September 21th Financial News

Daily News

Summary:

Fed rate decision: One more rate hike likely this year; U.K. inflation falls unexpectedly to a 18-month low, easing pressure on its central bank...

[Quick Facts]

1. U.K. inflation falls unexpectedly to a 18-month low, easing pressure on its central bank.

2. U.S. House Republicans will vote on the defense spending bill Thursday.

3. Fed rate decision: One more rate hike likely this year.

4. New Zealand avoids recession as its Q2 GDP growth beats expectations.

[News Details]

U.K. inflation falls unexpectedly to a 18-month low, easing pressure on its central bank

U.K. inflation fell unexpectedly to its lowest level in 18 months, easing pressure on the Bank of England (BOE) to raise interest rates further. The CPI data makes it easier for the BOE to consider ending the monetary tightening cycle when it makes the interest rate decision on Thursday.

Meanwhile, British core inflation softened markedly to 6.2% in August, down from 6.9% in July. This was likely to be a result of easing pressures on demand for goods and services, including lower furniture and food inflation. Lower hotel prices reflected the fading post-pandemic vacation fervor. However, labor cost pressures are still too great, so inflation cannot fall to the BOE's 2% target at present. Another rate hike at the September meeting remains possible.

It is important to be wary of whether, after this meeting, the market expects the BOE to raise rates for the last time.

U.S. House Republicans will vote on the defense spending bill Thursday

U.S. House Speaker Kevin McCarthy said Republican lawmakers will try again to move forward on fiscal 2024 spending legislation on Thursday, with a procedural vote on a defense appropriations bill. After a two-and-a-half-hour closed-door meeting with Republican lawmakers, McCarthy said lawmakers were "very close" to agreeing on a short-term stopgap measure that would avoid a government shutdown on Sept. 30. He said House Republicans would also begin advancing other full appropriations bills for the fiscal year 2024, which begins Oct. 1. One day earlier, the House voted 214 to 212 to reject a motion aimed at debating an $868 billion defense appropriations bill for fiscal year 2024, with five Republicans joining Democrats to vote against it.

Fed rate decision: One more rate hike likely this year

The Federal Reserve left its target for the federal funds rate unchanged at a range of 5.25%-5.50%. The FOMC statement showed that 12 officials expected one more rate hike this year, while other seven expected rates to remain unchanged. The Fed's dot plot shows that the median federal funds rate at the end of 2023 is expected to be 5.6%, which means there may be one more rate hike this year. The federal funds rate is expected to end 2024 at 5.1%.

The latest economic outlook raised the U.S. economic growth forecast to 2.1% and 1.5% for this year and next, respectively, and lowered the unemployment rate forecast to 3.8% and 4.1% for this year and next, respectively. Core inflation is expected to be 3.7% and 2.6%, respectively, still above the 2% inflation target.

We see the current stance of policy as restrictive, putting downward pressure on economic activity, hiring, and inflation, said Jerome Powell regarding the pause in rate hikes in September.

We're prepared to raise rates further if appropriate, Powell said. At the same time, he emphasized that the full effects of the current tightening have not yet been seen. Looking ahead, decisions will be made on a meeting-by-meeting basis. He never intends to send a signal about the timing of any rate cuts, which will come at some time.

The Fed has not made a decision on whether interest rates are sufficiently restrictive. Strong economic activity is the main reason for the need for more interest rate measures; the neutral rate may have risen and may be higher than the long-term one. A recession resulted from interest rate hikes "is always a concern."

New Zealand avoids recession as its Q2 GDP growth beats expectations

New Zealand's GDP grew by 0.9% in the second quarter, beating expectations of 0.4%. Its first-quarter GDP was revised to be flat from a 0.1% contraction. That means the economy has not contracted for two consecutive quarters, narrowly avoiding a technical recession.

It remains to be seen whether inflationary pressures will dissipate quickly enough to satisfy the Reserve Bank of New Zealand (RBNZ). Today's data increases the likelihood that at some point the RBNZ will feel the need to adopt the slight tightening policy it hinted at last month.

In August, the RBNZ reiterated that it was done raising interest rates, but its forecast suggested that there remained a low risk that it would do so again in the next 12 months. That forecast assumed the economy would return to growth in the three months to June before contracting again in the third and fourth quarters of this year.

