Following Fed Chairman Powell’s appearance at the Jackson Hole Symposium and this indirect announcement of the much-discussed Fed rate cut, the market is counting down to the September 18 meeting. This week’s labour market data could play a role in the size of this rate move with a negative set of prints potentially keeping the door open to a 50bps decrease.

This rate cut will be the first interest rate reduction since the 150bps of easing announced during March 2020 amidst the COVID pandemic outbreak. One must go back to 2019 for the first “normal” monetary policy easing with three consecutive 25bps cuts announced back then. Powell called these rate cuts “mid-cycle adjustment”.

Six initial rate cuts since 2000

Scrolling through the Fed’s actions since 2000, six easing cycles can be identified. Table 1 below shows the details of the initial interest rate cuts with both the 2002 and 2008 reductions featuring in the list. Both moves came after extensive Fed pauses and are hence each treated as the start of a new easing cycle.

The market is currently pricing in a 39% possibility of a 50bps rate move in two weeks’ time. This looks low considering that on five out of the six occasions examined, the Fed commenced its rate cut cycle with a 50bps move. However, such a move might be more difficult this time around since the US data on the whole are satisfactory, and the US presidential election is just around the corner.

Additionally, the market is currently expecting around 103bps of easing until year-end. As there are just three meetings left in 2024, the Fed is expected to announce rate cuts at every gathering, including the November 7 one. Historically, the Fed announced back-to-back cuts on four of the six periods examined.

How did the market perform one week after the initial Fed rate cut?

Chart 1 below presents the performance of key market assets one week after the initial Fed rate cut. Digging through the data, some interesting trends can be identified. Specifically, the S&P 500 stock index dropped by an average of 3.7% in the six periods examined, reflecting the market’s concerns about the overall economic outlook.

Interestingly, the US dollar tends to suffer in the aftermath of the initial Fed rate cut with euro/dollar rallying in five out of the six periods examined. Additionally, with the exception of 2001, WTI oil futures usually fall by 2.3%-27.2%, potentially reflecting the market’s concerns about a significant economic slowdown, and even recession.

Asset performances two months after the first rate cut

The picture becomes less clear when analyzing the market’s performance two months after the first Fed rate cut. However, this timeframe is rather important as it encompasses the November 5 US presidential election and the subsequent Fed meeting (November 7).

As seen in Chart 2 below, WTI oil futures suffered in 2008, 2019 and 2020, while the US dollar had a more mixed performance in the two months after the initial rate cut. On the flip side, based on the analysis’ findings, the 10-year US treasury yield tends to fall by an average of 38bps in the examined timeframe.

Additionally, the S&P 500 index was under pressure in five of the six periods examined as market participants were quite anxious about the state of the US economy. Interestingly, this equities’ weakness was one of the key findings in an earlier special report analyzing the performance of key assets two months ahead of the US presidential election.

Malaysia should capitalise on the Asean open market to showcase its products and services, keeping itself at the forefront of a bloc projected to reach one billion consumers, Economy Minister Rafizi Ramli said.

He said Malaysia is already leading in the region, offering significant opportunities as Asean is projected to become the world's fourth-largest economic power within the next 10-15 years.

"This 10-15 year period is brief. Asean currently has around 700 million consumers, and within this timeframe, the number is expected to grow to one billion.

"China has emerged as a major economic power, and India is also on track to become one, with a market exceeding one billion consumers," he told reporters after attending the Kick-Off Conference for the 13th Malaysia Plan (2026-2030) here on Thursday.

He added that, aside from the major global economies, Asean is the only region experiencing strong, sustained growth, with a consumer base on track to surpass one billion.

Rafizi further highlighted that many experts predict Asean will surpass Europe as the world's third-largest consumer market.

"In terms of our regional peers, Malaysia consistently ranks second in gross domestic product per capita, following Singapore. While our population may not be vast, it is projected to grow to 40 million, and our market remains significant.

"We have the right balance, with strong growth, abundant resources, and a strategic location at the heart of Asean. The potential is enormous. That is the future we aim to chart, which is why RMK-13 is a crucial planning document that aligns with this trajectory," he said.

