September 22th Financial News

Daily News

Summary:

Swiss National Bank and Bank of England unexpectedly pause rate hikes; Russia banned gasoline and diesel exports to most countries from Sept. 21; U.S. initial jobless claims hit a nearly 8-month low last week but could rebound in coming weeks...

[Quick Facts]

1. Swiss National Bank and Bank of England unexpectedly pause rate hikes.

2. Russia banned gasoline and diesel exports to most countries from Sept. 21.

3. "Bond King" Gross warns U.S. bond investors that pain isn't over yet.

4. Japan's core CPI has been above the BOJ target for the 17th consecutive month.

5. U.S. initial jobless claims hit a new low in nearly 8 months last week.

[News Details]

Swiss National Bank and Bank of England unexpectedly pause rate hikes

The Bank of England (BOE) kept interest rates unchanged on Thursday local time, which was the first time in nearly two years that it had chosen not to raise interest rates in fight against the stubbornly high inflation. In a statement, BOE Governor Andrew Bailey said inflation had fallen sharply in recent months and that would continue. "But there's no room for complacency," he said. According to the minutes of the policy meeting, interest rates would need to remain "sufficiently restrictive for a sufficiently long period" to bring inflation back to the central bank's 2% target, while it also downgraded the economic outlook. Prior to that, the Swiss National Bank (SNB) also unexpectedly announced a pause in interest rate hikes and would expand liquidity supply to banks, but SNB governor Thomas Jordan said if the inflation outlook worsens, interest rates will be raised again.

Russia banned gasoline and diesel exports to most countries from Sept. 21

The Russian government said it would impose a ban on gasoline and diesel exports from Sept. 21 for an unknown length of time, with the scale of exports of the two types of energy at about 1 million barrels per day (bpd). According to people familiar with the matter, Russia exported an average of about 63,000 tons of diesel and 8,000 tons of gasoline per day in the first 13 days of September, 31% lower than the average daily diesel exports compared with the first 30 days of August, as refineries were undergoing seasonal maintenance. Moreover, Russian government's efforts to curb rising domestic fuel prices has prompted producers to divert more fuel to the domestic market. Russia's temporary export ban on the fuel could exacerbate the current shortages in the global oil market as the two OPEC+ leaders, Saudi Arabia and Russia, are restricting crude supplies.

"Bond King" Gross warns U.S. bond investors that pain isn't over yet

Bond investors' pain isn't over yet, even though the Federal Reserve is done raising interest rates, said Bill Gross, former Pacific Investment Management Company (PIMCO) CEO. Gross wrote in his latest investment outlook that the bond market will suffer record losses for a third year due to sticky inflation and widening deficits. He likened the government's fiscal stimulus to "throwing money out of a helicopter." Gross urged investors to reduce holdings of U.S. Treasuries and corporate bonds as 10-year U.S. Treasury bonds are overvalued.

Japan's core CPI has been above the BOJ target for the 17th consecutive month

Japan's core inflation held steady at 3.1% in August and was above the central bank's 2% target for the 17th month in a row, data released on Friday showed. This is a sign of widening price pressures that could strengthen the case for an exit from its ultra-loose monetary policy. While the Bank of Japan (BOJ) is widely expected to leave its ultra-loose monetary policy unchanged, market attention is centered on any hints from BOJ governor Kazuo Ueda on how quickly the central bank may phase out stimulus. There is speculation that the BOJ will soon end negative interest rates as well as its target of keeping the 10-year JGB yield at around 0% in response to widening inflationary pressures.

U.S. initial jobless claims hit a new low in nearly 8 months last week

U.S. initial jobless claims fell unexpectedly last week. The U.S. Department of Labor data show that initial jobless claims for the week ended Sept. 16 recorded 201,000, a new low since the week ended January 28, indicating that the job market is still tight. The weekly initial jobless claims this year ranged between 194,000 and 265,000. But it could rebound in the coming weeks as the United Auto Workers' (UAW) partial strike will lead to a shortage of some production materials, forcing automakers to temporarily lay off workers. Ford last Friday furloughed 600 workers who were not on strike, while GM said it expected to halt operations at its Kansas car plant, affecting 2,000 workers. Chrysler-parent Stellantis said it would temporarily lay off 68 employees in Ohio and expected to furlough another 300 workers in Indiana. The strike is unlikely to have an impact on nonfarm payrolls, though, as it began near the end of the nonfarm payroll survey week.

