BOJ Faces Task of Flagging Rate Hike Path While Standing Pat

Economic

Summary:

All 53 polled economists see bank holding at 0.25% this week. Bank to keep close eye on reaction to likely Fed rate cut.

Bank of Japan Governor Kazuo Ueda faces the delicate task this week of making sure investors are firmly aware of interest rate hikes to come without ruffling markets even as he stands pat on policy.

All 53 economists surveyed by Bloomberg said Ueda’s board will leave the benchmark rate at 0.25% when its two-day meeting concludes Friday. Almost 70% of them forecast a rate hike by December, making the BOJ’s messaging crucial, particularly after it drew criticism for a lack of communication leading up to the July 31 rate increase and the market mayhem that followed.

BOJ Faces Task of Flagging Rate Hike Path While Standing Pat_1

The BOJ gathering will come just hours after the Federal Reserve is expected to make a momentous pivot toward an easing cycle after an aggressive tightening campaign that began in 2022. A turnaround by the Fed would further highlight the BOJ’s contrasting trajectory among its peers as the lone bank moving higher to normalize policy, a process it began with its first hike in 17 years in March.

With markets split on how big the US rate cut will be, there is scope for renewed market volatility, providing the BOJ with another reason to hold for now. An ongoing leadership election in Japan’s ruling party is another factor supporting the view among economists that the BOJ will maintain its settings this week.

That leaves Ueda with the challenge of reminding market players that the BOJ remains on a path toward higher rates and that the holding pattern is just temporary as it monitors market moves after the Fed and gauges the impact of its July hike.

With economists touting December as the most likely month for the bank’s next move, Ueda will need to use this week’s meeting to prepare markets if he still has an earlier move on his radar.

“This is an important opportunity to know where the BOJ stands on policy,” said Taro Kimura, an economist at Bloomberg Economics. “If they see a chance of an October rate hike, Ueda is likely to send some kind of signal for that.”

After the BOJ raised the rate for a second time this year in July, Ueda sent clear hawkish signals about the outlook, spooking global investors. That was followed by weak US data that rekindled concerns about a slowdown there. The combination spooked markets, buoyed the yen and chased yen-carry speculators from their positions. Those initial moves fueled a rout in risk assets and the biggest daily drop in Japanese stocks on record.

Volatility in Japan’s equities markets has remained high since then, with stocks extending a period of wild swings last week. BOJ Faces Task of Flagging Rate Hike Path While Standing Pat_2

BOJ Faces Task of Flagging Rate Hike Path While Standing Pat_2

The global market meltdown prompted lawmakers to call on Ueda to explain the thinking behind monetary policy at a highly unusual session conducted when parliament was closed. The proceedings ran for five hours.

For now the central bank would probably prefer to avoid drawing renewed attention from politicians as the nation prepares for a political transition. The Liberal Democratic Party’s leadership race kicked off last week, with the winner almost certain to become the nation’s next prime minister.

While BOJ officials are of the view that the early August market ructions were mainly caused by factors related to the US economy, they also must humbly acknowledge that the turmoil occurred just a few days after their policy decision, according to people familiar with the matter.

In a rare move, even a BOJ board member signaled frustration over the bank’s handling of its messaging efforts in July, which may have confused some market participants regarding the central bank’s policy intentions.

“I feel that there was room for better communications including its timing,” Naoki Tamura, one of nine board members told reporters Thursday. “It’s important to work on improving communications.”

BOJ officials acknowledge there was a communications vacuum ahead of the July meeting, though that was purely down to bad luck, according to the people. Ueda didn’t have an opportunity to discuss monetary policy in public for more than a month. Parliament was in recess after an ordinary session ended on June 23, and the governor skipped the Group of 20 meeting in Brazil in July.

“The BOJ should have someone speak in public in periods in between meetings,” economists Mari Iwashita and Kento Minami at Daiwa Securities wrote in a note Friday. “If that’s impossible, it should schedule a media interview for seamless communications.”

BOJ Faces Task of Flagging Rate Hike Path While Standing Pat_3

In the past month, the central bank has communicated much more. Five board members including Ueda have signaled that the bank will hike rates when its price target is realized in line with its current projections.

