignited! #2 - Why the end of -ve rates? - Jan prices rose 2%, 3rd month of rise (inflation = prices rising) – so they have increased rates from -0.1% to 0 to 0.1% - Wage increases – Rengo (Japan’s largest Labor Union) said the average wage increased by 5.28% (the largest since 1991) #3 - Impact/Conclusion - - BoJ will not go on an aggressive rate hike cycle as per their comments - They can’t keep rates down when worldwide rates are up - Financial markets had repositioned over the past week already (news/speculation) Hope the above post simplified everything for you Follow me Aditya Kondawar for more such simplifications

Same loan amount, same tenure, same credit score, but why are you paying higher interest than your friend? The RBI reduced the repo rate by 100 basis points in 2025, from 6.5% to 5.5%. Yet millions of home loan borrowers haven't seen their EMIs drop! Here's what's happening: In India, home loans follow different rate systems. → MCLR (Marginal Cost of Funds based Lending Rate) If your loan is on MCLR, your bank decides when to reduce your rate. They're not obligated to pass on the repo cut immediately or fully. → EBLR (External Benchmark Lending Rate) If your loan is on EBLR, your rate is directly linked to the repo. It resets automatically every 3 months. When the RBI cuts rates, you benefit within 90 days. The RBI mandated EBLR in 2019 for faster rate cuts - but only new loans got it automatically. Today, over 40% of existing home loans in India are still on MCLR or older systems like Base Rate! And, this isn't a small difference. Take a ₹50L loan over 20 years. → If you're on MCLR at 8.5%, your monthly EMI is ~₹43,391. → If you're on EBLR at 7.5% (post rate cut), your EMI drops to ₹40,280. That's ₹3,111 saved every month. Over 20 years, that's ₹7.46L in total savings! It would cost you anywhere between ₹25K - ₹30K to switch from MCLR to EBLR as a one-time fee. But the math works heavily in your favor. A small one-time cost could save you lakhs in interest. Send this to someone who needs this!

We’ve updated our #rate forecasts post-election, based on three main assumptions: 1) The #Fed will continue cutting rates, but may proceed more cautiously and maintain some optionality along the way; 2) The economy will continue to grow around trend near term; 3) A Republican sweep raises the prospects of fiscal expansion, which increases growth and inflation expectations. We still believe the direction of travel for interest rates is lower as any policy changes will likely take time to be finalized and implemented, the labor market continues to loosen, and the terminal rate has already repriced higher. But we now see the 10-year US Treasury yield trending towards 4% by June 2025, up from our previous forecast of 3.5%. Read more below.

Dueling Mandates The Federal Reserve’s dual mandate - to foster price stability and full employment - is rapidly morphing into a dueling mandate. The Fed’s Beige Book revealed that the labor market remains stuck in its low hire, low fire, stagnate mode, while inflation is accelerating. It noted stickiness in service sector inflation and incidents of opportunistic pricing. The latter are price hikes on goods that are not directly tariffed but benefit from the lack of completion that tariffs trigger. Shifts in the data prior to the shutdown further complicated the Fed’s assessment of the economy. Employment was revised down, while economic growth was revised up. That is unusual - understatement. Preliminary reports on the third quarter reveal an acceleration of consumer spending. What we have to ask ourselves is why? Is it due to inequality, doing more with less or a measurement problem? Probably some combination of all of the above. The measurement issue is the most important to the Fed. The official data often is slow to capture rapid shifts in the economy. Staffing shortages are worsening that problem. More than a third of the prices in the August CPI were imputed, as field officers were idled earlier this year. How does that distort our view of the economy? If we are undercounting inflation, then we are overstating economic growth. Chair Powell used the words “may be” when talking about the recent strengths of the economy. Revisions could reveal a weaker economy - that is what doves on the Fed are betting. If they are not, we could have more support for inflation than is understood. Adding to the uncertainty we face is the government shutdown, which leaves us with a dearth of data and could be more consequential to the economy than past shutdowns. It is hitting more workers that past shutdowns with threats of larger cuts & ripple effects to the communities in which they live. The bulk of those workers live outside of the beltway in DC. Another challenge for the Fed is inflation expectations. Research by the Boston Fed suggest that expectations may be becoming unmoored, or normalized. Tariffs typically represent a one-time bump in prices, which is self-correcting. The sequencing of tariffs on the heals of the pandemic inflation has left them mimicking inflation. That could further normalize inflation and make it a self-fulling prophecy. Bottom Line The Fed is left with “no risk-free path” for policy. If it doesn’t cut, it risks a recession. If it cuts too aggressively, it could stoke a more persistent bout of stagflation. That has left it moving with caution instead of certitude, cutting in 1/4 point moves to avert the worst in labor market weakness without stoking inflation. Prospects for 2026 are murkier & could shift with changes in Fed leadership. History is unkind to central banks which prioritize employment over inflation. Any gains in employment tend to be short-lived & stoke a more entrenched bout of inflation.

The Federal Reserve is facing a problem that goes deeper than interest rates or inflation prints. I've written my thoughts about it this morning in this article. These are my thoughts. The Fed's own mandate is pulling it in two directions at once and the strain is starting to show. There is a split inside the committee, which became very evident yesterday. Policymakers who share the same data are reaching very different conclusions about where rates should go next. The problem is that the Fed is expected to deliver both stable prices and something it calls maximum employment. The first has a clear target. The second does not. It is a judgement that shifts with demographics, technology and global supply patterns. When inflation remains above target but labour market indicators soften, the mandate offers no obvious hierarchy. Some officials believe employment risks must take priority. Others insist inflation should dominate. This tension matters because it shapes how markets interpret every signal the Fed gives. A divided committee rarely tells a clear story and clarity is the currency central banks trade in. As the world economy changes at speed, does the dual mandate still help the Fed or is it becoming an obstacle to the very stability it is meant to support? The other the question to ask is whether this dual mandate actually threatens the Fed's independence i.e. whatever decision it makes is questioned politically, making it vulnerable to political attack. What are your thoughts?