In his earlier speech, Rafizi explained that RMK-13 would echo RMK-1, a concise and comprehensive strategic document where every word aligns with specific policy directions.

The minister also emphasised the government’s aim to collect diverse ideas and feedback to foster an environment where concerns can be raised and the government can be guided in the right direction.

Source: Theedgemarkets

SYDNEY (Sep 5): Australia's top central banker reiterated on Thursday that it was premature to contemplate near-term rate cuts as inflation remained too high, sticking to a hawkish stance even as data showed the economy was struggling to motor on.

In a speech in Sydney, Reserve Bank of Australia (RBA) Governor Michele Bullock said bringing inflation down to the target band of 2-3% remains the central bank's highest priority.

"If the economy evolves broadly as anticipated, the board does not expect that it will be in a position to cut rates in the near term," said Bullock.

The hawkish rhetoric came even though data this week showed the economy barely grew in the second quarter as household consumption dragged. A monthly consumer price report had also showed headline inflation eased to 3.5% in July.

Bullock emphasised domestic inflationary pressures, such as in housing and market services, were still contributing to above-target inflation, one reason that core inflation is only expected to slow to the target band toward the end of 2025.

She acknowledged the substantial uncertainty around the bank's central forecasts, adding that the board would respond appropriately to any change in circumstances.

However, Bullock warned that if high inflation became entrenched in expectations, the RBA would have to slow the economy even more to bring it to heel.

The RBA has held rates steady at 4.35% since last November, judging it restrictive enough to bring inflation to target while preserving employment gains.

"Ultimately, though, it is crucial to remember that our full employment goal is not served by letting inflation stay above target indefinitely," said Bullock.

Markets are still wagering there is a 42% probability that the RBA could cut in November, in part due to expectations the U.S. Federal Reserve will ease policy this month, joining most other major central banks.

An RBA cut by December is almost fully priced in.

Bullock noted that inflation for retail goods is now close to its historical average, while gains for administered prices is only a little above its long-run average.

Rent inflation will likely remain high for some time, while labour costs growth is still strong, reflecting wage increases and weak productivity growth, she said.

Source: The edge markets

The recent Cabinet meeting gave approval for Malaysia to officially negotiate with the European Union (EU) to conclude a free trade agreement (FTA), said Investment, Trade and Industry Minister Tengku Datuk Seri Zafrul Abdul Aziz.

He added that the government will ensure that the negotiations will provide a 'win-win situation' for the EU and Malaysia.

"Recently, we presented to the Cabinet, so that we can restart negotiations and find a solution. Whether it can be done or not, we don't know yet.

"There are many requests for us to restart negotiations. Now it's up to the EU whether it wants to start [negotiations] or not," he said in an interview on the Niaga Awani programme titled 'BRICS: Countering Misconceptions' broadcast by Astro Awani on Thursday.

Negotiations on the FTA began in October 2010, involving eight rounds of negotiations until September 2012, but were postponed due to Malaysia's position in several areas such as palm oil, procurement policy, subsidies and the EU's sustainability clause.

Zafrul noted that only two Southeast Asian countries had concluded FTAs ​​with the EU so far, namely Vietnam and Singapore. He said Malaysia will also finalise an FTA with the United Arab Emirates (UAE) at year end, and will also start renegotiations with South Korea, which is expected to be completed next year. "We have more negotiations with two or three European countries that are not included in the EU, and will finalise our FTA with those countries as well," he added.

The minister said the government wants to ensure that Malaysia collaborates with all countries in a consistent, open and neutral manner. "Malaysia has 16 FTAs that are multilateral and bilateral, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP)," he pointed out.

Regarding Malaysia's desire to join BRICS, Zafrul noted that the combined economic size of the BRICS countries is almost 30% of the world's economy.

"We want to join the bloc, so that we can use this platform as a forum to collaborate with member countries, and also be a voice to the world on the challenges faced by the Global South in terms of climate change, energy, geopolitics and economics," he said, adding that Malaysia is a country with an open economy, therefore the country needs to continue to collaborate with all parties.

Malaysia has applied to join BRICS, a trade cooperation bloc for emerging economies that was established in 2009, and includes Brazil, Russia, India and China, followed by South Africa's participation in 2010. In January 2024, Iran, Egypt, Ethiopia and the UAE also joined as new members.

