Fed Closer to Adoption, and Chinese Developers to Defaults

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Based on yesterday's data on the US inflation and the texts of the minutes of the last FOMC meeting, the decline in the dollar and the growth of the US stock market seem illogical and rather strange. On the other hand, this is a great reason to buy the dollar cheaper and sell it on the stock market for a higher price.

Consumer inflation in the United States (the main benchmark for the Fed, in contrast to the same manufacturing inflation) yesterday reached its maximum levels over the past 13 years. In annual terms, the growth was 5.4% (2.5 times higher than the Fed's target), and in relation to the previous month, the growth was 0.4% (even higher than the forecast of 0.3%). Each month of these figures is a new confirmation of the Fed's position that inflation is a temporary phenomenon, caused by private factors (such as rising prices for used cars). In addition, this is the Fed's approach to the stage of the final and irrevocable acceptance of the fact that there is a problem of high inflation, which requires a solution.

The Central Bank has two options: to roll back quantitative easing or raise rates. Since the Fed is faced with a dilemma of how not to collapse the resulting bubbles in the financial markets (the US stock market, the US real estate market, bubbles in the commodity and cryptocurrency markets), the option to raise rates will be postponed until the last. But with tapering there is nowhere to hesitate.

Yesterday's minutes of the last FOMC meeting showed that mid-November is the most likely start to curtailment of the quantitative easing program (recall, now it is 120 billion of asset repurchases, of which 80 billion are treasury bonds, and 40 are mortgage bonds). The parameters so far sound as follows: every month the volume of purchases will decrease by 15 billion, of which 10 billion are treasuries, and 5 - MBS.

Against the background of such news, the dollar can and should be bought and the opposite with the stock market. Moreover, another problem of the world economy is getting worse every day. Developers in China continue to pour in. As we warned earlier, Evergrande is the first domino to trigger the fall of the next. S&P Global again downgraded the ratings of the two largest companies in the sector, Greenland Holdings and E-house. Kaisa Group's dollar bonds fell to 35 cents per dollar (that is, now their yield is 60%). And in general, the cost of resources for Chinese developers soared to an average of 24%, which by and large makes them inaccessible with all the ensuing opportunities for debt refinancing.