Tamura, the most hawkish member of the board, cited the need to raise the policy rate to 1% in the latter half of the BOJ’s current projection period, which spans from October next year through March of 2027.

Officials inside the bank aren’t ruling out another rate rate move later this year or in early 2025, depending on the state of the economy and financial markets, according to the people.

Japan’s wage data showed the biggest gain in 31 years and revised GDP reaffirmed Japan’s economy was on a recovery track last quarter. Economists see both developments as laying the groundwork for another rate increase.

“It’s undeniable that the BOJ’s stance became more cautious after the rapid market volatility upset its top officials,” said Izuru Kato, chief economist at Totan Research. “Still, their policy reaction function must be unchanged, so they will probably raise rates in December once they confirm no major disturbances to the global economy arising from the Fed’s rate cut and US presidential election.”

Source: Bloomberg

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Thomas

Cryptocurrency

Millions of potenial Australian crypto investors are “sitting on the sidelines” until regulations around the market are clearer, says the head of a local crypto exchange.

Jason Titman, the CEO of Swyftx, told Cointelegraph that his firm predicts between two to six million Australians will enter crypto when “the dust has settled on regulation.”

A Swyftx survey found nearly a third of respondents would be more likely to buy crypto if it was regulated, while 41% said they didn’t trust crypto without regulation.

Of the survey’s 2,229 adult respondents, 20% of those had never owned crypto, while 43% of those surveyed said they don’t know enough about how crypto works.

“We have a wall of investors right now sitting on the sidelines waiting for the security of consumer protections,” Titman said.

“When national markets are regulated you will get more investment in the sector, more utility, more security and more interest.”

Swyftx estimated from its survey that there are 3.9 million Australians who own crypto, while a further 1.3 million are considering entering the market in the next 12 months.

Swyftx’s survey also found crypto usage in Australia has fallen slightly despite Bitcoin rallying to an all-time high of $73,750 in March of 2024.

The overall number of people who own digital assets also dropped from 23% to 20, but one age bracket, Gen Z, saw an 11% increase in usage.

Most investors also reported making a profit over the last 12 months, with roughly 82% claiming to have made gains. Swyftx estimates the average profit was $9,600.

Adoption “sideways” until laws in place

Titman expects crypto adoption will “track sideways” until the country moves on regulations.

“The reality is that there are a finite number of investors who are willing to take on the risk of entering an unregulated market,” Titman said. “At some point, without regulation, adoption is going to slow.”

“The evidence coming out of Australia strongly supports the idea that the international crypto economy will exponentially grow when it’s regulated. We think a regulated industry is almost certainly how we hit one billion global crypto owners.”

Currently, cryptocurrencies are legal in Australia and are subject to laws treating them as property. Those who cash out profits on their investments must disclose the transaction to tax authorities.

The government has pledged to introduce exchange regulations and custody, but there are still no firm rules.

Source: COINTELEGRAPH

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Warren Takunda

Stocks

Asian stocks gained on Tuesday while the dollar and U.S. Treasury yields came under pressure, with just a day to go before the expected start of the Federal Reserve's easing cycle that could see policymakers deliver an outsized rate cut.

Extended holidays in China and South Korea made for thin trading conditions, with investors focused on Wednesday's Fed decision as odds have crept up in the past week in favour of a 50-basis-point rate cut.

That kept the dollar languishing near its lowest level in over a year against the yen at 140.64, having fallen below the 140-yen level in the previous session.

The stronger yen stoked concerns about Japanese exporters' earnings and pulled down Tokyo's Nikkei by 2% as the market returned from a national holiday on Monday.

Outside Japan, MSCI's broadest index of Asia-Pacific shares rose 0.47%. Hong Kong's Hang Seng Index advanced 1.44%.

S&P 500 futures and Nasdaq futures both eased marginally, though EUROSTOXX 50 futures tacked on 0.33% and FTSE futures gained 0.57%.

Markets are now pricing in a 67% chance that the Fed could ease rates by half a percentage point at the conclusion of its monetary policy meeting on Wednesday, after a slew of media reports revived the prospect of more aggressive easing.

