The Econgram

2022-10-31 22:21:37 Skyrocketing U.S. Mortgage rates*

Facts:
1) 30-year mortgage rate hit 7.08% for the first time in 20 years. 7 weeks ago it was under 6%. A year ago it was a little higher than 3%.
2) In September existing-home sales dropped by 24% compared to the previous year. New-home sales decreased by 18%.
3) Home prices fell by 1.1% in August from July.

Analysis:
1) The mortgage rates rise is explained by Fed’s interest rate increases aimed to fight inflation: as commercial banks now borrow money at higher costs, they escalate their returns.
2) Significantly higher mortgage rates led to a decrease in demand for houses and hence to a drop in their prices.
3) Regardless, the rates’ rise offsets the effect of the price decline, so the purchasing costs are still soaring. According to “Realtor. com”, a buyer who makes a downpayment* of 20% on an average-priced house would pay $2300/month. A year ago that would be $1300.
4) To conclude, people sell houses at lower prices, but the buyers taking a mortgage face higher costs.

Inspired by WSJ Open / Comment

2022-10-30 22:39:04 The start of the new Energy Transition

Facts:
1) Fossil fuels have constantly been 80% of the global energy supply for decades.
2) The U.S. Inflation Reduction Act* (August 2022) devoted ~$369 bln to energy security* and climate change programs to be conducted over the next 10 years. They include assistance to consumers in purchasing electric cars and investments in renewable and nuclear energy.
3) The EU has planned to spend ~$317 bln over the following 5 years on reconstructing its energy supplies and decreasing its dependence on Russian energy.
4) Nevertheless, the coal demand increased recently in the EU.

Analysis:
1) One of the crucial factors that incentivizes investment in renewables, especially for the EU, is the Russian invasion of Ukraine. This is so because now the EU countries share the problem of overly expensive energy.
2) International Energy Agency* predicts that the share of fossil fuels in global energy supplies will fall to 75% by 2030 and to 60% by 2050.
3) However, now the coal demand rises in the EU because alternative energy supplies are not developed enough or are unavailable. Coal consumption is expected to be bigger by 7% in 2022 compared to 2021.

Inspired by WSJ and IEA Open / Comment

2022-10-29 16:06:13 Whisky: Britain’s booming industry

Facts:
1) The value of the pound fell with respect to European and US currencies.
2) Last month, the pound weakened relative to the dollar until $1.035, a record low against the dollar.
3) According to the Scotch Whisky Association, around 90% of the whisky produced in Scotland is exported.
4) Whisky’s exports from Britain increased by 10.5% (from July 2021 to July 2022).

Analysis:
1) Due to the pound’s depreciation, the demand for Britain’s products in the U.S. and Europe increased.
2) Almost all the raw materials needed to produce whisky are made in Britain. Hence, the weakening of the pound does not affect the producer’s costs. Therefore, the current economic situation is beneficial for the growth of the whisky industry.

Inspired by The NYT Open / Comment

2022-10-27 18:46:40 The stock of Instagram's parent Meta is in decline

Facts:
1) Meta declared a quarterly revenue* of $27.7 billion, which is 4% less compared to the previous year. Besides, a 1% loss in revenues was reported last quarter.
2) Meta’s department responsible for virtual reality and metaverse reported a 49% fall in revenues from the previous year.
3) Hence, yesterday Meta’s shares dropped by 5%. Now the stock’s price is as low as it was in 2017.
4) Advertising constitutes 98.2% of the total revenue of Meta.

Analysis:
The downturn of Meta could be explained by adverse macroeconomic conditions, rivalry with TikTok, and Apple’s ad-tracking update:
1) The war in Ukraine caused inflation and an ad-spending downturn, pushing Meta’s revenues down.
2) TikTok claims Meta’s users’ attention.
3) Last year Apple introduced requirements that oblige applications to ask for the user’s permission to track their data. This data is used by Meta to place the ads that target the users’ interests. Many people did not permit to track their digital footprint*, so the ad-efficiency fell, leading to the company’s revenue contractions.

Inspired by WSJ Open / Comment

2022-10-26 19:37:59 Russian economy

Facts:
1) The EIU* is expecting the Russian GDP to decrease by 6.2% this year and by 4.1% in 2023.
2) Nevertheless, Rosstat* is projecting a little contraction of 2.9% in 2022 and of 0.9% in 2023 up until the growth in 2024.
3) The energy sector represents around ⅓ of the Russian GDP.

Analysis:
1) After Moscow cut off gas flows to Europe, The Kremlin is forced to sell oil to Asian countries at huge discounts.
2) In the long term, Europe will decrease its dependence on Russian energy, which is the reason why Moscow is restricting the gas supply now when its position is still strong.
3) It is hard to predict the exact condition of the Russian economy in the future because the impact of sanctions* is yet to come. Besides, other sanctions are probable to be implemented.
4) For instance, sanctions will make it extremely hard for Russia to explore and develop new energy fields, particularly in Arctic regions. This is due to the plan of the USA to stop the export of required technology.

