Renewables Generate a Third of Australian Electricity in Q1 2024

Economic

Energy

Summary:

Renewable energy sources generated over a third of Australia's utility-supplied electricity during the first quarter of 2024...

Renewable energy sources generated over a third of Australia's utility-supplied electricity during the first quarter of 2024, a record share for solar and wind farms during the first quarter of the year and Australia's peak summer demand period.

Solar farms generated 13.11 terawatt hours (TWh) of electricity during the first quarter of 2024, up 13.5% from the same period in 2023, data from energy think tank Ember shows.

Wind power generated 7.53 TWh of electricity, up 6.5% from the same quarter a year ago, lifting total output from renewable sources to 20.64 TWh during the quarter, and the highest first-quarter total on record. Renewables Generate a Third of Australian Electricity in Q1 2024_1

Renewables Generate a Third of Australian Electricity in Q1 2024_1

The solar and wind production totals were the second highest ever on a quarterly basis after the final quarter of 2023, and indicate that Australia's build-out of utility-scale clean energy generation capacity is having a deep impact on the country's generation mix.

Fossil Fuelled

Up until the end of 2020, Australia relied on fossil fuels to generate 75% of its electricity, while renewable energy sources accounted for less than 20% of utility-generated electricity supplies.

Coal remains the primary source of the country's electricity, accounting for around 55% of total electricity generation so far this year.

But coal's share of the generation mix is down sharply from more than 70% in 2020 due to strong societal and policy support for reducing use of fossil fuels for power generation.

This in turn has spurred a rapid expansion in renewable generation capacity, both at the utility level and behind-the-meter in households and small businesses.

Rooftop solar installations across Australia have surged in recent years, with an estimated 3 million households deploying some form of solar generation, producing roughly 11.2% of the country's electricity in 2023 according to the Australian Clean Energy Council.

Around 2.9 GW of rooftop capacity was estimated to have been added in 2023, according to the International Energy Agency, but delays to grid connection and declining incentives for new customers have led to a slowdown in the pace of new additions, which are expected to decline to 2.5 GW in 2024 and 2 GW in 2025.

At the utility level, Australian solar electricity generation has grown by roughly 90% from 2020 to 2023, and wind power output has grown by roughly 40%.

These growth rates compare to a 12% decline in coal-fired generation and a 23% drop in gas-fired output over the same period, and reveal a significant swing in power sources within utility generation systems.

Renewables Generate a Third of Australian Electricity in Q1 2024_2

Large swings in generation capacity have also changed Australia's power production landscape.

Between 2018 and 2022, renewable generation capacity jumped from less than 20 gigawatts (GW) to more than 40 GW, or by 128%, Ember data shows.

In contrast, fossil fuel generation capacity expanded by only 5.6% from 51 GW to 53.8 GW.

This has resulted in the share of clean power capacity within Australia's utility generation system growing from 34% in 2018 to 48% by 2023, and likely around 50% by the end of 2023 once official capacity data for last year is released.

Growth Path

Analysts project continued rapid growth in renewable power capacity in Australia over the coming decades, which should mean that clean sources supply a majority of the country's utility-generated electricity by the end of this decade.

Solar power looks set to remain a major driver of clean electricity growth, with utility-scale generation capacity set to climb from around 22 GW by the end of this year to 80 GW or more by 2029, according to the Australian Energy Market Operator (AEMO.)

But that surge in solar capacity looks set to be dwarfed by potential expansion in stored energy capacity over the same period. Stored energy sites include batteries and pumped hydro dams, and can store renewable energy during peak output periods and dispatch it later to consumers during demand peaks.

Total utility stored energy capacity could grow from 1.6 GW in 2024 to just over 22 GW by 2030, AEMO data shows. Utility-scale wind power capacity is also set to grow sharply.

If all these projected expansions unfold as planned, Australia's electricity generation mix will become overwhelmingly powered by clean energy sources.

In turn, that could result in the country transforming from a relative clean power laggard at the start of the current decade, into a potential clean energy leader by the 2030's.

Source: Reuters

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Economic

Central Bank

Will the Fed put rate cut hopes in more peril?

