Four sectors of the financial market

Rising interest rates will inevitably lead to slower economic growth, and then to decline.

During the recession reduced demand for raw materials and money, and this causes a drop in commodity prices and lower interest rates. Thus, the study of the dynamics of commodity markets and bonds can provide very useful information on the economic outlook.

The figure shows the comparative dynamics of prices of goods and for the bonds. The first represented the index futures commodity prices CRB, a base for the calculation which includes meat commodities, metals (gold, platinum, silver), imported products (coffee, cocoa, sugar), energy, industrial raw materials (copper, cotton, lumber). Second futures prices are at 30-year U.S. bonds.

This figure also shows the ratio obtained by dividing commodity prices (CRB) on the price of bonds. This factor can be called a measure of inflation. [1] Its growth means that commodity prices are rising faster than bonds, and it points to inflationary pressures and increasing the likelihood of higher interest rates. The fall of a factor indicates the absence of inflationary pressures and the likely rate cuts.

Trying to keep up

The figure shows the dynamics of the U.S. Federal Reserve interest rate on the background dynamics coefficient CRBobligatsii. The graph shows how recently the Fed tries to keep pace with the economic cycle, increasing interest rates against growth factor CRBobligatsii (from 1998 to mid-1999), and dropping them on the background of the incident rate CRBobligatsii (over 2000 ). However, since 2001, the growth rate CRBobligatsii not yet led to the growth of the discount rate. On the contrary, at the end of 2002, after a long pause, there was another decrease the discount rate.

In the graphs of futures prices for bonds and CRB index of commodity prices an inverse relationship - peaks bond prices correspond basins CRB index and vice versa. So, from April 1996 to December 1998 and from May 2000 to October 2001 (segment CD) ratio CRBobligatsii decreased, indicating a reduction in inflationary pressures and the gradual reduction in economic activity. Between December 1998 and May 2000 (the segment BC) characterized by an increase in inflationary pressure (increase in commodity prices and falling bond), indicating an overheating economy.

And at points A and D peaks and troughs in the markets were formed almost simultaneously, while at the points C and B bond market ahead of the commodity market, while in the classical reversal of commodity prices should outperform reversals bond prices. [1] We are now seeing an increase in commodity prices (started from the end of 2001), while the prolonged rise in prices of bonds. Why protracted because the point D (October 2001) there has been a simultaneous reversal in the bond market (prices have gone down) and on the product market (prices have gone up), which corresponded to the normal course of events.

The falling trend in prices of bonds with a simultaneous increase in commodity prices continued to point E (March 2002). Starting with this point, the markets behave "nonclassical" - grow simultaneously and commodities and bonds. However, despite the rising rate CRBobligatsii, the Fed at the end of 2002 is to decrease the discount rate. This deviation from the normal cycle of development can be attributed to several negative non-market factors that the U.S. economy has experienced. First, the wave of financial disclosures in corporate business, to ride in the middle of 2002 is reflected in both the business activity in the United States in general, and on the fall of the stock market in particular, which has led to the displacement of capital c the stock market to the bond market, and therefore, the growth of the latter. Second, it is geopolitical instability, which for the second half of last year, also has a negative impact on business activity in the U.S. and at the same time has led to accelerated growth of the index CRB (growth of geopolitical tensions caused an increase in oil prices and gold).