Are Retail Korean Treasury Bond Investments Losing Steam?

Where We Stand –

Look Ahead –

The much-anticipated FOMC day has finally arrived, and the financial world is eagerly waiting to see if Fed will opt for a 25bps or a more assertive 50bps rate cut. With market expectations split nearly down the middle, and likely some internal divergence within FOMC itself, the outcome is poised to trigger significant market volatility across asset classes. The key question is whether US equities will soar to new records, or face a harsh selloff afterwards.

On the currency front, Dollar is trading slightly softer but remains largely range-bound against major rivals, as traders hold back ahead of Fed’s announcement. But, Japanese Yen and Canadian Dollar are struggling as the weaker performers. On the flip side, Australian and New Zealand Dollars are standing out with relative strength. If today’s announcement triggers risk-on sentiment, these two currencies could see further upside. European majors are mixed in the middle.

Another key event to monitor today is UK inflation data. While Although a downside surprise is unlikely to influence the BoE’s expected decision to pause rate cuts tomorrow, an unexpected upside in inflation could reignite doubts over whether BoE will indeed proceed with another cut in November, giving a boost to Sterling.

Technically, EUR/GBP is still stuck consolidation from 0.8399. While strong recovery cannot be ruled out, upside should be limited by 38.2% retracement of 0.8624 to 0.8399 at 0.8485. On the downside, break of 0.8417 minor support will argue that fall from 0.8624 is ready to resume through 0.8399 to 0.8382 support.

Fed to cut 25 or 50? Stocks, bonds and Dollar await impact

FOMC’s upcoming decision on interest rates is shaping up to be one of the most anticipated in years, with markets still uncertain whether Fed will opt for a 25bps cut or go bolder with a 50bps reduction. As of now, futures markets are pricing in a 65% chance of a 50bps cut, while the remaining 35% lean toward the more traditional 25bps move. Despite this, many economists believe Fed will take a more measured approach, but the decision is likely to reveal a split within the FOMC, with intense debates expected between the hawks and doves on the committee.

Beyond the size of the rate cut, this meeting will offer much more insight into Fed’s thinking. Alongside the decision, markets are eagerly awaiting updates on future rate cut projections, revisions to the closely watched “dot plot,” and new economic forecasts. And together they will create a complex picture for traders to digest.

As for the broader markets, Dollar may likely follow overall risk sentiment, while the Japanese Yen will likely move in response to US Treasury yields.

The stock market is holding its breath after S&P 500 briefly touched a new intraday record before closing with only a slight gain of 0.03%. Technically, decisive break of 5669.67 will confirm up trend resumption. Next target for the rest of the year will be 61.8% projection 4103.78 to 5669.67 from 5119.26 at 6086.98. In case of a pullback, outlook will still be cautiously bullish as long as 5402.62 support holds.

In the bond market, 10-year yield’s down trend from 4.997 is still in progress for 100% projection of 4.997 to 3.785 from 4.737 at 3.525. Some support could be seen there to bring rebound, but outlook will stay bearish as long as 3.923 resistance holds. Decisive break of 3.525 will pave the way to next long term support level at 3.253.

Turning to currency markets, USD/JPY is now sitting close to a key long term fibonacci support, 38.2% retracement of 102.58 (2021 low) to 161.94 at 139.26. Break of 143.03 minor resistance should confirm short term bottoming, and bring stronger rebound back to 55 D EMA (now at 147.71).

However, decisive break 139.26 will suggest that deeper medium term correction is underway. Next near term target is 61.8% projection of 161.94 to 141.67 from 149.35 at 136.82. Next medium term target is 61.8% retracement at 125.25.

Japan’s exports rise for ninth month, but auto sector weighs on growth

Japan’s export growth continued in August, rising 5.6% yoy to JPY 8,442B, marking the ninth consecutive month of growth. However, this increase fell significantly short of market expectations of 10% yoy growth. The weaker export performance was largely driven by -9.9% yoy decline in auto exports.