The upcoming week looks sure to be an action-packed one for the US dollar, as besides an FOMC meeting and the April jobs report, there’s a flurry of other data on the US agenda that will give traders little time to rest.

The main focal point during the first half of the week will be the Federal Reserve’s policy decision on Wednesday. It wasn’t that long ago that the May meeting was seen as the one where policymakers would set in stone the path to a June rate cut. However, following the string of hotter-than-expected inflation and employment data, the timing has moved further out into the future, with a cut seen unlikely before September.

Week Ahead – Hawkish Risk as Fed and NFP on Tap, Eurozone Data Eyed Too_1

With no updated FOMC projections to accompany the May decision, investors will be hanging on every word to come out of Chair Powell in his press briefing for any clues as to how soon the Fed will begin easing policy. Those clinging on to hopes that a summer rate cut is still possible will probably be disappointed.

The most recent commentary from Fed officials suggests committee members are more than comfortable staying on pause for a while longer, although the majority continue to foresee some amount of easing later in the year. Powell will likely reiterate the need for patience but still hint that rate cuts remain on the cards.

What investors will be trying to gauge, however, is how confident Powell is on inflation coming down substantially over the coming months that would allow policymakers to loosen their restrictive stance. If Powell strikes a somewhat more hawkish tone than his usual more balanced approach, the US dollar could resume its uptrend.

A labour market that won’t cool

In the event there’s an absence of any fresh signals from the Fed, investors will turn their attention to Friday’s nonfarm payrolls report. Far from slowing, the US economy added an astonishing 303k jobs in March. Analysts expect a figure closer to 210k in April, while the jobless rate is forecast to have stayed at 3.8%.

The crucial factor here is whether wage increases will remain moderate and continue growing at slightly more than 4.0%. Any acceleration in average hourly earnings could spark a bigger panic about fading rate cut bets than an upside surprise in the headline payrolls print.

Week Ahead – Hawkish Risk as Fed and NFP on Tap, Eurozone Data Eyed Too_2

Also on investors’ radar next week are the ISM manufacturing and non-manufacturing PMIs for April, due on Wednesday and Friday, respectively. Following the softer-than-expected services PMI by S&P Global, a similarly weak ISM services PMI could offset the effects from potentially stronger jobs data and a hawkish tilt by the Fed.

In other releases, quarterly employment costs will be watched on Tuesday along with the Chicago PMI and the consumer confidence index. On Wednesday, there will be more labour market indicators consisting of the JOLTS job openings and ADP employment survey.

Euro sets sights on GDP and CPI update as June cut nears

Barring surprisingly strong wage figures awaited by the ECB at the end of May, a June rate cut seems to be a done deal. What is less certain is the rate path thereafter. Market pricing for the year end has fallen below 75 basis points (~3 rate cuts) in recent weeks and Germany’s influential Bundesbank head Joachim Nagel has warned that a June cut does not necessarily have to be followed by a series of further reductions.

Preliminary readings on first quarter GDP and April CPI due on Tuesday will likely further shape expectations about the rest of 2024, though the probability for June is unlikely to budge much unless there’s a big deviation from the forecasts.

Week Ahead – Hawkish Risk as Fed and NFP on Tap, Eurozone Data Eyed Too_3

The euro area economy likely expanded by 0.2% quarter-on-quarter in the first three months of the year after flat growth in Q4. An improving economic outlook would lessen the urgency for the European Central Bank to cut rates aggressively so policymakers would have to see further declines in inflation to maintain a dovish stance. Headline inflation is projected to have stayed unchanged at 2.4% in March.

The euro is currently trying to establish a foothold above the $1.07 handle; whether it succeeds will depend on which way the incoming data turns.

Chinese PMIs and New Zealand jobs on the way

Another region enjoying a bounce back in economic activity is China. The official composite PMI climbed to the highest since May 2023 in March, although much of it was driven by the services sector and the recovery in manufacturing remains tepid.

The latest PMI readings from both the government and Caixin/S&P Global are out on Tuesday.

