Currency Turmoil and Economic Clues | Weekly Business Briefs w/ Martin Perdomo

Is the yen's recent tumble a harbinger of more economic turbulence to come? Our latest episode unpacks the complexities of the currency market chaos as the yen battles against the dollar amidst significant investor anxiety and major sell-offs. We explore the intricate dynamics of the Federal Reserve's potential interest rate cuts and Japan's steadfast monetary policies, along with the critical role of the yen-carry trade. Plus, we'll decode how upcoming US economic indicators, especially the Consumer Price Index (CPI), might steer market sentiments and future financial strategies.

Next, we scrutinize the Federal Reserve's precarious balancing act as it navigates modest inflation upticks and the specter of a slowing labor market. With the July jobs report and the producer price index (PPI) painting a nuanced picture, the Fed's next move is under intense scrutiny. Hear why Fed Governor Michelle Bowman might resist a rate cut, and understand the broader implications of these interconnected economic signals. Tune in for a comprehensive analysis that links these critical elements and projects their potential impact on the global market landscape.

Transcript

Speaker 1: 0:01

It's Wednesday, august 14th 2024. Let's dive into the top three business news heating up in this week's weekly business brief. First up currency chaos, as the yen is tumbling against the dollar. The yen experienced a drop against the dollar on Monday as investors evaluated the possibility of the Federal Reserve implementing a significant interest rate cut next month. This decline came after a turbulent week marked by a major sell-off in currency and stock due to concerns about the US economy and the Bank of Japan's aggressive stance on monetary policy. However, a strong US jobs report on Thursday eased some fears, leading the markets to reconsider the likelihood of substantial Fed rate cuts this year. Investors are now focusing on upcoming US economic data, particularly the Consumer Price Index, the CPI, to determine whether inflation concerns will resurface or if the focus will remain on recession risk and the labor market. Despite last week's stabilizations, investors are still anticipating 100 basis points of Fed cuts by the end of year, as per the CME Group FedWatch 2. Upcoming US producer and consumer price data could significantly influence market expectation. The dollar was trading at 147 a yen, reflecting a slight increase, while the euro and the swift franc experienced minor fluctuation.

Speaker 1: 1:35

Last week's market volatility was largely driven by unwinding of the yen-carrying trade, which involves borrowing yen at low interest rates to invest in higher yielding assets. The recent strengthening of the yen to its highest level since January was influenced by Japan's intervention and unwinding of these trades. However, given the potential of increased market volatility due to upcoming US elections and expected rate cuts, a return to yen carry trade is considered unlikely. So here's what happened, guys the Japanese decided to keep their rates low while the US and the rest of the world was increasing interest rates to keep inflation under control. So what investors were doing was they were going to Japan, borrowing yen at low interest rates and then deploying it in the US stock market or deploying it in US assets and pay lower interest on yen. Right, makes sense. Actually, that's kind of brilliant, actually really smart move. Last week, what happened was the Japanese government increased rates, and that created fear in the market, as now investors that borrowed money at a lower rate from Japan and then deployed the money into other assets now had what their cash flow was going to be less right, because now the interest rates went up, and that's what caused all of the turmoil in the market.

Speaker 1: 3:03

I think inflation is an issue. That is what they're trying to keep under control. But here's the thing, guys when rates go down and they will go down when rates go down next month, and hopefully they'll go down by a point inflation will happen. That is a natural occurrence of when rates. Interest rates go down. When interest rates go down, people spend more, companies borrow more. When people spend more and they consume more, prices tend to go up, and that causes inflation.

Speaker 1: 3:33

Next up, find out why economists are watching the Fed's every move. Us inflation saw a modest increase in July, but experts don't expect it to prevent the Federal Reserve from cutting interest rates next month. The Consumer Price Index rose by 0.2% from June, aligning with predictions and suggesting a slow pace of annual inflation not seen since early 2021. The easing in inflation has given the Federal Reserve the confidence to consider lowering borrowing costs, while shifting focus to the labor market, which has shown signs of slowing down. The July jobs report indicated a significant reduction in hiring, with unemployment rate rising for the fourth consecutive month, a trend that sparked concerns of a recession and led to a global stock market downturn. While this partially led to a global stock market downturn Since the beginning of the globally stock market downturn was the move by Japan by raising rates. If the CPI results align with expectations, it would confirm a continuing downward trend in inflation, though some economists anticipate a slight rise following June's unexpected low figures. This uptick is believed to be linked to core services, excluding housing, a category closely monitored by policymakers. The producer price index of PPI will be analyzed for its impact on the Fed's favorite inflation gauge, the personal consumption expenditure's price index. Additionally, a report is expected to show a rise in retail sales in July. However, after accounting for specific components, the control group used to calculate GDP is predicted to see a significant slowdown.