In terms of regional performance, exports to the US fell -0.7% yoy, marking the first decline in nearly three years, with auto sales slumping -14.2% yoy. Exports to Europe also suffered, falling -8.1% yoy. In contrast, exports to China were a bright spot, rising by 5.2% yoy.

On the import side, Japan saw 2.3% yoy increase, reaching JPY 9,137B, but this was also far below the expected growth of 13.4% yoy. Despite this, the import figure was the second-largest on record for the month of August.

The country’s trade balance recorded a deficit of JPY -695B, remaining in the red for the second consecutive month.

In seasonally adjusted terms, both exports and imports declined on a month-over-month basis. Exports dropped -3.9% to JPY 8,759B, while imports fell -4.4% to JPY 9,354B. This left Japan with a seasonally adjusted trade deficit of JPY -596B.

BoC’s Rogers: Cooling inflation is “welcome news” but challenges remain

BoC Senior Deputy Governor Carolyn Rogers emphasized the importance of continued vigilance in combating inflation, even as cooling price pressures brought some relief.

Speaking at an event overnight, Rogers noted that while the recent decline in inflation to 2% is “welcome news,” it is still too early to declare victory. “There’s still work to do,” she stated, adding that policymakers need to “stick the landing” to ensure that inflation returns sustainably to target levels.

The comments come in yesterday’s data which showed that inflation had decelerated to BoC’s 2% target in August—the slowest pace since early 2021. The two key core inflation measures also eased, with the average annual pace falling to 2.35% from 2.55% in July.

Recently, there is growing focus on preventing a deep economic slowdown, while rising unemployment became critical concerns for policymakers. Rogers acknowledged the shift in risk perception, saying, “It’s not an absolute tilt to the downside risks, but definitely we’re in a period where the risks are more balanced.”

Looking ahead

UK CPI and PPI will be released in European session, then Eurozone CPI final. Later in the day, US will release building permits and housing starts. BoC will publish summary of deliberations. Then FOMC rate decision and press conference will follow.

AUD/USD Daily Report

Daily Pivots: (S1) 0.6742; (P) 0.6755; (R1) 0.6770;

Intraday bias in AUD/USD stays neutral for the moment. On the upside, decisive break of 0.6766 resistance should confirm that corrective pullback from 0.6823 has completed at 0.6621 already. Intraday bias will be turned to the upside to resume the rally from 0.6348 through 0.6823, and then 6870 resistance. On the downside, however, below 0.6691 will turn bias back to the downside for 38.2% retracement of 0.6348 to 0.6823 again.

In the bigger picture, overall, price actions from 0.6169 (2022 low) are seen as a medium term corrective pattern, with rise from 0.6269 as the third leg. Firm break of 0.6798/6870 resistance zone will target 0.7156 resistance. In case of another fall, strong support should be seen from 0.6169/6361 to bring rebound.

Source: ACTIONFOREX

Most currencies in emerging Asian markets rose on Wednesday as the dollar yielded some of its overnight gains, while equities in the region also advanced, as traders weighed the odds of an outsized rate cut by the US Federal Reserve (Fed) later in the day.

Malaysian ringgit scaled to its highest level in more than 19 months, up 0.4% at 4.2370 per dollar. The currency continued to build on its outperformance as a confluence of tailwinds including strong growth fundamentals and anticipation of Fed's interest rate cuts boosted inflows.

The ringgit is "buoyed by expectations of a rapidly narrowing yield differentials with the US and global funds pouring into Malaysian equities and bonds", said Lloyd Chan, senior currency analyst at MUFG.

Anticipation of a half-point rate reduction by the US Fed later in the day stood at 65%, substantially higher than 34% a week ago, according to CME FedWatch Tool.

With the Fed expected to cut rates by at least 75 basis points (bps) this year, the dollar has been pushed to the defensive, providing a much-needed breathing space for emerging markets and improving the allure of their assets.

