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TASS — Russia’s Central Bank cuts key rate to 7% for first time since 2014

Interest rates represent cost of borrowing and income from saving. Both are reduced by cutting rates. Since is this is a decrease in price, it is disinflationary, which is opposite to what central bankers assume. Savers receive less income, which would likely have been spent on goods purchases. Lower of the cost of firm investment potentially results in lower goods prices.

On the other hand, in deciding on a monetary policy using interest rate setting, central banks assume that lower interest rates are inflationary. This is an overly simplistic approach that called into question by the inflationary potential of rising rates and the disinflationary potential of falling rates.

Inversely, an increase is price occurs in bond markets, where change in securities price is the inverse of change in the interest rate. Lower interest rates imply that the market price of previously issued securities rises rise in adjustment to the change in the yield. This is a case of asset appreciation, which is considered irrelevant to goods price level that figures in inflation rate. The increase in asset price offset the decrease in income from lower yields. 

Of course, new issued securities reflect the going interest rate. Lowering interest rates means that the government issuer is injecting less funds into non-government than previously. This lowers the fiscal balance.

Specifically, the Central Bank of Russia is assuming that the lowered cost of borrowing will result in an increase in firm investment and that the lowering of interest income will not significantly affect demand, since income from saving may go disproportionately into more saving, given savers revealed preference for saving. The current central banking assumption is that savers fund borrowers, which presumes a loanable funds theory that has been shown to be incorrect. This disproof was confirmed recently by the Bank of England, but much of finance and economic is still based on the erroneous theory.

This is an MMT-based summary analysis contrasted with current central banking assumptions.

TASS

Russia’s Central Bank cuts key rate to 7% for first time since 2014

Brian Romanchuk — No More Neutral Rate?

A bit wonkish (but no math), but interesting if you are into interest rates and how they affect the economy.

Bond Economics
No More Neutral Rate?
Brian Romanchuk

Brian Romanchuk — Japan And The Costs Of Bond Yield Control

The dangers of distorting free market interest rates is one of the bits of market folklore that keeps getting passed around. There is actually not a whole lot of data to defend this view; it is best viewed as faith-based reasoning. This topic is particularly interesting in the case of Japan. I am somewhat agnostic on this issue; I do not see particular risks from manipulating the yield curve in the current environment, yet I can see some plausible dangers.

This article was triggered by the article "Bank of Japan once again shows who calls the shots," by Bill Mitchell, one of the leading Modern Monetary Theory (MMT) economists. In addition, I had a discussion about this topic with someone doing some research awhile ago. Rather than re-hash Professor Mitchell's points from the MMT perspective, I will put on my "generic market analyst" hat and give a description of the issue from a more theory-agnostic perspective....

Bond Economics
Japan And The Costs Of Bond Yield Control
Brian Romanchuk

Zero Hedge — Bank Sector In Peril As Refi Activity Crashes Amid Rising Rates

As Black Knight writes, it looks at the – quite dramatic – effect the mortgage rate rise has had on the population of borrowers who could both likely qualify for and have interest rate incentive to refinance. It finds that the number of potential refinance candidates has tumbled to the lowest since December 2008....

To be sure, it is hardly a shock that after a decade of record low rates, the current rise in rates means a collapse in refi activity: after all anyone who could, and would, refinance, already has, while the universe of those who have yet to take advantage of lower rates and are eligible to do so, has collapsed.

Which is bad news not only for homeowners, but also for the banks, whose refi pipeline - a steady source of income and easy profit - is about to vaporize....

Zero Hedge
Bank Sector In Peril As Refi Activity Crashes Amid Rising Rates

Tyler Durden

Jason Smith — It's the 80s!

Interesting look at the history.

Information Transfer Economics
It's the 80s!
Jason Smith

Edward Harrison — Ray Dalio: We are already in a bond bear market right now

Ed Harrison on Ray Dalio on bonds.

Credit Writedowns
Ray Dalio: We are already in a bond bear market right now
Edward Harrison

Brian Romanchuk — The Highly Predictable Treasury Bond Bear Market

Brian gives a simple and accessible explanation of bond market dynamics based on his considerable experience in the field as a "quant."