Speaker 1: 5:22

Fed Governor Michelle Bowman expressed concerns about inflation risk and labor market strength, suggesting he might not support a rate cut in the upcoming Fed meeting. So that is concerning to me that we have a one of the Fed board members not wanting to lower interest rates. Should they not lower interest rates, we will for sure, in my opinion, see a recession. Now the most important thing to watch for, in my opinion, is to be looking out for unemployment rate. Now the unemployment rate has ticked up since the beginning of the year. In January of 2024, we were at 3.7, and as of July, we went up to 4.3. Now that is significant. That's 600 basis points. That's significant. Remember, people don't have jobs and they struggle to pay their rent, they struggle to pay their bills and when people struggle to pay their bills, the businesses employing those employees to support the consumer our economy is built on consumer right and so they lay people off and it just becomes a downward spiral. So the Feds have to lower interest rates to avoid an upward spiral.

Speaker 1: 6:35

As it pertains to unemployment, high unemployment rate causes a lot of problems in the economy. In October guys of 2009, we saw 9.9% unemployment rate. That was the hype. We hit basically 10% unemployment rate. That was really painful to see a 10% unemployment rate, unlike COVID, which was pandemic right, a world pandemic. Unemployment rate went up to 14%, but that was a worldwide pandemic and the government stepped in and did a lot of stimulus checks and helped a lot of people and help people they had to. But when unemployment goes up that way and it's natural occurrence, naturally just by the markets it causes a lot of damage. People lose homes, people get evicted, people lose homes, people get evicted. It causes a lot of damage and the economic companies go out of business. Lots of turmoil and a lot of problems and I think right now that is the Fed's biggest concern, and they have expressed that this is the thing that they're watching for, as they should. So they have to lower the interest rates to avoid that from occurring.

Speaker 1: 7:46

And this week, on Election Watch 2024, elon Musk and Donald Trump break the internet. Elon Musk hosted a live interview with former President Donald Trump on X, the social media platform, attracting hundreds of thousands of users. However, the event was delayed by nearly 45 minutes due to a denial of service attack. Once the issues were resolved, the conversation began, lasting over two hours and covering various topics, such as Trump's alleged assassination attempt in July, immigration, foreign policy and the economy. Musk highlighted that this would be a conversation, rather than a typical interview, aiming for more formal and extensive discussion. Trump used the platform to reiterate familiar themes, such as criticizing President Biden and Vice President Kamala Harris, although Biden had already dropped out of the 2024 race.

Speaker 1: 8:44

This interview is part of Trump's broader strategy to engage new voters, especially those tuned into traditional media. Journalist Mike Rothschild suggests this approach targets a demographic that includes younger, more tech-savvy individuals who are reachable through platforms like X, youtube and Kik. Trump's recent appearance with influencers like Logan Paul, aiden Ross and Vice President JD Vance's collaboration with Nelk Boys indicated a focus on attracting a hyper-masculine, edgelord audience, despite concerns about his ability to expand his base beyond mainly white middle-aged men. Trump's team aims to energize existing supporters and draw in undecided voters. Meanwhile, musk benefits from posting these high-profile events on X, hoping to boost the platform's visibility and user engagement, despite challenges like declining growth and controversies over content moderation.

Speaker 1: 9:47

So Musk is a genius, obviously, in his own right. However, if Musk is not careful, he will turn X into what old Twitter used to be. You guys remember, in the last election, twitter got caught censoring all of people that put content on there, that were on the right, that were Republican. They censored Republicans. Now, if Musk is not careful, he'd be doing the same thing.

Speaker 1: 10:13

But on the other side, musk is a smart man, much smarter than I am just a regular guy, not a genius as Musk is. However, if he doesn't now do the same thing and bring on Kamala Harris or her people on X, it's going to make him look biased, whether he is or not. Ex has all types of people on there and we should not do what just because others behave in a certain way. It's not correct for us to behave in the same way. So I believe in my opinion again, just a regular guy is that Musk should now give the same opportunity and the same platform to Harris and give people like myself, independents like myself, the opportunity to listen to both sides so that we can make a decision on who we want to vote for. If you haven't yet decided who you're going to be voting for and this has been your weekly business brief I'll see you guys next week.