"The case for a 50bps rate cut this week hinges in part on the idea that rates are well above most estimates of neutral - if officials judge that keeping policy in restrictive territory for too long creates unnecessary risk for the economy then there is no sense in dragging their feet," said Neil Shearing, group chief economist at Capital Economics.

Yes, we've seen some less-stellar-than-hoped for guidance, but not, in my opinion,

"The problem is this is a high bar for a large rate cut, particularly at the start of the easing cycle. If nothing else, it creates the impression that central bankers have made a mistake and fallen behind the curve."

For the year, markets have priced in roughly 120bps worth of easing by December.

The two-year U.S. Treasury yield , which typically reflects near-term rate expectations, was last at 3.5547%, having fallen to a two-year low of 3.5280% in the previous session.

The benchmark 10-year yield was little changed at 3.6232%.

RATE DECISIONS

The Bank of England (BoE) and the Bank of Japan (BOJ) also meet this week to discuss monetary policy, where both central banks are seen keeping rates on hold.

Expectations of less aggressive easing by the BoE in contrast to the Fed have in turn kept sterling supported. It was last 0.1% lower at $1.3202, but strayed not too far from August's peak of $1.3269, its strongest level since March 2022.

"We forecast the BoE will keep the bank rate unchanged, at 5.0%, at its September policy meeting," said economists at ANZ. "We expect it will adopt a gradualist approach in the early part of its easing cycle."

Elsewhere in Asia, China's stuttering economic recovery continued to weigh on sentiment, after data over the weekend showed the country's industrial output growth slowed to a five-month low in August, while retail sales and new home prices weakened further.

Still, concerns over faltering Chinese demand for oil were overshadowed by the ongoing impact of Hurricane Francine on output in the U.S. Gulf of Mexico, sending oil prices rising on Tuesday.

Brent crude futures rose 0.44% to $73.07 a barrel, while U.S. crude futures gained 0.67% to $70.56 per barrel.

Spot gold eased 0.22% to $2,576.84 an ounce.

Source: Reuters

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Owen Li

Forex

Several regional private equity firms have banded together to establish a Vietnamese alliance, aiming to facilitate US$35 billion (S$45.73 billion) of investment into the Southeast Asian country over the next decade.

The newly established Vietnam Private Capital Agency, founded by five partners from funds including Golden Gate Ventures, Do Ventures and Monk’s Hill Ventures, will organise seminars, support private equity firms and both lobby and work with the government on policy. Its goal is to facilitate investment in sectors from agriculture to education and health care, said Mr Vinnie Lauria, a board member for the agency.

It is unclear how the association arrived at its investment projection, which is several times higher than Vietnam’s tech sector attracts annually, at present. But many investors tout the country’s potential at a time US-China tensions are prompting businesses to relocate factories and target new markets for growth. Vietnam’s digital economy is expected to surpass US$90 billion in 2030 from US$30 billion last year, according to a joint report from Google, Temasek Holdings and Bain & Co.

“Vietnam is a hot market,” said Mr Lauria, a Golden Gate founding partner. “The motivation to establish the VPCA stemmed from key developments in Vietnam, including rising wages and GDP, increasing FDI, export growth post-Covid-19, government innovation programs, and rapid infrastructure development.”

The industry association hopes to broaden its membership to 100 individuals by the end of 2025, from more than 40 now. Existing member firms also include Vertex Ventures, Ascend Vietnam Ventures and Mekong Capital.

Vietnam’s startup scene has exploded in past years, driven by the rise of firms such as games developer VNG Corp. But as with much of Southeast Asia, the country’s tech sector has struggled to raise capital since a post-Covid-19 economic downturn.

In 2021, Vietnam drew a record US$2.6 billion through 233 private deals, up from US$700 million via 140 deals a year prior, according to the Google report. But total capital invested in Vietnamese tech startups in 2023 plunged 17 per cent to US$529 million, placing it third among Southeast Asian countries, according to a separate report from Do Ventures and the Vietnam National Innovation Center.