Most Asian currencies logged a stellar performance in August, with the Philippine peso chalking up its best monthly gains in roughly 18 years.

However, the market seems to have overpriced a series of Fed rate cuts this year, said Ryota Abe, an economist at Sumitomo Mitsui Banking Corp, further stating that relief will not be "how much" the Fed cuts this time but "how deep" can it cut rates in this imminent easing cycle.

Abe said a quarter-point rate cut by the Fed will result in the Asian currencies being sold as the dollar may be bought back.

"In the short term, market participants will review chances for the Fed to deliver a 50bps rate cut soon as the current economic data do not necessarily support such large cuts, which will in turn lead to the resurgence of USD."

Indonesia's rupiah and equities treaded water ahead of a monetary policy decision later in the day. Bank Indonesia is expected to stand pat on its interest rate, a Reuters poll of 33 economists showed.

Elsewhere in Asia, the Singaporean dollar and the Thai baht added 0.2% each, while the Philippine peso inched 0.2% lower.

The Philippine central bank earlier in the day announced it was considering a substantial cut in the reserve requirement ratio (RRR) for banks this year.

Equities in emerging Asia were range-bound, with Malaysian benchmark down 0.6%, while stocks in Thailand and Indonesia were up and those in the Philippines added 0.6%.

In China, stocks were largely flat after trading resumed following the Mid-Autumn Festival break.

Markets in South Korea were closed for a public holiday.

Source: The edge markets

Japan's export growth slowed sharply in August as shipments to the US dropped for the first time in three years, while machinery orders unexpectedly shrank in July in a worrying sign for an economy struggling to mount a solid recovery.

The frail external demand undermines Japan's quest to drive sustainable economic growth, analysts say, especially given a growing risk of a slowdown in the US and further weakness in China's economy, two major trading partners.

"Japan's exports are bound to struggle as the global economy is failing to pick up momentum, with growth in both the US and China economies seen slowing down next year," said Takeshi Minami, chief economist at Norinchukin Research Institute.

He said a boost from the weak yen to exports has faded as the Japanese currency rebounded sharply in August.

Total exports rose 5.6% year-on-year in August, up for a ninth straight month, data showed on Wednesday, well below a median market forecast for a 10% increase and following a 10.3% rise in July.

Exports to the US dipped 0.7%, the first monthly decline in nearly three years, as auto sales slumped 14.2%.

Those to China, Japan's biggest trading partner, rose 5.2% in August from a year earlier.

The overall picture in terms of volume also provided for sombre reading, with shipments down 2.7% last month from the year-ago period, the seventh consecutive month of declines.

The value of imports grew 2.3% in August from a year earlier, versus a 13.4% increase expected by economists.

As a result, the trade balance stood at a deficit of ¥695.3 billion (RM20.9 billion), compared with the forecast of a deficit of ¥1.38 trillion.

Separate data from the Cabinet Office showed core machinery orders unexpectedly declined 0.1% in July from the previous month, confounding a 0.5% rise expected by economists in a Reuters poll.

Compared with a year earlier, core orders, a highly volatile data series regarded as an indicator of capital spending in the coming six to nine months, rose 8.7%, blowing past a 4.2% increase seen by economists.

The government stuck with its assessment on machinery orders that recovery is at standstill.

A rise in personal consumption helped Japan's economy rebound strongly in the second quarter from a slump at the start of the year, but the growth was revised down slightly last week.

The Bank of Japan is expected to keep monetary policy steady at a two-day meeting that ends on Friday, but signal that further interest rate hikes are coming and highlight progress the economy is making in sustaining inflation around its 2% target.

Norinchukin's Minami said economists generally expect consumption to support Japan's growth but "with little hope for a boost from exports, the momentum of recovery would be weak".

Source: Theedgemarkets

Swiss watchmakers urged the central bank and the government to support exporters by curbing the strength of the country’s currency as overseas sales slump.