Bond Economics
The Highly Predictable Treasury Bond Bear Market
Brian Romanchuk

Richard Turnill — What a Flattening U.S. Yield Curve Means

The flatter yield curve is not a recessionary signal, so what is it telling us? Much of this year’s earlier yield curve flattening represented a reversal of the 2016 steepening that accompanied surging economic growth and inflation expectations after the U.S. presidential election. Markets had bet that fiscal stimulus and infrastructure spending would spur growth and inflation. Long-term yields jumped in response. Those market expectations unwound over the course of 2017 when policy changes were slow to materialize and weak inflation readings became the big surprise. Persistent demand for long-term Treasuries pushed 30-year yields lower even as short-term rates rose. We could see long-term Treasuries rising a bit from here—but expect low-trend growth, plentiful global savings seeking income and other structural factors to keep them historically low. Our outlook for growth and inflation supports our preference for equities, including cyclicals—despite the flat yield curve. Within U.S. fixed income, we like Treasury inflation-protected bonds over nominal government debt.

EconMatters
What a Flattening U.S. Yield Curve Means
Richard Turnill | global chief investment strategist at Black Rock

Edward Harrison — We are in the most dangerous period in the business cycle

The big picture then is this: a global economy into its ninth year of the business cycle that is starting to gain momentum with the US flirting with 3% growth and 4% unemployment with richly priced asset markets but a flattening yield curve.

We’ve seen this picture before.…

In retrospect, one could argue that the Fed’s late interest rate hike campaign was a policy error – that the Fed should have seen the flattening yield curve as a canary in the coal mine and resisted raising its policy rates despite any concern about elevated asset prices.

I think this is the Fed’s real conundrum this late in a business cycle. If the economy is running solidly and leading economic indicators are bullish, the Fed is hard-pressed to not raise rates in an environment in which headline unemployment is low and falling, asset prices are rich, and lending standards have loosened — even if the yield curve is flattening. Aren’t they supposed to take the punch bowl away?

I don’t have the answer to that question. Time and again, late in the cycle, the Fed has indeed taken the punch bowl away. And the result was recession and financial crisis.

That’s exactly why this is the most dangerous period in the business cycle.

Credit Writedowns
We are in the most dangerous period in the business cycle
Edward Harrison

Tom Rees — Bank of England hikes interest rates for first time in a decade

• Bank of England increases interest rates for the first time in a decade in order curb high inflation squeezing UK households
• Base rate lifted from 0.25pc to 0.5pc; Mark Carney will give a press conference at 12.45pm to explain the central bank's decision
• Bank of England last hiked interest rates in July 2007; interest rates fell to historic lows to help the UK economy recover from the financial crisis
• Pound plunges on currency markets on dovish commentary from the central bank

The Telegraph
Bank of England hikes interest rates for first time in a decade
Tom Rees

See also

Business Insider
BANK OF ENGLAND HIKES RATES TO 0.5%

Also

Bitcoin has been on a tear over the last week, posting record highs on consecutive days. The digital currency had not been higher than $6,300 at the start of the week but has now gained $700 on that level in just a few days.

The recent run has been helped by news on Tuesday that CME Group, the world's largest exchange operator, plans to introduce bitcoin future contracts in response to client demand. This is seen as a stamp of legitimacy from the world of traditional finance for bitcoin.

Traders are also speculating that this week's bull run is partly helped by a coming "fork" in bitcoin's underlying software. The SegWit2x software update is scheduled for November 16 and could split bitcoin in two, creating a new currency.

This has happened in the past with bitcoin cash and bitcoin gold and, in those cases, bitcoin holders got those new coins free. As a result, investors may be piling into bitcoin in the hopes of a SegWit2x dividend. 

Bitcoin passes $7,300
Oscar Williams-Grut

Also

Brent crude has successfully consolidated its position above $60 per barrel this week, and WTI is approaching $55 per barrel, which would be the highest oil price in more than two years.