Source: Straitstimes

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SAXO

Bond

Introduction

Historically, bond yields tend to decline heading into an easing cycle, driven primarily by lower real yields and wider breakeven rates, as the Federal Reserve cuts rates to stimulate the economy.

However, this time, we are seeing an unusual pattern. Despite expectations of a prolonged and aggressive easing cycle, breakeven rates have fallen faster than real rates, signaling that markets are pricing inflation to fall below the Fed’s 2% target. This is surprising because, typically, Fed rate cuts would lead to higher long-term breakeven inflation rates, as monetary easing stimulates the economy.

The disconnect between falling breakeven rates (signaling lower inflation expectations) and more resilient real yields (indicating tighter policy) reflects the uncertainty in the current market environment. Markets are anticipating lower inflation due to slowing economic activity, but the higher real yields suggest that, for the Fed to meaningfully shift policy, it may need to cut rates more aggressively than currently expected. Elevated real yields are also a sign that investors are hedging against persistent economic headwinds rather than a complete breakdown in economic fundamentals.

What Is Driving the Recent Rally in US Treasuries?

The recent rally in Treasuries, particularly the decline in 10-year yields, has been driven by expectations of economic weakness. Several key factors have contributed to this:

Oil Prices and Inflation Expectations:

A key trigger for the bond rally has been the decline in crude oil prices. Oil falling below $70 per barrel, its lowest level since December 2021, has heightened fears that inflation may undershoot the Fed’s target. This drop in inflation expectations has led investors to move into Treasuries, pushing yields lower. The 10-year breakeven inflation rate, which measures expected inflation over the next decade, has fallen to 2.02% — the lowest since 2021. Even more telling, breakeven rates for shorter-term bonds (up to 5 years) have fallen below the Fed’s 2% target. This indicates that investors are now pricing in the possibility of inflation undershooting over the medium term, reinforcing expectations of an aggressive rate-cutting cycle by the Fed.

Breakeven Rates and Real Yields:

Interestingly, the decline in yields has been primarily driven by falling breakeven rates, rather than real yields. While breakeven rates have dropped significantly, real yields (which are tied to inflation-protected securities or TIPS) have only fallen to levels last seen in July of last year. This disconnect highlights that inflation expectations are driving the rally, rather than a significant deterioration in real economic conditions. Elevated real yields reflect a restrictive policy environment, meaning that for the Federal Reserve to become less restrictive, it may need to cut rates more aggressively than markets currently expect.

Bond Market Outlook: Why U.S. Treasuries Look Expensive Ahead of the Upcoming Rate-Cutting Cycle_1

Why Treasuries Appear Overvalued?

Limited Room for Further Yield Declines:

Treasury prices have already recovered more than 50% from their post-2020 declines, significantly reducing the upside potential even if a recession materializes. Historically, bond yields have fallen by around 200 basis points (bps) during recessions. Since their recent peak in October 2023, 10-year Treasury yields have already dropped by 140 bps. With this substantial decline already priced in, the potential for further yield declines appears limited. Moreover, inflation remains elevated, and the timeline for any potential recession is uncertain. The market may find it difficult to price the Fed funds rate below 3%, which Philadelphia Fed President Patrick Harker recently suggested as the new long-term neutral rate.

Declining Convexity Appeal:

Bonds tend to perform well during recessions due to their positive convexity, meaning prices rise more as yields fall. However, with 10-year yields already down 130 bps from their highs, the positive convexity of bonds is losing its appeal. Historically, the peak-to-trough decline in yields during a recession averages about 200 bps. With yields having already fallen significantly, further price appreciation seems unlikely unless a severe recession materializes, which current economic data does not strongly support.

Recession Risk Overstated:

While the bond market appears to be pricing in a recession, the economic data suggests otherwise. Tight credit spreads, historically high profit margins, and declining bankruptcy filings indicate that businesses are not under significant financial stress. Additionally, low unemployment claims suggest that the labor market remains resilient, making the case for an imminent recession less convincing. If a recession does not occur, the current pricing of Treasuries could prove too rich, leaving investors with limited upside.

