Weekly Forecasts 1/2024
A new service (Free)
We are launching a new service for our paid subscribers, where we provide economic, financial and/or geopolitical forecasts once a week. We have been preparing this since late spring and we are confident that this service will bring great benefits to our customers.
Launching such a service also makes perfect sense, because we constantly gather economic, financial and geopolitical information. Through this service, we will provide it to you with a higher, weekly frequency. We will present 3-4 forecasts each week, with data and our view behind them.
We provide both long-term and short-term forecasts depending on the state of world, our risk analyses and the needs of our customers. We ask for your feedback. If there are no major developments in sight, we will concentrate on long-term forecasts, but otherwise our aim is short to mid-term forecasts. We will also incorporate market liquidity forecasts in this section.
Our first weekly forecasts are:
Inflection point rapidly approaching in the Russo-Ukrainian war.
The Federal Open Market Committee (FOMC) is likely to cut the Federal Funds Rate by 25bps in their meeting on September 17-18.
Volatility in the financial markets is likely to start to increase, again, heading into a tumultuous October.
Forecasts
Inflection point in the Russo-Ukrainian war
The surprise attack of the Armed Forces of Ukraine (AFU) into the Kursk region of Russia has started to backfire. Reports are piling up from Russian, Ukrainian, European and the U.S. sources that the eastern front of the AFU, most notably in around Pokrovsk, Vuhledar and Chaziv Yar, is collapsing rapidly. Some reports also claim that Russian pressure is building, again, in Luhansk and Kharkiv. Reports from Ukrainian sources claim that soldiers of the AFU would be already preparing to defend Dnipro, a city in Dnipropetrovsk Oblast on the shores of Dnepr, deep in Ukraine (and outside the Donetsk region Russia annexed on 30 September, 2022). Moreover, several key members of the cabined of President Volodymyr Zelenskyi have resigned. Either President Zelenskyi is ‘cleaning the house’ or these people do not want to be a part of what’s coming next. In any case, these developments indicate that a major turning point in the war is near.
Options are running thin for President Zelenskyi and the factions in NATO supporting Ukrainian war-efforts. Essentially, they are left with just two:
To escalate in an extremely desperate manner by striking to Moscow, etc., or by conducting a nuclear false flag attack in Ukraine or somewhere in Europe blaming Russia.
Truce and peace, on Russia’s terms.
We currently give a 50/50 chance of these occurring. That is, we consider that the situation in Ukraine can go either way.
The time-window for deeper escalation is closing fast with the collapse of the AFU closing and voices for peace growing in Europe and in the U.S. So, if something happens, it needs to happen within the next few weeks (before the U.S. Presidential elections on 5 November).1
25bps hike
We are currently assuming that the Federal Reserve will lower interest rates by 25 basis points in their meeting on September 17-18. The Fed Chair Jerome Powell and several regional Fed Presidents have signaled that the “time has come”. There’s some weakening in the labor market and unemployment rate has started to creep up. There was also a massive downward revision of 818,000 jobs in the 12 month period ending March this year. JOLTS openings were around 7.7 million in July with 8.1 million expected (8.2 million previous). Labor market is thus clearly softening, and economic momentum is slowing (see below).
Yet, the ‘core inflation’, excluding food and energy still runs at an annualized rate of 3.2%, while the ‘super-core’ measuring services inflation (less energy services) runs at annualized rate of 4.9%. Especially the latter is very high still. Because the labor market is softening, the FOMC may feel compelled to do something, while the still-rapid core inflation urges caution with cuts. This is why we expect a 25bps cut.
Our current probabilities for the cut in September are: 0bps (28%), 25bps (55%), 50bps (25%), 75bps (2%). The secondary-likelihoods are slightly tilted to the side of no cut, because we expect Friday’s Job’s Report to show some strength (which may become revised downwards in the coming months).
Financial market volatility
This figure presents the money supply of China. Like we have been noting, liquidity draining tends to occur in April, June and October in China.
Our forecasts imply that we would see a hefty $400+ billion global liquidity injection in this month. This would surely support the markets. However, liquidity injections can start to ease already in mid-month heading into the October-draining, while recession signals are growing louder.
The U.S. ISM Manufacturing Purchaser Managers Index (PMI) published on Wednesday, was rather recessionary, mirroring the S&P Manufacturing PMI we reported at the August World Economic Outlook. Markets reacted accordingly.
The overall figure of ISM PMI came at 47.2, while the consensus forecast was 47.9. In July, the overall print was 46.8, which means that there was a smallish improvement, but the index has now been in contraction (under 50) for five consecutive months. Moreover, new order index dropped to 44.6 from 47.4 in July, while production index cratered to 44.8 from 45.9. Prices also rose at a faster pace than in July. Essentially the report hints on the possibility of an U.S. stagflation, but drawing such a conclusion is too early.
Recession signals are growing louder, which is likely to increase volatility in the asset markets. The likely Fed cut, especially if it’s any higher than 25bps, can amplify the worries of investors thus increasing volatility further. We also have to remind you on this.
Sometimes history rhymes.
Disclaimer:
The information contained herein is current as at the date of this entry. The information presented here is considered reliable, but its accuracy is not guaranteed. Changes may occur in the circumstances after the date of this entry and the information contained in this post may not hold true in the future.
No information contained in this entry should be construed as an investment advice nor advice on the safety of banks. GnS Economics nor any of the authors cannot be held responsible for errors or omissions in the data presented. Readers should always consult their own personal financial or investment before making any investment decision or decision on banks they hold their money in. Readers using this post do so solely at their own risk.
Readers must make an independent assessment of the risks involved and of the legal, tax, business, financial or other consequences of their actions. GnS Economics nor any of the authors cannot be held i) responsible for any decision taken, act or omission; or ii) liable for damages caused by such measures.
To note, we have seen rumors that the AFU would be planning to strike to major Russian cities with long range missiles, like Joint Air-to-Surface Standoff Missiles, or JASSM, in around October 7, which are currently being delivered to Ukraine. This is President Putin’s birthday. It has been reported that the delivery of JASSMs could take months. However, for example, the delivery of Army Tactical Missile Systems, or ATACMs, to Ukraine before the approval of Congress, shows that the administration of President Biden can act unilaterally and highly proactively. This implies that the U.S. missiles can already be in Ukraine.