[Focus of the Day]

UTC+8 15:30 Swiss National Bank announces interest rate decision

UTC+8 16:00 Swiss National Bank President Jordan speaks

UTC+8 19:00 Bank of England announces interest rate decision

UTC+8 20:30 U.S. Weekly Initial Jobless Claims

UTC+8 22:00 European Central Bank President Christine Lagarde speaks

UTC+8 22:40 European Central Bank Executive Member Schnabel delivers a speech

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FXOpen

Forex

The AUD/USD pair extends the previous day's sharp retracement slide from levels just above the 0.6500 psychological mark, or a nearly three-week high, and continues losing ground through the Asian session on Thursday. The downward trajectory drags spot prices to the lower end of the weekly range, around the 0.6420-0.6415 region, and is sponsored by sustained US Dollar (USD) buying.

In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, climbs closer to a six-month peak touched last week and remains well supported by the Federal Reserve's (Fed) hawkish outlook. As was widely anticipated, the US central bank decided to leave interest rates unchanged at the end of a two-day monetary policy meeting on Wednesday. The Fed, however, left the door open for one more 25 bps lift-off in 2023 and maintained its forecast for rates to peak at 5.5% to 5.75% by the end of this year. Moreover, policymakers now see the benchmark rate at 5.1% next year, suggesting just two rate cuts in 2024 as compared to four rate cuts projected previously.

This reaffirms a higher-for-longer narrative pushes the yield on the rate-sensitive two-year US government bond to a 17-year high. Furthermore, the benchmark 10-year yield has climbed to its highest since late 2007, which, along with a softer risk tone, is seen underpinning the safe-haven buck and exerting additional pressure on the risk-sensitive Australian Dollar (AUD). Apart from this, China's conservative approach to introducing more stimulus measures and speculations that the Reserve Bank of Australia (RBA) might have ended its rate-hiking cycle contribute to the offered tone surrounding the AUD/USD pair. This, in turn, suggests that the path of least resistance for spot prices is to the downside.

Even from a technical perspective, the formation of a bearish flag pattern on short-term charts validates the negative outlook for the AUD/USD pair. That said, it will be prudent to wait for a sustained break below the 0.6400 mark before positioning for any further depreciating move. Market participants now look to the US economic docket – featuring the usual Initial Weekly Jobless Claims, Philly Fed Manufacturing Index and Existing Home Sales data. This, along with the US bond yields and the broader risk sentiment, might influence the USD price dynamics and produce short-term trading opportunities around the AUD/USD pair ahead of Friday's release of flash PMI prints.

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Owen Li

Commodity

Energy - Cushing crude stocks continue to decline

Higher for longer was the key message from yesterday's FOMC meeting, which has weighed on risk assets, including oil. However, Brent is still trading well above US$90/bbl and a tightening balance suggests that there is still more upside. How sustainable a move higher would be is another question, which we covered yesterday.

The Pernis refinery in Rotterdam, which is the largest in Europe, was forced to shut a unit at the refinery after a leak was discovered. The refinery was looking to restart the unit last night, however, there is no clarification on whether this occurred. The outage will add to concerns over tightness in the middle distillate market.

The EIA's weekly inventory report showed that U.S. commercial crude oil inventories fell by 2.14MMbls over the last week, which was less than the 5.25MMbbls draw the API reported the previous day. Lower refinery run rates would have played a role in the smaller-than-expected crude drawdown with utilisation rates falling by 1.8pp over the week. However, crude oil exports increased by a significant 1.98MMbbls/d WoW to average 5.07MMbbls/d. Crude oil stocks at Cushing declined by 2.06MMbbls over the week, leaving stocks at the WTI delivery hub at their lowest levels since July last year. This should continue to support prompt WTI timespreads. Finally, on the products side, gasoline and distillate stocks fell by 831Mbbls and 2.87MMbbls respectively. Weaker refinery runs and stronger implied demand would have driven these draws.

Metals – Global aluminium output rises

The latest numbers from the International Aluminium Association show that the average daily global primary aluminium output rose marginally to 195kt in August, up from 194.5kt a month earlier. Total monthly output rose 1.6% YoY to 6.04mt last month, although it was almost flat month-on-month. This leaves cumulative aluminium production at 46.5mt in the first eight months of the year, up 1.7% YoY. Chinese output increased 2.2% YoY to 3.6mt in August, whilst year-to-date production rose 2.5% YoY to 27.4mt. Production in Western and Central Europe is still struggling, falling 8% YoY to 230kt, while output was unchanged from the previous month.