Week Ahead – Hawkish Risk as Fed and NFP on Tap, Eurozone Data Eyed Too_4

If the economy gathers further momentum in April, that would bode well for risk-sensitive assets like stocks and oil, and commodity-linked currencies such as the Australian and New Zealand dollars.

In New Zealand, the local dollar will also be keeping an eye on domestic employment numbers scheduled for Wednesday. First quarter data on jobs growth, the unemployment rate and wages might offer clues as to how soon the RBNZ is likely to cut rates after the central bank recently gave its strongest indication yet that the next move will be down.

The kiwi could come under pressure if the labour market appears to be slowing.

Elsewhere, Canada publishes monthly GDP estimates on Tuesday and preliminary industrial production numbers for March are due out of Japan on the same day. Switzerland will release April CPI figures on Thursday and on Friday, Norway’s central bank announces its decision on interest rates.

Source:XM

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Alex

Economic

Largely unacknowledged as such, a fourth arm of the defence forces is shaping our world.

A futurist might mention space forces but after army, navy and air force, there is already a more potent factor at work. It goes back a hundred years and has gone through phases of being in and out of fashion.

It is economic warfare. This has evolved to become almost the first tool out of the locker when diplomacy begins to falter. Often sanctions come to mind, but this strand has depth and prevalence that go far beyond the daily grind of punitive measures.

The more politely packaged theme of "economic security" was explored last week at London's Chatham House by the UK's low-profile and efficient Deputy Prime Minister, Oliver Dowden.

Speaking in detail of his responsibilities, Mr. Dowden left little doubt that the ratchet is being progressively tightened on the national security impact of investment and trade. As one of his colleagues revealed recently, there is a cabinet consensus that the UK is in a pre-war (as opposed to a post-Cold War) era.

Mr. Dowden was asked to address the elephant in the room: that the UK's laws are not only designed to blunt Chinese economic expansion but that the legislation also enforces a US lead.

Contrasting to the Cold War parallels, he vowed that while the UK would not decouple from China it would de-risk. In the spirit of honesty, he added, London's rules would constantly adapt to reinforce this process.

For a glimpse at how far the shift has already gone, Mr. Dowden revealed that he was already making dozens of decisions every day about transactions in the UK economy. What happens is that he or his cabinet colleagues have powers to call in particular deals and run these through the prism of economic security.

One area of concern is how economic control turns into coercion, meaning that the owner would compel an outcome that the UK would deem as being against its interests. Bluntly, he said, there are areas that are so important that they are held exclusively within the ambit of the UK government.

But once a country starts on this path, the bureaucracy finds it very hard to stop and the politics then tends to go on mission creep. So it is that the gimlet eye is now focused not just on investment coming into the UK but also funds flowing to overseas activity as well.

The vigilance theme extends to efforts to secure its supply chains. The UK, for example, is willing to tackle at source the Houthi attacks on the Red Sea and Gulf of Oman shipping lanes.

"I genuinely believe economic security and economic prosperity are totally interlinked," Mr. Dowden said. "What I don't want is a situation whereby we don't do anything about this and then we find ourselves in a situation of heightened geopolitical conflict. And then we have a sort of a screeching turn, and we find out our supply chains are vulnerable."

Allied to all this is the phenomenon of contestation where cyber-targeting plays a key role.

Some states that are openly hostile to their western counterparts are well-known to harbour hacking and other outfits that can flourish through ransomware attacks. As an active policy, this is an obvious strategy to undermine the wealthy nations. Addressing this vulnerability is as much about national defence as putting a well-armed frigate to sea.

In some research published earlier this year from the University of Oxford, a 1938 manual for the "fourth fighting service" was retrieved from the national archives and published. The author, a visiting fellow from government, said that the Handbook of Economic Warfare operated for 16 years as a cornerstone of British grand strategy to integrate these tools with defence and foreign policy.

The work done by British officials at the time informed the erstwhile League of Nations' economic deterrence regime and ultimately its successor, the UN sanctions regime. It was only overshadowed on a national level by the primacy of strategic bombing during the Second World War and the reliance on nuclear weapons in the Cold War era.

We have since had three decades of true and all-encompassing globalisation. But now the wind has shifted.