[Focus of the Day]

UTC+8 07:30 Japan Core CPI YoY (Aug)

UTC+8 11:00 The Bank of Japan announces its interest rate decision

UTC+8 14:00 U.K. Retail Sales MoM (Aug)

UTC+8 14:30 Bank of Japan Governor Kazuo Ueda holds a monetary policy press conference

UTC+8 15:15 France Manufacturing PMI Prelim (Sept)

UTC+8 15:30 Germany Manufacturing PMI Prelim (SA) (Sept)

UTC+8 16:00 Eurozone Manufacturing PMI Prelim (SA) (Sept)

UTC+8 16:30 U.K. Manufacturing & Services PMI Prelim (Sept)

UTC+8 20:30 Canada Retail Sales MoM (SA) (Jul)

UTC+8 20:50 Federal Reserve Governor Lisa Cook speaks

UTC+8 21:45 U.S. IHS Markit Manufacturing & Services PMI Prelim (SA) (Sept)

UTC+8 01:00 Next Day: San Francisco Fed President Mary Daly speaks

UTC+8 01:00 Next Day: Minneapolis Fed President Kashkari delivers a speech

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Damon

Economic

Market acknowledges the risk of a final hike, but it will depend on the data

The Fed's messaging of higher for longer interest rates has been taken on board by financial markets, with the dollar strengthening and the yield curve shifting higher in the wake of yesterday's decision. Nonetheless, the market remains somewhat sceptical on the prospect of the final 25bp interest rate rise that the Fed's forecasts signalled for this year, with the pricing for November's FOMC meeting only being 8bp with 13bp priced by the time of the December meeting.

The jobs market remains tight, as highlighted by low jobless claims numbers today, but we continue to believe that core inflation pressures will slow meaningfully, the economic outlook will soften, and the Fed won't end up carrying through. The jobs market is always the last thing to turn lower in a downturn and there are areas of more obvious weakness.

For example, U.S. existing home sales fell 0.7% MoM in August to a level of 4.04mn rather than rising the 0.7% MoM as the market expected. This is due not only to weakness in demand but also a complete collapse in properties available for purchase. The affordability issue is front and centre here, with prices having risen nearly 50% nationally during the pandemic, but demand has obviously been crushed by the fact that mortgage rates have tripled since the Federal Reserve started hiking interest rates. But this surge in borrowing costs is constraining the supply of homes for sale as well - people who are locked in at 2.5-3.5% mortgage rates cannot afford to give them up. They can't take the mortgage with them when they move home, so even if you downsize to a smaller, cheaper property, you are, in all likelihood, going to end up paying a higher monthly dollar mortgage payment.

Consequently, we are in a crazy-sounding position whereby the number of housing transactions is on a par with the lows seen during the global financial crisis, yet home prices are rising. This should be a boon for home builders, but note the big drop in sentiment and housing starts seen earlier in the week. The drop-off in prospective buyer traffic is making builders cautious. Mortgage rates at 7%+ will obviously do that over time, but it may be another sign of the household sector starting to pull back at the margin now that the Fed believes pandemic-era savings are close to being exhausted. U.S. Housing Feels the Squeeze from High Mortgage Rates_1

U.S. Housing Feels the Squeeze from High Mortgage Rates_1

Leading index still indicates recession can't be ruled out

Meanwhile, the U.S. leading economic indicator, which combines a range of other numbers, including jobless claims, orders, average work week, the yield curve and credit conditions, posted its 17th straight monthly decline. As the chart below shows, the index at these sorts of levels has been a clear recession indicator in the past, but for now, GDP growth is strong. U.S. Housing Feels the Squeeze from High Mortgage Rates_2

U.S. Housing Feels the Squeeze from High Mortgage Rates_2

Our view remains that this strength in activity has been caused primarily by households running down pandemic-era accrued savings aggressively and borrowing more on credit cards. But with savings obviously being finite - note the Fed's Beige Book citing evidence of the "exhaustion" of these savings - and consumer credit harder to come by and certainly less affordable than it was, the cashflow required to finance ongoing increases in spending will have to increasingly come from rising real income growth. Rising gasoline prices will erode spending power while student loan repayments, strikes and the prospect of a government shutdown will add to the financial stresses on millions of households, so we will need to see substantial wage increases for everyone - not just auto workers - to keep this growth engine firing.

Given this situation, we not only think the Fed will leave rates at their current levels, we also see the potential for more rate cuts next year than the 50bp currently being signalled by the Federal Reserve.

Source: ING

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Economic

Central Bank

Stocks

Forex

Market Recap

Market sentiments continue to reel in from the post-Federal Reserve (Fed) meeting jitters (DJIA -1.08%; S&P 500 -1.64%; Nasdaq -1.82%), as the US 10-year Treasury yields rose to another fresh 17-year high near the 4.50% handle amid a high-for-longer rate outlook. Some resilience in the US labour market, reflected from lower-than-expected read out of US jobless claims overnight, just provided more room for the Fed to retain its hawkish stance further.

