Energy – SPR refill

While oil prices saw a brief spike following the Fed's 50bp rate cut, the market settled marginally lower on the day. In early morning trading in Asia, oil is again under pressure. Expectations for a 50bp cut had grown in recent weeks, so the move was largely priced in.

For oil, that means attention will likely turn back to demand worries. China has obviously been the key concern when it comes to demand, but there have also been reports of refiners in Europe cutting run rates due to poor margins.

EIA weekly numbers yesterday showed that US commercial crude oil inventories fell by 1.63m barrels over the last week, somewhat different to the 1.96m barrel build the API reported the previous day. US commercial crude oil inventories are now at their lowest level in a year. Crude inventories at the WTI delivery hub, Cushing, also fell by 1.98m barrels over the week to 22.71m barrels, which will also create noise around inventories nearing tank bottoms and provide some support to prompt WTI timespreads. The draw in inventories was driven by trade. Crude oil exports grew by 1.28m b/d WoW, while imports fell by 545k b/d. On the refined product side, small builds were reported. Gasoline and distillate stocks increased by 69k barrels and 125k barrels respectively. Gasoline demand continues to trend lower following the end of the summer driving season. The 4-week average implied demand number fell by 104k b/d WoW to 8.88m b/d.

The US administration is looking to buy 6m barrels of crude oil for the Strategic Petroleum Reserve (SPR) for delivery February-May 2025. Given the recent weakness in oil prices, it makes sense for the Department of Energy (DoE) to increase purchases to refill the SPR. The DoE’s target price is below US$79.99/bbl, while WTI early 2025 forwards are trading sub-$69/bbl currently.

Metals – Zinc surplus eases

The latest data from the International Lead and Zinc Study Group (ILZSG) shows that the global zinc market recorded a surplus of 254kt in the first seven months, lower than the surplus of 466kt during the same period last year. Global refined zinc production remained almost flat at 8.1mt, while total consumption reported gains of 2.6% YoY to 7.8mt between January and July 2024. As for lead, total production was flat at around 7.6mt while consumption fell by 1.3% YoY to 7.5mt over the first seven months of the year. The global lead market witnessed a surplus of 59kt in Jan’24-Jul’24, compared to a deficit of 36kt during the same period last year.

The latest batch of trade numbers from Chinese Customs shows that imports of unwrought aluminium and aluminium products rose 2% YoY to 280kt in August, while cumulative shipments increased 51% to 2.6mt in the first eight months of 2024. For steel products, exports increased by almost 15% YoY to 9.5mt, which leaves cumulative steel product exports at 70.58mt over the first eight months of the year, up 20% YoY. Weaker domestic demand continues to see larger volumes of steel exports from China.

Agriculture – Ukrainian grain exports

The latest data from Ukraine’s Agriculture Ministry shows that grain exports so far in the 2024/25 season rose by 51% YoY to 8.9mt as of 18 September. This includes wheat exports of 5mt (+76% YoY) and corn shipments of 2.5mt (almost the same as last year). Farmers have already harvested 30mt of the grains.

Trade numbers from China Customs show that corn imports dropped 64% YoY (for a fourth consecutive month) to 430kt in August, while cumulative imports declined 15.7% YoY to 12.6mt in the first eight months of the year. China has already taken steps to protect farmers by limiting overseas purchases with domestic warehouses holding plenty of grain. For wheat, monthly imports fell 51% YoY to 410kt. However, cumulative imports are still up 9.8% YoY to 10.5mt in Jan’24-Aug’24.

Macro:

Monetary Policy Statement

The Federal Reserve Open Market Committee (FOMC) cut the target range for the federal funds rate by 50 basis points (bps), to 4.75% to 5.00% and announced it would continue its balance sheet runoff.

The Fed noted that it “has gained greater confidence that inflation is moving sustainably toward 2 percent”, and “judges that the risks to achieving its employment and inflation goals are roughly in balance.”

On the future path of policy, the statement repeated that “the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”

The Fed’s Summary of Economic Projections was updated from June:

The median projection for real GDP growth was largely unchanged at 2.0% in 2024, 2.0% in 2025, 2.0% in 2026, and 1.8% over the long run;

The median unemployment rate forecast was raised to 4.4% in 2024, 4.4% in 2025, 4.3% in 2026, and 4.2% over the long run (from 4.0%, 4.2%, 4.1%, and 4.2%), respectively;

On inflation, the median estimate for core PCE was lowered to 2.6% in 2024, 2.2% in 2025, and 2.0% in 2026 (from 2.8%, 2.3%, and 2.0%);

The median projection for the fed funds rate was also lowered to 4.4% in 2024, 3.4% in 2025, 2.9% in 2026, and the long-run neutral rate was assumed to be 2.9% (from 5.1%, 4.1%, 3.1%, and 2.8%).

One FOMC member voted against the decision. Michelle W. Bowman preferred to cut the funds rate by a quarter point. That is the first dissent by a Fed governor since 2005.