The international community's stop-start implementation of blockades during the early decades of the economic deterrence strategy was deemed an embarrassment even by its own architects. That does not mean that the experience has been consigned to history.

Take, for example, the G7's efforts to impose a price cap on exports of Russian crude oil. Could that effort owe something to the handbook rule that made certificates compulsory for goods shipped to the British Empire's ports through neutral countries that were not part of a pre-clearance system?

The handbook's author makes a point that the pioneers of economic war probably believed that war itself was rendered impossible by great-power competition in the context of an interconnected global economy that had knitted the interests of nations to each other.

Factors such as advanced shipping, currencies underpinned by the gold standard and instant communications fostered this view at the turn of the 20th century.

These very same thoughts could be said to have predominated in these circles until today.

Source: The National News

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Cohen

Commodity

Economic

THE uptrend in the prices of a number of commodities — reflected in the 14.2% rise in the S&P GSCI from its recent December trough — brought back memories of the commodity bull run in 2021 and 2022, when the effects of the Covid-19 pandemic followed by the war in Ukraine choked global supply chains and sent food prices higher.

With the current trajectory of commodity prices, is the asset class headed for another bull run so soon after the last one?

Commodity experts say the strength seen in prices so far has varied from one commodity to another, but they are convinced that prices have found a new base. This means that the next move for prices is upwards this year, but many are not calling it a bull run just yet.

"We see global commodity price cycles as having passed their troughs, with prices expected to be higher on average in 2024 than in 2023," says Paul Bloxham, HSBC's chief economist for Australia, New Zealand and global commodities.

On whether the uptrend can be sustained and even move higher, the answer seemed to be dependent on the type of commodity. Are Commodities at The Start of a Secular Bull Run?_1

Are Commodities at The Start of a Secular Bull Run?_1

Standard Chartered head of commodities research Paul Horsnell believes that for some key commodities like oil and copper, the lack of investment in previous years has led to the supply side being stressed as demand rises. "This is most pronounced in oil and we see scope for further price increases over the next 18 months to balance the market." He adds that copper should similarly rise into the medium term with the global energy transition proving to be a strong medium-term positive for many metals.

HSBC's Bloxham calls the current commodity price uptrend a "super-squeeze, not a super-cycle", a view he has held since the last commodity boom in 2021/2022.

"The difference is that the still-elevated commodity price levels are due to supply constraints, rather than strong demand, as was the case in the China-led super-cycle in the earlier part of this century. The key supply constraints driving the super-squeeze include geopolitics, climate change and the energy transition," he explains.

In an April 1 report, DBS Research says a price surge in commodities will not be occurring soon but it believes the turnaround seen in commodity prices could mark the end of the disinflationary trend that has soothed equity, bond and credit markets in the past year.

China factor

There are several key themes that seem to be affecting commodity prices, the most positive factor being the bottoming of China's economy.

The country had an insatiable appetite for industrial and construction growth and was one of the largest importers of key metals such as iron ore, copper and aluminium as well as key agricultural commodities. But all that came to a sudden halt due to its strict zero-Covid policy and troubled property sector that led to plummeting demand for metal and other commodities.

However, a pickup in economic activities in the first two months of this year, coupled with the improvement in China's Purchasing Manager Index (PMI) in March, sparked hope that the worst could be behind the world's second largest economy.

The PMI rebounded from 49.1 in February to 50.8 points in March. It was the first time in six months that the PMI data had turned expansionary.

"Commodity traders are increasingly encouraged by signs of demand bottoming in China. This optimism is reflected in fledgling buoyancy in the markets, as critical commodities like crude oil, cocoa, cotton, sugar, palm oil, nickel, aluminium and copper rallied in the first quarter of 2024," says DBS Research in the April report.

Copper futures on the London Metal Exchange (LME) have gained about 9.15% year to date, but most of the gains have been made in recent weeks. As at April 11, the metal's three-month futures stood at US$9,342 per tonne.

According to a report by ING Research, the global supply for the metal is tightening as copper mines currently in operation are nearing their peak due to declining ore grades and reserves exhaustion.