“With inflation currently well below 2 per cent, the Swiss National Bank (SNB) has room to manoeuvre and act on the foreign exchange market,” the Federation of the Swiss Watch Industry and the Employers Federation of the Swiss Watch Industry said on Tuesday (Sep 17). “An ad hoc and more reactive approach would also make it possible to reduce the volatility of the franc.”

The nation’s watchmakers are grappling with a drop in demand for costly timepieces. After record shipments by value in the past three years, watch exports dropped by 2.4 per cent in the first seven months of 2024. Some brands and several components makers have resorted to government-supported work reductions to avoid permanent job cuts, Bloomberg News has reported.

With brands ranging from Rolex to Patek Philippe and luxury conglomerates including Swatch Group and Richemont that each own a slew of brands, the industry includes some 700 companies employing about 65,000 people. It is a key pillar of the Swiss economy, where exports account for 55 per cent of GDP.

The watchmakers are the second prominent Swiss industry lobby to call on the central bank for measures to weaken the franc. Early last month, technology manufacturers’ association Swissmem said the sudden appreciation in the currency is threatening a vulnerable recovery for overseas sales seen in recent months.

Two interest rate cuts by the Swiss National Bank have so far failed to prevent the franc from again approaching an all-time high against the euro that was last reached in the final days of 2023. Officials have repeatedly said that the currency’s strength was crucial in restraining Swiss inflation, which peaked at about a third of the eurozone’s highest level.

SNB officials will meet for the next rate decision on Sep 26.

Subcontractors and makers of entry-level and mid-range priced watches are being hurt the most by the drop in demand, the watch trade group said. “The negative forecasts for the end of 2024 could prove highly problematic for some players in the sector.”

Faced with the sudden drop in demand, many watch companies have had to resort to short-time working, extended summer closures and job cuts, the industry group said.

Source: The edge markets

Confidence among US home builders rose in September for the first time in six months, just before the US Federal Reserve is expected to cut interest rates from the current two-decades high.

A gauge of housing market conditions from the National Association of Home Builders (NAHB) and Wells Fargo climbed two points to 41 this month, matching the median estimate of economists surveyed by Bloomberg. All regions saw an increase.

Measures of prospective-buyer traffic and present sales rose off their 2024 lows. And an outlook index for the next six months increased four points to 53, its biggest gain since January.

“With inflation moderating, the Federal Reserve is expected to begin a cycle of monetary policy easing this week, which will produce downward pressure on mortgage interest rates and also lower the interest rates on land development and home construction business loans,” NAHB chief economist Robert Dietz said in a prepared statement.

Shares of builder stocks have been soaring, largely in anticipation of falling interest rates, according to Bloomberg Intelligence analyst Drew Reading. Lennar Corp is trading at record levels ahead of its earnings report later this week, as is the iShares US Home Construction exchange-traded fund, comprised of builders and related firms.

The anticipated interest rate cut by the Fed this week is expected to help bring down mortgage rates over coming months. Home borrowing costs have already fallen to their lowest levels since February 2023 ahead of the Fed’s move, and the Mortgage Bankers Association sees the 30-year fixed rate dropping to 5.9% by the end of 2025 from 6.29% currently.

Builders have said customers are taking a wait-and-see approach to buying, partly as they wait for lower borrowing costs and partly because of uncertainty over the US presidential election, Reading wrote in a research note last week. Home sales typically rise in the year after a presidential election, he said.

The share of builders cutting prices fell to 32% this month, down from 33% in August, according to NAHB. The average price reduction also decreased, to 5%, the first time it’s been below 6% since July 2022. And, the share of builders that reported using sales incentives declined as well.

Data releases this week will provide further insights into the housing industry during August, with housing starts from the government on Wednesday and existing-home sales from the National Association of Realtors on Thursday.

Source: Theedgemarkets