Key Implications

Today was one of the most uncertain Fed decisions in recent memory. The central bank could have easily gone either way with this one. But given that it elected to go for an oversized 50 bps cut, it’s clear that the Fed has gained sufficient confidence that inflation is headed to 2%. It can now focus on the slowing job market, where the unemployment rate has been steadily rising.

Looking at the updated Fed member forecast, the “dots”, the median expectation is for only 50 bps in further cuts expected this year. This could be another 50 in November, or it could imply that the Fed will move to a slower path now that it has come out of the gates quickly, with a quarter point cut at each of the remaining meetings this year. From our point of view, the Fed’s current policy stance is still roughly 200 bps above where it needs to be given the state of the economy. This implies that, no matter the specific pace, investors should expect the Fed to keep cutting through the rest of this year and next.

[Quick Facts]

[New Details]

[Today's Focus]

FOMC Front Loads Easing Cycle

Heading into today’s FOMC meeting, there was more uncertainty among market participants about the outcome than there has been in some time. A rate cut, which would be the first since March 2020, was universally expected. But would the Committee reduce the target range for the federal funds rate by 25 bps or 50 bps? In the event, the FOMC decided to cut rates by 50 bps. The vote was 11-1 in favor, with the lone dissent coming from Governor Michelle Bowman. Just one dissent is not uncommon, but it is more uncommon for a member of the Board of Governors to vote against the policy decision. Today marks the first governor to dissent since 2005, and the first governor to dissent in favor of tighter policy since 1994.

The post-meeting statement highlighted the cooling in the labor market, saying that job gains had “slowed.” In that regard, the economy created 267K jobs per month in the first quarter of the year, but that pace has nearly halved over the past three months (Figure 1). The statement also seemed to hint that concerns about the labor market had been the primary driver of the 50 bps move with the line “in light of the progress on inflation and the balance of risks [emphasis ours], the Committee decided to lower the target range for the federal funds rate by 1/2 percentage point.” The idea that the risks are skewed to the downside for the labor market was further reinforced by the addition of a line signaling that the Committee is “strongly committed” to supporting maximum employment in addition to the existing line about returning inflation to 2%.

Summary of Economic Projections Highlights More Balanced Risks

The update to the Summary of Economic Projections (SEP) suggests today’s 50 bps cut was an effort to front-load the removal of policy restriction, and that additional 50 bps cuts may not occur at upcoming meetings without a meaningful deterioration in the economy. The median participant projection for the fed funds rate at year-end slipped to 4.375%, implying two 25 bps cuts if further easing is spread evenly over the two remaining meetings this year (Nov. 7 and Dec. 18). However, seven Committee members projected rates to fall only 25 bps further this year, while two projected no change (Figure 2). In other words, only one voter may have dissented in September, but a meaningful share of the Committee is still in no hurry to reduce the fed funds rate.

The disconnect between today’s action and the outlook for additional easing in the near term may stem from uncertainty about where the neutral policy setting is. The median estimate of the longer run fed funds rate rose a tick to 2.9% in September, but the range remains wide at 2.4%-3.8%. Yet by that measure, even the more hawkish members of the Committee seem to agree that the prior policy rate of 5.25%-5.50% was very restrictive, allowing space to reduce the target range without inadvertently venturing into “accommodative” territory.

Participants expect further easing in 2025, although at potentially a slower pace. The median dot for 2025 shifted down to 3.375%, implying 100 bps further easing next year.

The more balanced risks between the inflation and employment side of the Fed’s mandate were evident in the economic portion of projections. The median estimate for the unemployment rate at year-end rose to 4.4% from 4.0% in June, slightly higher than most participants’ longer-run estimates, and is expected to stay at 4.4% in 2025 (Figure 3). Meantime, Committee members seemed more constructive on the inflation outlook. The median estimate for headline inflation in Q4-2024 fell from 2.6% to 2.3%. The FOMC also projects core inflation to descend a touch faster than it did in the last SEP; the median estimate slipped to 2.6% for 2024 and 2.2% for 2025 compared to 2.8% and 2.3% previously. Notably, 16 of 19 participants now see the risks to core inflation as broadly balanced, compared to only seven at the June meeting (Figure 4). At the same time, the majority of the Committee (12 participants) believe the risks to the unemployment rate lie to the upside versus only four when the Committee met in June.

Coming into today’s meeting, we expected a 25 bps rate cut today followed by a pair of 50 bps rate reductions at each of the November and December meetings for a cumulative 125 bps decline in the federal funds rate by year-end. With today’s decision by the FOMC, a 50 bps move came a bit faster than we were anticipating, but our overarching view that the FOMC will ease materially in the coming months has not changed. It will be a close call whether we get another 50 bps move by year-end or if the Committee slows down to a more-measured 25 bps pace. The employment reports that are slated for release in the next three months will be critical inputs into the FOMC’s decisions at the November and December meetings. We will formally update our meeting-by-meeting fed funds forecast in the coming days, but we remain of the view that monetary policy will be back near neutral in one year’s time. That is, we look for the federal funds rate to be roughly 3.00%-3.25% or so by this time next year.