"In Chile, Codelco — the world's biggest supplier of copper — is struggling to return production to pre-pandemic levels of about 1.7 million tonnes a year by the end of the decade, from around 1.3 million tonnes this year. This marks the lowest level in a quarter century amid ageing assets and declining ore grade. At the same time, there is a lack of high-quality large-scale projects in the pipeline that could push the copper market into deficit as demand from the green energy sector grows," says the research outfit.

Aluminium prices have in recent weeks picked up pace as the LME aluminium futures rebounded from the low of US$2,159 on Jan 22 to US$2,454 per tonne on April 11.

However, it is not "all coming up roses" yet for China. UOB Global Economics & Markets Research in an April 3 report says the country's real estate market indicators remain negative and "together with the high local government debt, continue to be a major drag on the recovery".

The research house adds that the outlooks for private consumption and employment remain lacklustre at the moment, bringing concerns of deflation to the forefront. Headline inflation was flat in January and February, while core inflation averaged at 0.8% y-o-y.

In March, prices rose 0.1% y-o-y but fell 1.0% month on month, as price pressure stayed muted after the Lunar New Year.

UOB expects China's full-year 2024 gross domestic product (GDP) to grow 4.5% compared with the official target of 5%.

Geopolitics keeps prices of oil and safe-haven assets elevated

In the Middle East, Israel's bombardment of Gaza has escalated since its first attack in the final quarter of 2023. The region has seen geopolitical tensions rise in the past months, from Hamas' surprise invasion of Israel on Oct 7 to the ongoing Red Sea crisis that started earlier this year.

In recent weeks, the situation escalated further after Iran's consulate in Syria was destroyed in a suspected Israeli missile attack. Seven people were killed, including a top commander and his deputy.

When the Israel-Gaza war erupted last October, there was an initial knee-jerk reaction, with Brent crude prices climbing to US$92.38 per barrel by Oct 19. But the price rally did not hold and declined thereafter. The consensus was that the war would not cause Brent crude prices to soar as neither parties are major oil exporters.

Nevertheless, close to six months later, views seem to have changed. Following the April 1 attack on Iran's consulate in Syria, analysts see heightened risks of tension in the Middle East, spreading beyond the Gaza strip.

According to an April 5 report by Maybank Investment Bank Bhd, the price action in financial markets is suggesting a "non-zero chance" of an escalation in the conflict, with oil, gold and safe-haven currencies being better supported.

Meanwhile, the war between Ukraine and Russia continues to rage, going into the third year. Ukraine has started to target Russia's energy and refinery facilities, adding another layer of complication for crude oil prices.

If history could serve as a marker, the Iraqi invasion of Kuwait in August 1990, which saw 4.3 million barrels per day being removed from global markets, resulted in crude oil prices skyrocketing from US$34 per barrel to US$77 per barrel.

"An escalation of security risks in Ukraine and the Middle East is always on the cards, threatening to affect the supply-demand balance at a time when global energy inventory levels are lean," says DBS Research.

Crude oil is also facing the likelihood of tighter supply ahead, keeping prices elevated as Opec+ maintains its supply cuts, shifting the oil market from a surplus environment to one of a deficit soon.

"While a rollover of some of the Opec+ (Organization of the Petroleum Exporting Countries plus other oil-producing countries) voluntary cuts was expected, the fact that the full 2.2 million barrels per day of cuts was rolled over into the second quarter of 2024 leaves the oil market in a deeper-than-expected deficit over this period," says ING Research in a March 21 report.

This year, Brent crude prices have climbed 18% from US$77.04 per barrel to US$90.85 on April 12.

Gold has also skyrocketed, as anticipated back in 2023, with gold futures rising by about 15% since the start of the year, hitting record highs on a daily basis. As at April 11, gold futures stood at US$2,396.30 per troy ounce.

While geopolitics teased the price of the bullion higher, expectations that the US Federal Reserve would cut rates this year have also contributed to the uptrend. Interestingly, global central banks have been accumulating gold at a record pace since last year, adding to the soaring prices (see "Four factors behind gold price climb").