Agriculture – Brazil forecasts lower corn output

Brazil's agriculture agency, CONAB, in its first estimates for the 2023/24 season expects Brazil's corn production to fall 9.1% YoY to 119.8mt. The agency said grain prices are not offering decent profitability, which would result in reduced corn area for the 2023/24 harvest. In contrast, CONAB expects soybean production to rise 5.1% YoY to 162.4mt in 2023/24, if achieved this will be yet another record crop.

For coffee, CONAB lowered its Brazilian coffee production estimate slightly to 54.4m bags this year, compared to its previous estimate of 54.7m bags. This is still above the 50.9m bags produced last season.

Source: ING

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Warren Takunda

Economic

Surprise Inflation Decline

August's inflation data caught markets off guard, with the Consumer Price Index (CPI) registering a year-on-year increase of 6.7%. This figure, while high, fell below expectations and was marginally lower than July's reading of 6.8%. This unexpected moderation in inflation has created a ripple in the monetary policy outlook.

Core Inflation Concerns

Core inflation, which excludes volatile food and energy prices, also underwhelmed. It posted a meager month-on-month uptick of just 0.1%, falling significantly short of expectations. Year-on-year core inflation stood at 6.2%, a notable drop from earlier projections and below the preceding month's 6.9%.

Market Expectations Reconsidered

In light of this surprising deceleration in inflation, market expectations for additional interest rate hikes by the BoE have dwindled. Investors have now reassessed their outlook, with the probability of a rate hike shifting from an 80/20 stance prior to the inflation report to a more balanced 50/50 proposition.

Bank's Decision in Flux

Anticipating the potential ramifications of this inflation development, some financial institutions, such as Nomura and Goldman Sachs, have recalibrated their forecasts. They now anticipate that the BoE may opt to maintain its existing interest rates, signifying a possible hiatus in the ongoing rate-hiking sequence.

Potential for a Rate Cut Looms

Should the BoE choose to pause its rate hikes but retain a data-dependent approach for future decisions, it could prompt the market to revise expectations for rate cuts in 2024. This shift in sentiment may exert further pressure on the Pound's exchange rate.

Timing of Rate Cut Uncertain

Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, offers an intriguing perspective, suggesting that the BoE's first rate cut could materialize as soon as May 2024. This timeline would deviate from current projections, potentially introducing downside risks for the Pound's value.

The UK's monetary policy landscape is undergoing a transformation in response to unexpected inflation dynamics. The BoE's next moves will be closely monitored, with potential implications extending beyond domestic interest rates to the performance of the Pound and broader economic conditions.

To stay updated on all economic events of today, please check out our Economic calendar

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Damon

Economic

It's all about global interest rates for Asia on Thursday.

Three monetary policy decisions in Asia and a finely balanced call from the Bank of England will give Asian markets their steer, as investors digest the Federal Reserve's policy decision, revised forecasts and guidance on Wednesday.

The central banks of Indonesia and the Philippines are all widely expected to keep key lending rates on hold at 5.75%, 6.25% and 1.88%, respectively, so investors will be looking to policy statements for clues on future moves.

The surprise fall in UK inflation last month puts the BoE decision on a knife edge - Goldman Sachs, Deutsche and Nomura all changed their BoE calls - and the pullback in rate hike expectations contributed to the fall in global bond yields earlier on Wednesday.

But that was before the Fed.

Punchy upward revisions to U.S. policymakers' median rate forecasts for the next couple of years tipped markets the other way - the dollar rebounded sharply, U.S. Treasury yields spiked to new multi-year highs, the yield curve flattened and stocks collapsed.

U.S. crude oil fell 1%, its biggest fall in a month - some relief for investors, who will also note that this was the first time in a month oil has fallen two days in a row.

For Asian markets, one of the most significant consequences of the Fed's revisions is the dollar's rise, most notably against the yen. The dollar hit an 11-month high above 148 yen, which Japanese policymakers will be paying close attention to. Central Bank Bonanza, Yen Intervention Watch_1

Central Bank Bonanza, Yen Intervention Watch_1

The Bank of Japan meets on Friday, and a growing number of analysts were already expecting a signal that ultra-loose policy would soon end. A renewed slide in the exchange rate could raise those expectations even further.

What's more, the yen sliding deeper into territory that prompted record yen-buying intervention from Japanese authorities late last year is bound to intensify speculation that a repeat is on the cards.

In that light, it is worth noting that Japan's intervention on Sept. 22 last year was a day after the FOMC decision and revised forecasts. Will lightning strike twice?

The Asia and Pacific regional economic calendar on Thursday also include second quarter GDP data from New Zealand - seen rebounding to +0.5% on a quarter-on-quarter basis and almost halving to 1.2% on an annual basis, according to a Reuters poll - and Hong Kong inflation for August.