I've read many comments complaining that the FOMC didn't cut interest rates in June. One thing that I don't believe is appreciated is that a 25 basis point cut in rates is unlikely to spur much activity due to the concomitant existence of such profound economic policy uncertainty, due primarily to tariff policy. As evidence, I wanted to share an excerpt from Bloom (2014) concerning this issue (https://lnkd.in/gew8rQar). Thoughts: •As I've highlighted, economic uncertainty dampens the response that firms have to interest rate cuts. In layman's terms, what this means is that a 25-basis point cut in interest rates generates less capital investment when economic uncertainty is high versus when economic uncertainty is low. •Consider, for example, the situation facing a manufacturer that is considering expanding production. To do so, it must order machinery imported from the European Union. Let's imagine the lead time is 6 months. The fact said manufacturer cannot forecast what tariffs on EU machinery will be in 6 months means that cutting interest rates is less likely to spur that capital investment to occur. Implication: economic uncertainty regarding tariffs compounds negative effects of the tariffs by freezing firms in place. If economic uncertainty continues to remain as elevated as it currently is, eventual FOMC interest rate cuts will be less effective in spurring economic activity. Something to keep in mind as the FOMC still projects two cuts in 2025. #economics #markets #supplychain #supplychainmanagement #manufacturing

In the end, the Fed rate decision was hardly a surprise. Of course, it could’ve been a different story! At the start of the year, many analysts expected March would be the first rate cut. But the inflation and growth data have been hotter than expected since then. And that ended any hopes of early policy easing. Instead, it’s a ‘no change’ from Mr Powell and team. Three points are worth noting for investors : 1️⃣ First, how far are we from the first cut? At the Congressional testimony a few weeks ago, Chair Powell said “not far”. But he didn’t use that phrase today. Globally, central bankers are now more concerned that the ‘last mile’ of disinflation could be hard-going. So the Fed wants to stay data-dependent and retain maximum flexibility. That means that markets will remain ‘hyper-sensitive’ to inflation news. On the balance of the data, we still expect the first cut in June. And Mr Powell also told us that the pace of QT will slow “fairly soon”. 2️⃣ Second, the Fed shared the updated quarterly forecasts – ‘the dots’. In December, they had 3 cuts pencilled in for 2024 and they’ve retained that guidance. But many investors I speak to already assume 2-3 cuts. Something to ponder there. Just as important is the scenario for 2025. Back in September, the Fed assumed 4 further cuts. But they now guide for 3 rate cuts next year. Of course, there’s a wide range around that. But, if delivered, it would mean that the Fed funds rate only goes back to c 4% by the end of 2025 – by historic yardsticks, it would be a very gradual rate cutting cycle. Meanwhile, the Fed upgraded its growth forecasts (now expecting 2.1% GDP growth in 2024), and lowered the unemployment estimate. In other words, the projected scenario is the softest of soft landings. 3️⃣ Third, the long run. A key issue for investors is where interest rates ultimately settle. The Fed has nudged its assumption higher from 2.5% to 2.6%. But this estimate still looks too low - a legacy assumption from the economy of the 2010s. Today’s macro paradigm is different. A number of Fed officials have already talked about 3% or higher terminal rates. And I would expect the long-run assumption to continue to drift higher. No big surprises, but a few interesting tidbits, and a positive tone for investment markets to respond to. The big week for central bankers continues … #fed #economy #markets #investmentstrategy chart source = HSBC AM, Macrobond

𝐈𝐟 𝐲𝐨𝐮 𝐡𝐚𝐯𝐞 𝐚 𝐥𝐨𝐚𝐧, 𝐚𝐧 𝐅𝐃, 𝐨𝐫 𝐬𝐭𝐨𝐜𝐤𝐬—𝐲𝐨𝐮 𝐧𝐞𝐞𝐝 𝐭𝐨 𝐫𝐞𝐚𝐝 𝐭𝐡𝐢𝐬. The RBI just cut the Repo Rate by 25 bps, bringing it down to 6%. Here’s what that means for your money, your investments, and your future—explained simply: 1. What is the Repo Rate? It’s the rate at which the RBI lends to banks. Lower repo = Cheaper money for banks = Lower interest rates for you. 2. EMIs are set to drop. Home loans, car loans, personal loans— Banks will likely cut lending rates → Your EMIs fall → More monthly savings for you. 3. Stock Market Reaction This move is usually bullish for: ✅ Banking ✅ Auto ✅ Real Estate ✅ Infrastructure Cheaper credit = More earnings = Market rally potential 4. FD Rates? Not so exciting. Banks may slash fixed deposit interest rates to protect their margins. Savers/Investors will start looking at: ✔️Mutual Funds ✔️REITs ✔️Dividend stocks 5. Good news for businesses. Lower borrowing costs = More funds to: 6. But… watch out for inflation. More liquidity = More spending = Inflation risk. The RBI will need to balance growth with price stability carefully. In short: EMIs → Fall FDs → Less attractive Stocks → Could rally Inflation → A risk to watch If you care about your money—don’t just read the news. Understand what it means. #update #rbi #stockmarket #ratecuts #finance