OilPrice.com

Why Oil Bulls Are Running Rampant

Nick Cuningham

Eric Tymoigne — Money and Banking Post 21: The Interest Rate

In Post 20, a lot is said about the role that the rate of return on financial instruments—the interest rate—plays on the pricing on securities, but little was said about what determines that rate of return. Two competing theoretical frameworks explain what influences the interest rate, one of them emphasizes the role of real factors and the other emphasizes monetary factors.

New Economic Perspectives
Money and Banking Post 21: The Interest Rate
Eric Tymoigne | Associate Professor of Economics at Lewis and Clark College, Portland, Oregon; and Research Associate at the Levy Economics Institute of Bard College

Elena Holodny — The 5,000-year history of interest rates shows just how historically low US rates still are right now

Business Insider
The 5,000-year history of interest rates shows just how historically low US rates still are right now

Elena Holodny

Kevin Erdmann — Leverage is not a sign of risk seeking, a continuing series

A contrarian view.

Idiosyncratic Whisk
Leverage is not a sign of risk seeking, a continuing series
Kevin Erdmann

Kevin Erdmann — The flattening yield curve

Here is another narrative.

Idiosyncratic Whisk
The flattening yield curve
Kevin Erdmann

Tyler Durden — Derivative Markets Signal Looming End Of The Business Cycle

It's looking like the Trump bump is over, with the expected tax cuts and infrastructure spending stalled as the country becomes embroiled in Trumpgate and Congress focuses instead on repeal/repairing Obamacare, depending on which faction of the GOP one is in and what one's reelection prospects are.

Oh, and did I mention the impending debt ceiling, which looks like its going to be contentious again, at least from the signals that Trump is sending.

Zero Hedge
Derivative Markets Signal Looming End Of The Business Cycle
Tyler Durden

Pedro Nicolaci da Costa — There’s a reason poor countries feel they've lost control of their economies

The increasing integration of global markets and economies, in addition to new technologies that help accelerate the transmission of financial shocks from one region to another, is making it trickier for so-called emerging countries to manage their banking systems.

A surge in dollar-denominated bonds in developing economies, and their dependence of the vagaries of the richest nations, leave policymakers in areas like Latin America, Africa and Asia in difficult, if not entirely untenable positions, according to the International Monetary Fund’s latest report on global financial stability. Currency markets are particularly vulnerable and volatile....

Business Insider
There’s a reason poor countries feel they've lost control of their economies
Pedro Nicolaci da Costa

Brian Romanchuk — How To Approach The Term Premium

The term premium is an important concept in fixed income analysis.

For our own analysis, there are a few ways of using the term premium. Unfortunately, there is no way of extending the analysis for an individual to the market in general, as there is no need for market participants to agree on the term premium before undertaking a transaction. As a result, we should not expect to be able to infer an average term premium implied by market pricing using any algorithm.

This article follows on from the article "The Term Premium Problem," which outlined my thinking about the term premium. I imagine that readers would be most interested in my criticisms of existing techniques to calculate the term premium. My argument is that the problem with those techniques is that they start in the wrong place; there is no technical fix as a result. Rather than attempt to criticise hundreds of complex algorithms, I will instead explain what I see as the best starting point. From that vantage point, the defects of the conventional approaches become more obvious.

Relevant to understanding the bond market and yield curve.

Bond Economics
How To Approach The Term Premium
Brian Romanchuk

Brian Romanchuk — Fed Hike Cycle: The Long Game

I discuss rate hike cycle at much greater length in Interest Rate Cycles: An Introduction. The key argument is that bond yields are driven by expectations for the path of short rates, and not some abstract notion of "supply and demand."

If you are trading short-term interest rate futures (fed funds, Eurodollar), yes, the short-term path of the policy rate (and LIBOR spreads) matters. However, if you are looking at the pricing of a 10-year Treasury Note, you need to have a forecast horizon similar to that 10-year maturity.

Bond Economics
Fed Hike Cycle: The Long Game
Brian Romanchuk

EconMatters — Bank Loans Taking A Dive...

I am compelled to correct a report posted on Zerohedge about the cliff-dive going on in commercial, industrial and consumer loans....

EconMatters
Bank Loans Taking A Dive...