Here are key developments that could provide more direction to markets on Thursday:

- Indonesia central bank meeting

- Philippines central bank meeting

- Bank of England policy decision

Source: Yahoo

To stay updated on all economic events of today, please check out our Economic calendar

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Justin

Forex

Central Bank

Economic

The week is expected to close on a high note

The Bank of Japan is holding its sixth meeting for 2023 on Friday, two days after the key Fed meeting. Despite the yen's underperformance making new headlines, the BoJ is not expected to announce a change in its main interest rate. However, the market is curious whether the BoJ is ready to proceed to another amendment of its monetary policy toolkit, especially if the Fed opts for another rate hike on Wednesday.

At the last meeting in late July, the BoJ widened the boundary of its yield curve control (YCC) framework. This was seen as a shy first step towards the eventual normalization of monetary policy, as bond yields were finally allowed to increase a tad. The post-meeting BoJ members' comments didn't diverge from the usual commentary, closing the door to the buildup of hawkish expectations. However, the overall sentiment appears to have changed somewhat after Governor Ueda's September 10 comment.

His "quiet exit" remark reignited market rumours that the BoJ is finally preparing to abandon its ultra-loose monetary policy stance. Further adjusting the YCC framework seems to be the easy next option for the BoJ, but the market is focusing on negative rates. The BoJ's target rate has remained at -0.1% since February 2016. Interestingly, BoJ's Tamura has already been on the airwaves downplaying the importance of a possible return to positive rates, by stating that the abandonment of negative rates is not the same as monetary policy tightening. Therefore, the BoJ policy board has probably already discussed this move and it is expected to be part of the discussion again this week.

Data releases failing to surprise on the upside lately

The basis for any BoJ move is the economic outlook. The strongly positive GDP figures for the second quarter of 2023 have been followed by mixed data. Similar to other countries, the housing sector remains under pressure with the July housing starts dropping very close to an 8-year low, and labour cash earnings showed a considerable slowdown in July. On the flip side, the PMI surveys remain optimistic, especially when compared to the euro area figures.

However, the BoJ's focus falls squarely on the inflation data and wages. The August Tokyo inflation print surprised on the downside. If this tendency is confirmed by the national data, on Friday we could see the headline CPI dropping below 3% for the first time since July 2022. Various BoJ members have stated that inflation is expected to gradually re-accelerate after a period of slowdown. Therefore, a possible downside surprise could affect market sentiment, but it will probably not change BoJ’s strategy going forward.

Wages have emerged as the key input in BoJ's analysis

What is affecting the BoJ members' attitude are the developments in wages. Since the record-breaking wage agreements in April 2023, retail sales have been registering strong annual increases. For this trend to continue, firms need to continue with their aggressive wage hikes, further fueling spending and helping the public overcome the deflation mentality of the past decades. Importantly, Ueda stated that by year-end the BoJ could have enough on the 2024 wage negotiations. This could mean that a rate hike could be firmly on the agenda at the December 19 meeting.

The yen needs help, especially if the Fed hikes on Wednesday

The yen continues to suffer against most currencies with the US dollar-yen pair making a new 2023 high and reaching its highest level since November 4, 2022. With the Japanese authorities limiting their reaction so far to verbal interventions, the burden falls on the BoJ to provide some support to the ailing yen. If the BoJ maintains its current stance on Friday, the US dollar-yen pair could set sail for the October 21, 2022 high at 151.94.

On the flip side, should the BoJ manage to surprise on Friday, we could see yen bulls staging a pullback similar to the mid-July correction with the main target being the 144.99 area. However, such a move could prove excessive and premature if the economic data don’t start to improve significantly over the next few trading days.

Could BoJ Upset Expectations for a Dull Meeting?_1

Source: XM

To stay updated on all economic events of today, please check out our Economic calendar

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Cohen

Economic

Investors have been waiting all year for central banks to declare victory over inflation, at which point markets could throw a party in anticipation that interest rates would peak and, with luck, fall as fast as they rose. Now, we're almost there.

The European Central Bank raised eurozone interest rates to a record 4 per cent last Thursday but signalled that its 10th increase in 14 months could be the last rise in this cycle.

European stocks enjoyed their strongest day in six months, closing 1.5 per cent higher, while the FTSE 100 jumped 2 per cent, and the rally continued on Friday. Better news about the Chinese economy also helped.

