Australia Central Bank Governor Reiterates Rate Cuts Are Premature

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

The establishment of SG4 Group Sdn Bhd (SG4 Group) by the four opposition-governed states, Kedah, Kelantan, Perlis and Terengganu, has good intention but it should study the world's rare earth element (REE) market prices.

Deputy Prime Minister Datuk Seri Dr Ahmad Zahid Hamidi said this was because the current world REE prices have declined by 70%.

"This is due to the dumping of REE on the world market with stockpile production by certain countries.

"Although the price has dropped 70% from the original price, these four states need to have their own strategy, and it is subject to taxation and the ecosystem that has been determined by the federal government for that purpose," he said.

He told reporters after launching the International Legal Conference on Online Harms 2024 which was also attended by the Minister in the Prime Minister's Department (Law and Institutional Reform) Datuk Seri Azalina Othman Said and the Spanish Ambassador to Malaysia Jose Luis Pardo.

Terengganu Menteri Besar Datuk Seri Dr Ahmad Samsuri Mokhtar was previously reported as saying that SG4 Group will focus on developing the REE processing industry in an effort to improve the economy of the four states under the Perikatan Nasional (PN) administration.

Regarding the Barisan Nasional (BN) candidate for the Mahkota state by-election, Ahmad Zahid, who is also the BN chairman, said it will be announced by Johor Menteri Besar Datuk Onn Hafiz.

"I will give authority to the Menteri Besar of Johor to announce the candidate for Mahkota candidate," he said.

The Election Commission (EC) set the voting day for the Mahkota by-election on September 28, while nomination and early voting were set for September 14 and 24 respectively.

The Mahkota state by-election is being held following the death of its incumbent, Datuk Sharifah Azizah Syed Zain, 64, on August 2.

Source: Theedgemarkets

Bank of Japan (BoJ) Board Member Hajime Takata is back on the wires early Europe on Thursday, noting that “if the economy, prices move in line with our forecast, we will adjust policy rate in several stages.”

Additional quotes

Don't have specific image in mind when I say we need to spend "sufficient time" to scrutinize economy, price developments.

Current market moves are second round of the volatility we saw in early August, which reflects concern over  the US economic outlook.

Our basic stance is to adjust degree of monetary support if economy, prices on track but that is not without some qualifications.

If markets are volatile, we must gauge the moves' impact on economy, prices in setting policy.

Based on our hearings, we expect there to be more price hikes in October though that was when the Yen was weakening.

We have seen some change in FX, market moves so must need to take fresh look at impact on economy, prices.

We won't directly respond to FX moves but we are aware they could affect economy, prices and risks.

Don't have preset idea on pace of rate hikes, or on whether we will hike rates several times.

We have no choice but to scrutinize at each policy meeting how market moves affect corporate balance sheets, earnings and risks to economy.

Source: FXSTREET

USD/CHF trades in negative territory for the third consecutive day near 0.8460 in Thursday’s early Asian session. 

Weaker US economic data and dovish Fed weigh on the US Dollar. 

Softer inflation in Switzerland supports the case for another rate cut by the SNB.

The USD/CHF pair extends its decline around 0.8460 during the early European session on Thursday. The growing speculation that the US Federal Reserve (Fed) will cut a larger interest rate in September exerts some selling pressure on the US Dollar (USD). Investors will focus on the release of the US ISM Services Purchasing Managers Index (PMI), the ADP report on private-sector employment and weekly Initial Jobless Claims on Thursday ahead of the highly anticipated August Nonfarm Payrolls (NFP). 

The recent weaker US economic data and the dovish stance of the Fed continue to undermine the Greenback broadly. The US Job Openings and Labor Turnover Survey showed that available positions declined to 7.67 million in July, compared with 7.91 million openings in June, the Labor Department revealed Wednesday. This report came in worse than the estimation of 8.1 million.

Meanwhile, Atlanta Fed President Raphael Bostic said on Wednesday that he is ready to start cutting interest rates even though inflation remains above the 2% target.  San Francisco Fed President Mary Daly said early Thursday that the central bank needs to cut interest rates to keep the labor market healthy, but she needs more data, including Friday's job market report and CPI, to determine the size of a rate cut. 

On the Swiss front, Swiss inflation slowed more than expected in August, prompting the expectation for another interest rate cut by the Swiss National Bank (SNB). Switzerland’s Consumer Price Index (CPI) rose 1.1% YoY in August, compared to the previous reading of 1.3%, below the market consensus of 1.2%. On a monthly basis, the CPI inflation remains unchanged in August from a decline of 0.2% in July, softer than the expectation of a 0.1% increase. 

Source: FXSTREET

KEY POINTS

EUR/GBP inches lower amid rising odds of the ECB reducing rates in September.

Eurozone Producer Price Index increased by 0.8% MoM in July, the largest increase since December 2022.

The British Pound strengthens as expectations grow that the BoE will remain more hawkish compared to the ECB.

EUR/GBP offers its recent gains from the previous session, trading around 0.8420 during Thursday’s Asian hours. Traders await Eurozone Retail Sales data scheduled to be released later in the day.

The downside of the EUR/GBP cross could be attributed to rising speculation that the European Central Bank (ECB) will cut interest rates in September. The ECB’s rate cut would mark the second interest rate cut by the ECB since it began shifting toward policy normalization in June.

In the Euro Area, the Producer Price Index (PPI) rose by 0.8% month-over-month in July, the largest increase since December 2022. This follows an upwardly revised 0.6% rise in June and significantly exceeds market forecasts of 0.3%.

However, the Eurozone Services PMI fell to 52.9 in August, from 53.3 in the previous month. Meanwhile, the Composite PMI decreased to 51.0, missing expectations and falling below the previous reading of 51.2.

The British Pound (GBP) advances further by rising expectations that the Bank of England's (BoE) rate-cutting cycle is more likely to be slower than the European Central Bank. The bets were lifted by Tuesday’s BRC Like-for-Like Retail Sales, which increased by 0.8% year-on-year in August, up from a 0.3% rise in July, marking the fastest growth in five months.

Meanwhile, there was positive sentiment from the UK macroeconomic front, as a Purchasing Managers Index (PMI) survey showed that business activity in August accelerated at its fastest pace since April.

On Wednesday, the S&P Global UK Composite PMI increased to 53.8 in August, up from 53.4 in the previous month and revised higher from the preliminary estimate of 53.4. The Services PMI rose to 53.7 in August, compared to 53.3 in the prior month. The data showed on Monday that the Manufacturing PMI held steady at 52.5 for August, consistent with preliminary estimates.

Source: FXSTREET