Weather and underinvestment hit harvests

Meanwhile, climate change has severely impacted the harvest of various crops, leading to soaring prices for these agricultural commodities. Take, for example, cocoa, where global shortages have pushed prices to stratospheric levels, reaching above US$10,000 per tonne this year.

On April 12, cocoa futures on the Intercontinental Exchange (ICE) hit a high of US$10,582 per tonne, rising over 151% year to date.

Droughts have ravaged cocoa crops in West Africa, the world's biggest producer of the beans, while severe underinvestment in cocoa farms in the past has compounded the issue.

"According to the International Cocoa Organization, global cocoa supply will decline by almost 11% over the 2023/2024 season. The crop is still largely cultivated by smallholder farmers, many of whom struggle to make a living income and lack the means to reinvest in their land — which translates to lower yields over time," notes JPMorgan in a report dated April 3.

The report also says that what was initially a structurally led, supply-side issue that has been exacerbated by dry weather has now morphed into an "investor-driven parabolic move in prices". "For instance, non-commercial investors now hold over 60% of total open interest across cocoa futures and options in the New York market, which is an historical high. Consumers are now scrambling to hedge forward exposure in thin liquidity," it explains.

Coffee is also seeing a similar situation, where concerns that the hot weather across Vietnam will impact harvests, driving robusta coffee prices up. Vietnam is the world's largest producer of robusta coffee beans.

The country's agriculture department has forecast a 20% drop in its coffee production this year to 1.472 million metric tons — the smallest harvest in four years — on account of the drought.

Robusta coffee futures have also climbed significantly this year with the July contract increasing 29% since the start of the year. It closed at US$3,932 per tonne on April 12.

The dry and hot weather in Malaysia, attributed to the lingering effects of El Niño, has also driven palm oil prices higher on the expectation that production will be affected.

Last week, palm oil futures traded on Bursa Malaysia Derivatives reached over RM4,440 per tonne, having risen 19% since the start of the year. Nevertheless, prices closed lower at RM4,282 on April 12.

Recent data from the Malaysian Palm Oil Board shows that the February stockpile dropped to 1.92 million tonnes, a seven-month low, on lower production and stocks, as well as higher domestic consumption.

Analysts are expecting prices to remain supported for a while, until output increases. Some see this happening as soon as the second quarter, before reaching a peak in the third quarter.

Source: The Edge Malaysia

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Samantha Luan

Economic

Energy

Japan's utilities are on track to boost clean electricity output to the highest levels in several years in 2024, after recording a 12.4% rise in clean power output over the first two months from the same period in 2023.

Clean electricity output during January and February totalled 52.67 terawatt hours (TWh) according to energy think tank Ember, the highest for that period in at least five years.

Japan's power firms also cut fossil fuel-based generation over the opening two months of the year by 6% from the year before, to the lowest since 2019.

As a result, clean power sources supplied 31.6% of Japan's electricity during the first two months of 2024, up from a 28% share at the same point in 2023. Japan Set for Clean Power Surge in 2024_1

Japan Set for Clean Power Surge in 2024_1

With Japan's peak solar and hydro output periods still ahead, utilities are in a position to potentially lift clean power generation even more in the coming months, likely to the highest levels since the country slashed nuclear output in the wake of the 2011 Fukushima accident.

Power Drivers

During the first two months of 2024, solar power was the largest source of clean energy in Japan, generating just over 14 TWh of electricity.

Nuclear reactors (13.3 TWh), hydro dams (10 TWh) and bioenergy plants (9.5 TWh) were the next largest clean sources, followed by wind farms (4 TWh), Ember data shows.

All sources of clean generation posted increases over the same period in 2023, with nuclear, hydro and bioenergy sources registering double-digit growth.

Over the same period, coal and gas-fired generation contracted by 2.3% and 5.5% respectively.

Clean Peak

Clean generation levels look set to climb further over the coming months as solar output rises to its annual peak and hydro dams receive their largest monthly rain totals during Japan's summer.

Japan Set for Clean Power Surge in 2024_2

In 2022 and 2023, Japan's solar electricity generation levels increased by around 70% from the January-February average during the peak summer months of May through August.