Markets expect the Bank of England to deliver one more 0.25 percentage point rise this week, to 5.5 per cent, while the Fed may hold rates at 5.5 per cent this month (possibly with one more increase by year end).

So, are markets about to enjoy the long-awaited bonanza?

Nobody should underestimate how fast interest rates have soared. In February 2022, the Fed funds rate stood at just 0.08 per cent. If it hikes once more to 5.75 per cent, that works out as an increase of 7,087.5 per cent.

Higher interest rates are designed to destroy inflation by driving up borrowing costs, which makes businesses and consumers feel poorer and less inclined to spend, cooling activity.

It's a blunt and brutal instrument, though. Profits fall. Businesses close. Jobs go. People lose their homes. Share and property prices drop.

The alternative is to let inflation run out of control, which is worse.

On the plus side, higher interest rates are also supposed to encourage savers to tuck money away rather than go on a spree, as they get higher returns on their deposits.

In 2022, the policy shift did its work as global markets crashed and frothy assets like Bitcoin took a beating.

Monetary policy takes around 18 months to feed through to the real economy but now it appears to have arrived, says Samy Chaar, chief economist at Lombard Odier.

He thinks the ECB's job is done. "Given abundant evidence that monetary policy transmission is working, with both inflation and growth momentum fading, the case for tightening will likely weaken in the months ahead," Mr Chaar says.

The UK economy is also showing signs of cooling, says Vijay Valecha, chief investment officer at Century Financial.

"Gross domestic product fell 0.5 per cent in July, while industrial production also declined more than expected. September's hike could be the last," he adds.

It's a different story across the Atlantic, where Wall Street has recovered almost all of last year's losses, driven by the artificial intelligence-fuelled tech stock revival.

The U.S. economy is showing surprising "resilience" to higher interest rates, with the labour market and producer prices both proving stronger than expected, says Ryan Brandham, head of global capital markets for North America at Validus Risk Management.

"Further Fed action may be required," he says.

Consumer prices jumped 0.6 per cent in August, the biggest monthly gain of 2023, largely due to higher fuel prices. Inflation rose 3.7 per cent over the year, notably higher than July's 3.2 per cent.

While European and UK stock markets rebounded sharply last week, U.S. markets saw more muted gains, says Chris Beauchamp, chief market analyst at online trading platform IG.

He calls resurgent inflation a "wild card" that could force more Fed rate hikes.

This may be partly down to President Joe Biden's Inflation Reduction Act, which is pumping $1 trillion into clean energy, heating up the economy at the same time as the Fed tries to cool things down.

So, we're not out of the woods yet.

There's another worry holding markets back. Stagflation.

The economy won't suddenly spring into life simply because interest rates have peaked. They are still dramatically higher than before.

Growth could be hard to come by until central banks start cutting rates and markets now fear that may not happen until the second half of 2024.

Mr Chaar warns that "growth will likely remain subdued and almost in stagflation territory", and he's not the only one to use the S-word.

William Marsters, financial markets expert at Saxo Bank, anticipates "light stagflation", which he says normally leads to poor equity returns.

"Defensive sectors often outperform in this environment, so investors might consider consumer staples, energy, health care and utilities," he says.

Richard Flax, chief investment officer at wealth manager Moneyfarm, notes that the ECB has upgraded inflation predictions for 2024 to 3.2 per cent.

"This stagflationary picture, with weakening growth and sticky inflation, is a challenging scenario," he says.

While the ECB reckons inflation will average 2.1 per cent in 2025, we may still have to "stomach-deteriorating economic data for the sake of curbing inflation", Mr Flax adds.

Nobody was ever going to bang a gong and announce the start of the next full market by claiming inflation was dead.

Life isn't like that. Investing certainly isn't. Investors have raced ahead of reality. They do that.

Bond markets are "jittery" as they wait to see what happens next, with two-year U.S. Treasury yields climbing past 5 per cent, says Jason Hollands, managing director at wealth manager Evelyn Partners.

However, we may enjoy a boost from a surprising quarter.

"The deterioration in the Chinese economy could place additional downward pressure on global inflation. The weak yuan, alongside falling factory gate prices, will make Chinese manufactured goods very cheap in global markets," Mr Hollands adds.

He thinks the Fed will hold off from hiking rates this month, but says hopes that rate cuts would swiftly follow have faded.

"Economic resilience has changed that. Rates may soon peak, but they look set to remain higher for longer," he says.

The war on inflation isn't won yet, so investors may have to be patient just a little while longer. Unfortunately, patience isn't their strong point.