Stablecoins, Beige Book, and Japan Catch Investors’ Attention

Jeffrey Roach (00:08):

Hi, I am Jeffrey Roach, Chief Economist for LPL Financial with some talking points for the current macro landscape. First, the Fed's Beige Book is priceless. Amid that out of office notice we have from non-essential government workers, investors need to pay attention to alternative insights, just like the Federal Reserve's Beige Book published last week. My take is market segmentation is key to understanding the economy and running a savvy business. It's still a bifurcated world. Firms saw strong demand for luxury discretionary spending from wealthy consumers, and then bargain shopping from lower and middle income households. Business demand for labor was weak across sectors, and those doing the hiring well, they favored temporary and part-time workers over offering full-time opportunities. I expect the job market to slow further. As it relates to inflation,

Jeffrey Roach (01:08):

some firms facing tariff induced cost pressures kept their selling prices largely unchanged to preserve market share and in response to push back from price sensitive clients. The bottom line is this, recession risks remain low as investors expect interest rates to fall. Second, world leaders expect expansion of digital payments. I had the pleasure of attending the annual meeting for the IMF. That's the International Monetary Fund. Hands down, the most interesting panel discussion was entitled "Stablecoins and the Future of Finance". I'll have a link to that below in the description of this video. Digital assets, especially stablecoins, will likely play a larger role in the future economy, potentially leading to a significant increase in global transactional activity. One of the panelists said the concept of a cross-border payment is going to sound like a cross-border email. Now we aren't there yet. Networks are experiencing the race to scale as both the settlements and the compliance for global payments need to get safer, faster, and cheaper.

Jeffrey Roach (02:13):

Something to look for in the future is money moving as frictionless as data. Third, the Bank of Japan warns of overheating. On October 23, the Bank of Japan released its semi-annual financial system report, which highlighted the potential overheating in the markets and in real estate prices. Now, the BOJ pointed out that the growing presence of foreign hedge funds, which have increased their leverage in the Japanese government bond market, could amplify market volatility. No surprise there. Now, policymakers are concerned about the potential for hedge funds quickly adjusting their positions in response to unexpected market changes. Now, that could trigger de-leveraging and cause broad asset price volatility. If such adjustments do occur in the JGB market, the effects could spill over into other financial instruments in Japan. Now, the BOJ warned that negative feedback loops, like those seen in the global financial crisis, could be triggered by large scale fund redemptions in the foreign non-bank financial intermediary sector. Now, despite the cautionary tone in the current report, Japan is one of the few economies expected to grow above trend this year, which explains why their central bank is currently in a rate hiking cycle. Well, that's all for now. If you want more insights on global market trends, follow us on social media and take care.