Underpricing of Inflation Risks:

The market is currently underpricing the risk of inflation returning. Several factors, including rising food prices and easier access to credit, could lead to a resurgence in inflation. The St. Louis Fed's Price Pressures Index is already signaling a near 100% probability that headline PCE (Personal Consumption Expenditures) inflation will exceed 2.5% over the next year. If inflation picks up again, bond yields could rise, which would hurt Treasury prices. Given the market’s current focus on downside risks, the possibility of a return to inflationary pressures seems to be underappreciated.

Bond Market Outlook: Why U.S. Treasuries Look Expensive Ahead of the Upcoming Rate-Cutting Cycle_2

Preserving Capital: Why Savvy Investors Are Opting for Cash and T-Bills at 5%

Savvy investors like Warren Buffett have recognized that, at this stage, there is little to gain from extending duration in Treasuries or heavily investing in the stock market. Buffett himself has chosen to hold onto cash, acknowledging the lack of attractive opportunities in the current environment. For investors looking for a secure place to park their money while waiting for more favorable conditions, U.S. Treasury bills (T-bills) offer a compelling option, yielding around 5%. These short-term instruments provide a solid return without exposing investors to the risks associated with longer-duration bonds or volatile equity markets.

Given the uncertain economic outlook and the limited upside in Treasuries, it may be wise to take advantage of the attractive yields in T-bills. This allows investors to preserve capital and earn a respectable return while keeping liquidity high, positioning themselves to move into better opportunities when the market outlook improves.

Risk Warnings and Disclaimers

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Kevin Du

Coal India Ltd is planning to invest about 670 billion rupees (RM34.65 billion) to build coal-fired power plants close to its mines, signalling the fast-growing economy will remain reliant on the fossil fuel for decades to come.

The state-owned miner has already won approval for 4.7GW of generation to be built over the next six to seven years, with most of the facilities to be in the state of Odisha on India’s east coast, Business Development Director Debasish Nanda said in an interview. Another 2GW are currently under discussion and may take longer to complete, he said.

The new power stations are in addition to a plan, announced by New Delhi late last year, to add 88GW of thermal generation capacity through 2032. The world’s most populous country is forecasting electricity demand to surge over the next few years, making it tough to wean itself off coal, which accounts for around three-quarters of the power mix.

The fossil fuel will remain relevant to the country’s electricity mix for at least three decades, Nanda said. Putting these plants near mines will allow the company to avoid transport costs, keeping them competitive, he said, adding that Coal India is also looking to build renewable power stations and get into mining critical minerals.

India has a goal of getting to net zero by 2070, later than other major economies, reflecting the fact that both its population and economy are still growing quickly. However, environmentalists say the government should be doing more to decarbonise the power system.

“Coal is already unsustainable on the four key parameters of climate, environment, social justice and economics,” said Sunil Dahiya, a New Delhi-based analyst at the Centre for Research on Energy and Clean Air. “The government needs to form policies that allow wise use of resources instead of burdening the power system and the economy with expensive coal-fired electricity.”

Source: Theedgemarkets

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Samantha Luan

Economic

Over the past century, after a significant Fed rate hiking cycle which resulted in an inverted yield curve — as we have seen over the past couple of years — there has been a major recession and stock bear market.

With investor sentiment towards stocks at historically high levels, most investors are either unaware of this phenomenon or believe this time is different for some reason.

I believe most investors are in for a major surprise… and not in a good way.

Declining employment is a key hallmark of recessions and leads to significant declines in spending and production, which leads to significantly lower corporate earnings, which leads to significantly lower stock prices.

In this article, I will show that the latest employment data suggests a recession is coming soon or is here already.

Jolting JOLTS Data

Every month, the US Bureau of Labor Statistics releases the Job Openings and Labor Turnover Survey, known on Wall Street as the JOLTS report. This report provides data on job openings, hires and separations, including quits and layoffs.

The latest JOLTS data shows that job openings, quits and hires are all declining at a rate that historically has only been observed during recessions. Of particular concern is job openings in the construction industry, since it is such a highly cyclical industry. Remarkably, construction job openings have collapsed by a whopping 46% over the past six months.