If that trend is followed again in 2024, this year's solar production should average around 11.75 TWh per month during May, June, July and August, and should account for around 15% of total electricity generation during those months.

Hydro output has historically roughly doubled from January-February averages during the peak summer months to around 7.5-8.0 TWh a month, and so should also help further lift total clean electricity generation in the middle of this year.

The summer months also mark the high point of Japan's total electricity demand needs, due to the widespread use of power-hungry air conditioners during the hottest times of year.

However, to meet some of that additional round-the-clock consumption, utilities may be able to dial up production at nuclear reactors and bioenergy plants that can adjust baseload output levels as needed. Japan Set for Clean Power Surge in 2024_3

Japan Set for Clean Power Surge in 2024_3

Power firms will also likely deploy more coal and gas-fired electricity if demand levels consistently exceed clean energy supplies, which is often the case during the warmest months of the year.

But with most clean sources of electricity likely to increase substantially from current levels during the summer, Japan's utilities may be able to limit any increase in fossil fuel-powered output, and thereby continue to build on the clean energy momentum already in evidence so far in 2024.

Source: Reuters

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Central Bank

Forex

Stubborn inflation weighs on rate cut bets

When they last met, Fed officials left interest rates untouched as it was widely expected, and although they revised up their growth and inflation projections, they continued pointing to three quarter-point rate cuts by the end of the year, which served as a disappointment to those expecting less due to stickier than expected inflation.

Back then, the probability of a first reduction in June rose to around 80% and the total number of basis points worth of reductions by the end of the year was 83. Nonetheless, inflation accelerated further in March and the labor market further tightened, prompting Fed officials to signal that there is no urgency to start loosening, and investors to reevaluate their rate cut bets. This massive repricing supercharged the US dollar, which gained against all its major counterparts and managed to break several key technical levels.

Fed Faces Dilemma Amid Sticky Inflation and Slowing Economy_1

But economy grows by less than expected

Nonetheless, the upbeat momentum in dollar buying did not last for long. The miss in the preliminary S&P Global PMIs for April and the weak first estimate of GDP for Q1 suggest that the world’s largest economy is not faring as greatly as it was previously thought, resulting in some profit taking in dollar long positions.

But the GDP report was not all bad after all. It came with mixed messages. Despite the US economy growing at its slowest pace in nearly two years, domestic demand remained strong, evident by the strong acceleration in PCE prices during the quarter. This confirmed the notion that inflation is much hotter than the Fed would hope and allowed investors to further reduce the amount of basis points worth of rate cuts expected by December, even as they continued selling the dollar. They are now seeing interest rates only 35bps below current levels.

Fed Faces Dilemma Amid Sticky Inflation and Slowing Economy_2

Still higher for longer?

Next week’s Fed meeting will be one of the smaller ones that are not accompanied by new economic projections nor an updated dot plot. Thus, all the attention will fall on the statement and the press conference by Fed Chair Powell for clues on whether rate cuts are still warranted this year, and if so, how many.

If officials hint that interest rates should stay at current levels to ensure that inflation will return to their 2% objective, Treasury yields may continue to rise, and the dollar could stage a comeback as market participants further lift their implied rate path. However, anything leaving the door open to more than one rate reduction to avoid a deeper economic slowdown could come as a disappointment and thereby dollar traders may liquidate more of their long positions.

Fed Faces Dilemma Amid Sticky Inflation and Slowing Economy_3

Euro/dollar returns within a range

From a technical standpoint, euro/dollar has been in a recovery mode lately, managing to poke its nose back above 1.0725, the level that acted as the lower bound of the sideways range that contained most of the price action between mid-November and April 11.

Fed Faces Dilemma Amid Sticky Inflation and Slowing Economy_4

The recovery may continue for a while longer within the range, but a hawkish Fed may encourage the sellers to take charge from below the 1.0800 zone, near the 50- and 200-day exponential moving averages (EMAs) and push the pair back down to the 1.0725 zone. A break lower could carry more bearish implications, perhaps paving the way towards the 1.0610 zone that provided support between April 16 and 19.