Inspired by CNBC Open / Comment

2022-10-25 22:12:37 EU member countries discuss the imposition of the price cap on gas

Facts:
1) Following the Russia-Ukraine war and subsequent drop in the gas supply, the gas prices in the EU soared.
2) The emergency cap* on the price of gas (on imports and at the EU's main trading exchange) was offered in order to protect businesses and households.
3) The European Commission pointed out conditions at which the price cap can be imposed: the flow of gas among EU states is constant and gas consumption does not increase due to the cap.
4) The European Commission published proposals for the companies to pool* the gas demand and hence purchase it altogether.
5) Nevertheless, during the last few days, gas prices in Europe declined to their minimum since late June.

Analysis:
1) Germany and Netherlands opposed the price cap’s imposition, arguing that it would increase consumption, exacerbating scarcity.
2) The pooling of gas demand of EU countries is needed to negotiate better prices, as members would stop bidding against each other. Therefore, access to gas would be simplified, especially for smaller countries.
3) The decrease in the gas price in recent days is due to the forecasts for favorable autumn weather.

Inspired by WSJ Open / Comment

2022-10-24 19:49:15 Ubiquitous inflation

Facts:
1) The Federal Reserve and the IMF have been failing to predict inflation over and over again since 2020.
2) The Fed thought its interest rate would remain around zero in 2023. However, now it expects it to soar to at least 4.6% due to the inflation growth.
3) There is a shocking rise in the dollar’s value due to the interest rate increase, which raises the cost of imports for foreign economies, pushing up the inflation level.
4) As of September 2022, the average inflation rate for countries in Europe was 10.9%, a very high benchmark.

Analysis:
According to the new work published by the IMF, there are three potential causes of the inflation increase: macroeconomic shocks, nominal wage rise and discouraging expectations:
1) Many macroeconomic shocks in the world, including the war in Ukraine, pushed up the value of the dollar and consequently inflation in Europe.
2) The rise in nominal wages due to a decrease in unemployment after COVID-19 also leads to higher prices. However, the real wages decreased, hence people’s living standards are in decline.
3) Market expectations in Britain and the EU are discouraging due to recent events. That pushes up inflation too.

Inspired by The Economist Open / Comment

2022-10-23 21:34:53 One of the safety havens on Wall Street ruins

Facts:
1) Utility stocks are perceived as a stable haven for investors due to steady checks collected by the firms of the sector.
2) In 2022 in mid-September, the S&P utilities sector was up more than 8% from the beginning of the year.
3) However, over the past month utilities sector has shown itself to be the worst-performing among all of the S&P 500 sectors. It is down 13% compared to a 4% downturn of the whole index.
4) Some days ago the utilities sector dropped to the historical minimum of the year.

Analysis:
1) Utility stocks are demanded partly because of the dividends they provide with. Companies in the S&P utilities sector offer a 3.2% dividend yield, a high benchmark.
2) The downturn of the utilities sector can be explained by the growth of the interest rate on the background of inflation rise. One of the manifestations of the increasing interest rate is a 4% yield on the 10-year Treasury note. Such a high yield on a virtually risk-free asset drastically decreases the demand for utility stocks.

Inspired by WSJ Open / Comment

2022-10-21 17:41:24 The U.K. in search of stability

Facts:
1) Jeremy Hunt became the new U.K. Treasury (economic and finance ministry) Chief after Kwasi Kwarteng, his predecessor, was fired.
2) Kwarteng previously announced tax cuts of 45£ billion and an energy price cap, protecting households and businesses from volatile energy prices.
3) Hunt cancelled the tax cuts and pared back the energy price cap.

Analysis:
1) Kwarteng was targeting economic growth by increasing the government debt.
2) The market reacted with a fire sale of the government bonds, leading to a fall in their prices, and causing an increase in the interest rate. This raised the cost of debt. Bank of England was forced to intervene immediately, stabilizing the situation.
3) The fire sale happened due to uncertainty in the stability of the U.K. government's position because of the rise of the debt in times of soaring inflation.
4) Hunt, oppositely to his predecessor, targets stability and thinks it is irresponsible to increase the debt and expose public finance to the volatility in gas prices. Also, he believes that it is crucial to leave the opportunity to BOE to raise interest rates in times of inflation. He aims to do it by reducing government debt.

Inspired by WSJ Open / Comment

2022-10-18 21:28:55 Zero-Covid policy in China

Facts:
1) Xi Jinping was re-elected as the communist party leader.
2) Over 90% of the population has received two or more doses of China’s vaccines.
3) Recent vaccination drive (free vaccination spots) - some 10kk people a day were given shots at the peak.
4) Western vaccines were prohibited.

Analysis:
1) Xi Jinping's policy on Covid relies on mass testing, big lockdowns and restrictions.
2) The IMF expects China’s GDP to grow by just 3,2% this year (8,11% in 2021).
3) Youth unemployment is close to 20% due to the recession.
4) There is no sign from the government to loosen its zero-covid policy.

Inspired by The Economist Open / Comment