For now, while Fed funds rate futures continue to reflect some doubts that the Fed may not follow through with its final rate hike this year, the timeline for rate cuts are now pushed back to a later timeline of 2H 2024. The US dollar saw some slight profit-taking (-0.1%) overnight, while gold prices remain weighed (-1.3%). On the other hand, crude oil prices have managed to eke out slight gains after a short blip from oversold technical conditions.

Major US indices are finding themselves at a critical juncture, with the S&P 500 back to retest a key support at the 4,330 level. Similarly, the Nasdaq 100 faces a key test for dip-buyers at the 14,680 level. Rate-sensitive growth sectors have been bearing a greater brunt of the sell-off lately, with the SPDR S&P Semiconductor ETF seemingly breaking below its neckline of a head-and-shoulder formation on the daily chart. There is still the potential for a bullish divergence to be formed on the daily relative strength index (RSI), provided that the index turned higher over coming days, but the neckline resistance will have to be reclaimed. Failure to do so may leave the May 2023 low on watch for a retest at the 174.00 level. Risk-Off Sentiments in Place, BoJ Meeting on the Radar Ahead_1

Risk-Off Sentiments in Place, BoJ Meeting on the Radar Ahead_1

Asia Open

Asian stocks look set for a downbeat open, with Nikkei -1.16%, ASX -1.13% and KOSPI -0.90% at the time of writing, largely following through with the negative handover from Wall Street. The key focus today will be on the Bank of Japan (BoJ) meeting. With the BoJ Governor Kazuo Ueda floating the idea that the central bank could have enough data by year-end to determine whether to end negative rates, markets seem to perceive it as an imminent rate hike into early-2024. Therefore, all eyes will be on the Governor's communications at the press conference for any slightest signs of hawkishness to validate such timeline.

The USD/JPY has touched a new year-to-date high this week, with the pair still trading above the 145.00-145.80 range, where the BoJ had intervened with US$19.7 billion of yen-buying back in September 2022. With that, focus at the upcoming BoJ meeting will also be on how policymakers may address the weak yen and their willingness to tolerate a pull-ahead in the Japanese 10-year bond yields to levels last seen in 2013.

A bearish divergence on the daily RSI points to some near-term exhaustion for now, but staying above its Ichimoku cloud pattern and various moving averages (MA) on the daily chart still leaves an upward trend intact for the pair. Rising yield differentials between the US and Japan government bond yields have touched a new 10-month high, which may still provide some upward bias for the pair. Risk-Off Sentiments in Place, BoJ Meeting on the Radar Ahead_2

Risk-Off Sentiments in Place, BoJ Meeting on the Radar Ahead_2

On the watchlist: Silver prices attempt to stay supported with some dip-buying

Silver prices have been resilient lately, with a post-Fed sell-off on Thursday met with some dip-buying overnight, as seen by the formation of a bullish pin bar on the daily chart. Thus far, prices have been edging higher upon a retest of an upward trendline support in place since August 2022, with higher lows on Moving Average Convergence/Divergence (MACD) pointing to some upward momentum.

Further upside may leave the US$24.50 level on watch for a retest, where the upper edge of its months-long consolidation pattern resides. Whereas on the downside, the upward trendline support will be an immediate support to defend by the bulls. Risk-Off Sentiments in Place, BoJ Meeting on the Radar Ahead_3

Risk-Off Sentiments in Place, BoJ Meeting on the Radar Ahead_3

Thursday: DJIA -1.08%; S&P 500 -1.64%; Nasdaq -1.82%, DAX -1.33%, FTSE -0.69%

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Economic

Fed fallout and wilting growth stocks

Hello, I'm Angeline Long, and welcome to Beat the Street, the show that gives you all the tradable news and data that you need to know ahead of the Wall Street open. Coming up, Federal Reserve fallout, growth stocks wilt as the Fed keeps the door open to yet another hype. Plus, going the distance, how far are strikers willing to go?

US automakers face the threat of lengthy strikes. More details in a moment. And on the corporate front, FedEx in focus after its cost-cut payoff, and it gains on the pain of its rivals.

Now, good afternoon and a very warm welcome to you on this new edition of Beat the Street. Not long now before Wall Street starts trading; let's have a look at how equity markets are looking on the IG platform.

Decline evident on US Tech 100

Let's start with the US Tech 100 first. As you can see here, this is a one-hour chart, and we are seeing somewhat of a decline indicator there. Let's have a look at Wall Street as well; similar picture there.

However, it has to be said that many of the moves that we're seeing post-Fed are to do with rate-sensitive stocks, including Apple, Meta, Alphabet and NVIDIA. They all fell after the Fed kept the door open to one more hike potentially ahead, two-year and 10-year Treasury yields, meanwhile scaled multi-year highs.