Source: Theedgemarkets

Markets

Yesterday’s JOLTS report was yet another perfect illustration of market’s high sensitivity to the labour market since Fed chair Powell bombarded it to the single most important theme for policy. July Job openings in the US tumbled from a downwardly revised 7.94 mln to 7.67 mln, undershooting consensus by about 400k. Resisting the urge for a “jolt(s)”-related pun, it triggered a shock reaction in markets.

US yields added to previous losses to the tune of 2 bps to end the day significantly lower: from -6.5 (30-yr) to 10.9 (2-yr) bps. Front-end outperformance resulted from money markets adding to 2024 easing bets. A cumulative 110 bps on the remaining three meetings means that investors are increasingly considering more than one jumbo-sized (50 bps) rate cut.

US stock markets hit their intraday highs in the hour after the JOLTS report before paring gains to trade only little changed. The loss of interest rate support weighed on the US dollar. EUR/USD bounced from 1.104 towards 1.108 and the trade-weighted index dropped to 101.36 (from 101.7 at the open). USD/JPY revisited the August sell-off lows around 143.7 on both dollar weakness and JPY strength. The latter extends into Asian dealings this morning after data showed wages in July growing faster than expected.

The Bank of Japan’s preferred gauge came in at 4.8% y/y in July. That’s barely slower than June’s 5.1% – which was already boosted by back-pay reflecting this year’s wage negotiations – and significantly more than the 3.2% estimate.

Front-end US yields decisively broke through the recent August lows (eg. 2-yr sub 3.8%). Their technical picture deteriorated significantly as a result. There’s little in the way for a return towards the March 2023 lows seen in the wake of the regional banking crisis in the US (3.55% in the 2-yr yield).

A possibly unconvincing ADP job report and/or US August services ISM (expected at 51.4, same as in July) today will undoubtedly add further downward pressure going into tomorrow’s key payrolls release. Longer maturities such as the 10-yr are at a crossroads with the similar August lows barely surviving for the time being. A break lower depends on whether the data is weak enough to reignite recessionary fears. The dollar looks vulnerable nevertheless. EUR/USD 1.1139 serves as a first dollar support.

News & Views

The Bank of Canada yesterday reduced its policy rate for the third consecutive meeting by 25 bps to 4.25%. Q2 growth (2.1%) was slightly stronger than forecast, but preliminary indicators suggest that recent activity was soft. The labour market slows, but wage growth remains elevated relative to productivity growth. Inflation, including underlying measures, declined further in July (2.5%). This allowed for a further easing, with excess supply putting r downward pressure on inflation. High prices for shelter and some services still give some counterweight.

At the press conference, Governor Tiff Macklem still advocated data-dependent approach, but also kept the option open for bigger rate cut steps. With inflation getting closer to the target, the BoC needs to increasingly guard against the risk that the economy is too weak and inflation falls too much. The Canada 2-y bond yields yesterday declined 7 bps, but his was also supported by broader (US-driven) market momentum. The market currently fully discounts two additional 25 bps cuts at the October and December meetings and about 30% chance of one bigger move. The Loonie strengthened (USD/CAD 1.35 from 1.355) but this was partially due to overall US weakness.

The Reserve Bank of Australia (RBA) doesn’t join the broader positioning toward (faster) policy easing. In a speech this morning, RBA Governor Michele Bullock reconfirmed bringing inflation to the 2-3% target as the RBA’s priority. “If the economy evolves broadly as anticipated, the board does not expect that it will be in a position to cut rates in the near term,” Bullock said. Inflation cooled to 3.5% but especially domestic inflation from housing and services remains too high. Bullock warned that if high inflation became entrenched in expectations, the RBA would have to slow the economy even more to bring prices back in check, with ultimately a larger rise in unemployment and higher risk of a recession. If circumstances change, the RBA will respond accordingly.

The Aussie this morning trades little changed (AUD/USD 0.6725) after having declined earlier this week on lower commodity prices. Markets still see a first RBA rate cut by the turn of the year (December or February meeting).

Source: ACTIONFOREX