Alternatively, a dovish Fed may drive euro/dollar above the EMAs and initially aim for the 1.0875 area. However, the pair would still be within the aforementioned range and thus, the broader outlook would still be neutral. For the picture to be considered bullish, a break above 1.0940 may be needed.

Source:XM

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Thomas

Economic

China's dominance of global electric vehicle production and sales is an established fact, but a new International Energy Agency (IEA) report points to the country extending its influence in autos across the fast-growing economies of Asia.

The IEA's Global Electric Vehicle (EV) Outlook 2024 report, released on Tuesday, shows that China accounted for 60% of all EV sales in 2023, and its rapid uptake will continue, with one in three cars on China's roads in 2030 expected to be electric.

Perhaps more significantly the IEA sees China's influence and lead in EVs spreading throughout Asia as it leverages its vast industrial resources to invest and promote cheaper EVs in countries such as Thailand, Vietnam and Indonesia.

The key to success for China's EVs, when compared to vehicles made in Europe and North America, is cost.

"In China, we estimate that more than 60% of electric cars

sold in 2023 were already cheaper than their average combustion engine equivalent," the report said.

"However, electric cars remain 10% to 50% more expensive than combustion engine equivalents in Europe and the United States, depending on the country and car segment," the IEA said.

China is pursuing a different path with EVs compared to Europe and North America, choosing to emphasise smaller and cheaper city cars that can compete, and even out-compete equivalent internal combustion engine (ICE) vehicles.

In contrast, the bulk of European and U.S. EVs have been larger, more luxurious and more costly, with automakers seemingly targeting a wealthier demographic of early adopters of new technologies.

What is happening is that China has built an early advantage in making EVs cheaper and accessible to more people, a strategy that is likely to pay off in Asia.

This is especially the case in countries where switching to EVs, both cars and two- and three-wheelers, enjoys policy support and incentives from governments.

"In 2023, 55% to 95% of the electric car sales across major emerging and developing economies were large models that are unaffordable for the average consumer, hindering mass-market uptake," the IEA said.

"However, smaller and much more affordable models launched in 2022 and 2023 have quickly become bestsellers, especially those by Chinese car makers expanding overseas," the report said.

Asia EV Surge

In Thailand, EV sales quadrupled year-on-year in 2023 to reach a 10% market share and the Southeast Asian country has launched subsidies for battery manufacturing and lowered tariffs, which allowed Chinese car makers to increase their presence.

In Vietnam, the IEA said car sales contracted in 2023, but EVs still managed to grow to reach a 15% market share, while in Malaysia EV registrations more than tripled amid tax breaks and import duty exemptions.

India, the world's most populous country, saw EV registrations rise 70% in 2023 from the year before, while overall car sales rose by 10%.

Indonesia is a good example of the combination of policy incentives and the availability of cheaper Chinese-made EVs.

The IEA said until 2019 EV sales in Indonesia were below 100 a year, and this jumped to 17,000 by 2023 as EVs benefited from a Value-Added Tax rate of just 1% compared to 11% for ICE vehicles.

Indonesia also put local content requirements of 40% in place last year in order for EVs to enjoy purchase incentives, and currently only two models qualify.

But more manufacturers are setting up in the Southeast Asian nation, including China's BYD, which aims to build manufacturing facilities to produce 150,000 vehicles, and Vietnam's VinFast, which plans to have a capacity of 50,000 cars per year.

It is worth noting that China's EV sector is facing its own struggles. The state planner expects an intensifying price war amid a glut of supply and new models. China is also facing a European Union investigation on whether to impose tariffs on imports of EVs on the basis that the state has subsidised Chinese car makers, a claim Beijing dismisses as baseless.

Overall, the IEA report shows that China's path of cheaper and smaller EVs is likely a winner in Asia, the fastest-growing region of the world.

It also shows that European and U.S. automakers have substantial work to do to improve the affordability of EVs, and to boost the infrastructure needed to support their widespread adoption.

The report also hoses down some of the worries about a rapid shift to EVs, such as the additional electricity required, saying that the power required by EVs is likely to rise from 0.5% of the global total of electricity generated in 2023 to less than 10% by 2035.