The chart below shows there has been a strong historical relationship between job openings (orange line) and S&P 500 stock prices (blue line). This relationship has been severed over the past couple of years, as AI-mania over mega-cap tech stocks like NVIDIA has driven the S&P 500 to all-time highs, while job openings continue to decline. Meanwhile, the median stock (as represented by the Value Line Geometric Index) is still 16% lower than it was nearly three years ago!

Key Signs a Recession is Starting Soon... If It Hasn't Already Started_1

OVOM Research

Latest Jobs Report Signals Recession

The August jobs report was disappointing. A total of 142,000 new jobs were added in the US during August, missing Wall Street expectations of 165,000. Also, the July and June jobs numbers were revised down by a combined total of 86,000 jobs. This is consistent with prior months, as six of the past seven monthly jobs numbers have been revised down.

Note that this disappointing report came out after the Bureau of Labor Statistics recently revised March 2024 nonfarm payrolls down by 818,000 jobs. That was the second-largest negative payrolls' revision after the revision in 2009. Clearly, jobs growth has been disappointing.

Manufacturing jobs declined by 24,000 in August, which is the second-largest decline in manufacturing jobs in three years. This is concerning, since manufacturing, along with construction, is one of the most cyclical industries in the economy.

Another concern shown in the jobs reports was a decline in full-time jobs, offset by an increase in part-time jobs. Full-time jobs fell by 438,000, while part-time jobs rose by 527,000. In fact, all the net jobs added over the past year have been part-time jobs, with full-time jobs declining by 1.02 million and part-time jobs increasing by 1.05 million. As the following chart shows, full-time jobs (blue line) are declining by 0.8% year-over-year, while part-time jobs (red line) are rising by 14.4%. Such a wide disparity between full-time and part-time jobs is typical in the early stages of a recession. Note that full-time jobs have declined for the past seven months. Historically, a recession has occurred when there has been three straight months of full-time job declines.

Key Signs a Recession is Starting Soon... If It Hasn't Already Started_2

FRED

Temporary job losses are another proven leading recession indicator, since it is easier for companies to lay off temporary workers. As with full-time jobs, a recession has historically occurred when there have been three straight months of temporary job declines. So far, temporary jobs have declined for the past twenty-two months.

Another key recession sign is a decline in the total number of workers. Historically, recessions have typically occurred when the number of people employed has declined. In August, employment fell by 66,000 from the prior year, which is the first decline since the covid panic.

Whenever the percentage of total payroll growth over the past year driven by private payrolls (excluding education and healthcare sectors) has fallen below 40%, that has signaled a recession. This measure dropped to 38% in July (as shown below) and 37% in August.

Key Signs a Recession is Starting Soon... If It Hasn't Already Started_3

BofA Global Research

Another simple and proven recession indicator is the unemployment rate. The last nine recessions occurred when the unemployment rate rose by at least 0.5%. The unemployment rate in August was 4.2%, which is 0.8% higher than the lows reported in April 2023, 16 months ago. Historically, a recession has occurred 1 to 16 months after the unemployment rate troughs. If history is a guide, that suggests a recession is starting now or has already started.

Fed Rate Cuts Will Not Help

The Fed is widely expected to start cutting rates this month, even though “SuperCore” PCE inflation, Fed Chair Jay Powell’s favorite inflation metric, increased by 3.3% in July, the same increase seen in December 2023. That is more than 50% higher than the Fed’s arbitrary 2% target. In addition, wage growth was 3.8% in August, nearly double the Fed’s target.

Amazingly, most investors appear to believe that Fed rate cuts will prevent a recession and lead to a continuation of the stock market rally, even though rate cuts did not prevent the recessions and bear markets of the early 2000s and 2008-2009. They have forgotten that monetary policy is notorious for having long and variable lags, lasting a couple of years on average.

Indeed, as the following chart shows, whenever the Fed has cut rates after significant rate hikes, the unemployment rate has risen dramatically and there has been a recession.

Key Signs a Recession is Starting Soon... If It Hasn't Already Started_4

FRED

Conclusions

Many proven employment-related recession indicators are flashing red right now. So are many stock sectors and asset classes. With stock market valuations and investor stock allocations near all-time highs, many investors will likely suffer in the bear market to come. I recommend not being one of them.