Just checking on some breaking news now as we speak, just getting them through. Initial jobless claims for the week ending 16 September 2023: we were expecting 225,000. We got 201,000 instead. That was a surprise on the downside, and perhaps this mirrors the continually robust picture being painted on the US economy.

Labout market strong in the face of cost-of-living crisis

Despite the cost-of-living crisis, despite the headwinds, the higher interest rates, its labour market continues to show signs of resilience.

The US dollar, meanwhile, rose after Jerome Powell delivered a firm hawkish stance. Higher for longer was the message, and updated quarterly projections show that the central bank may still lift rates one more time this year to a peak of 5.5 to 5.75% range. Fed received half a percentage cut in 2024.

As a view, Fed officials had expected to cut rates by a full percentage point next year. Meanwhile, policymakers now see the fight against inflation lasting into 2026 and believe they can succeed without damaging the US economy.

Now, as we are on central bank watch, not too long ago, the Bank of England (BoE) kept rates on hold. The previous 14 times the bank made a decision prior to this, it opted to boost the rates starting at the end of 2021.

Warren Venketas has been tracking the pound's reaction after today's results. Much mixed messaging from BoE officials. Looking at the voter split from the previous meeting, we saw seven members in favor of a rate hike versus two in favor of a pause, and I think that will obviously be more divided going into this particular rate announcement.

I just wanted to touch on a bit of the pound price action. I do have the daily cable chart on screen. We can see the pound being sold off quite drastically, particularly after that Fed rate pause, which included a very hawkish message of higher for longer. I think we could see a bit of that in the BoE's messaging as well today…

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SAXO

Cryptocurrency

On September 15, 2022, Ethereum successfully changed its consensus mechanism by its transition away from proof of work to proof of stake. This transition was known as the merge. The latter was a goodbye to miners in verifying transactions but a welcome to stakers. Ethereum has now been running on proof of stake for about a year, so in this piece, we look back at tangible factors brought forward by the merge rather than describing the transition in detail. If you are interested in learning more about the transition, you can find a more in-depth analysis here, published a few months prior to the merge.

A financially sustainable cryptocurrency

During the proof of work era, Ethereum issued about 5.4mn new Ether yearly to reward miners for validating transactions. This is also known as the security cost, as it ensures sufficient security by a cost funded by inflation in the native cryptocurrency. To fund this security cost, Ethereum had a yearly inflation of about 3 - 4%. However, any cryptocurrency derives much greater security at a much lower cost by proof of stake compared to proof of work. This has allowed Ethereum to slash its yearly issuance to 816,000 Ether at the current staking ratio. As the latter is set to increase, Ethereum is likely to hit a yearly issuance of 1,000,000 Ether at some point, but that is still significantly below the pre-merge issuance of about 5.4mn yearly.

As the majority of Ether paid in transaction fees are burned, hence removed from the supply, Ethereum has seen a nearly 300,000 Ether reduction in its supply since the merge. This is in stark contrast to a supply increase of nearly 3.9mn Ether in the past year provided that the merge had not occurred. Not only has Ethereum been deflationary since the merge, but its issuance has also been rewarded to holders of Ether if staked rather than miners with no duty to hold Ether. This means that Ethereum has truly turned into a financially sustainable cryptocurrency, rewarding holders with a negative supply change, and staking rewards if they choose to stake. Barely any cryptocurrency can brag about this, particularly none even close to the size of Ethereum. One Year Later: How Proof of Stake Has Changed Ethereum_1

One Year Later: How Proof of Stake Has Changed Ethereum_1

Energy consumption has been reduced by 99.95%

In proof of work, miners participated in a never-ending rivalry to be the ones to process a block. This rivalry was about computing a string below a target set by the network. The latter was computed using a mathematical function to mostly go through trial and error. This called for immense computational power, in Ethereum's case, GPUs, using a great amount of electricity. Now, the network randomly chooses a validator every 12 seconds to process a block, so there are no battles for the blocks. The bottom line is that Ethereum has reduced its energy consumption by about 99.95%. This great reduction makes Ethereum much more appealing in a never-satisfied ESG world.

Another advantage of proof of stake is the consistency of 12-second blocks, so they do not fluctuate similar to during Ethereum's proof of work era. This makes the network more predictable and easier to utilize for various protocols. The shift from average blocks of 13 seconds during proof of work to consistent 12-second blocks has also made Ethereum slightly more scalable, as block sizes have stayed the same.

Is Ethereum now more centralized?

This is a discussion largely beyond the scope of this piece; however, we will shortly touch upon the most critical considerations. Leaving the matter of decentralization aside for a second, Ethereum has certainly archived greater security by proof of stake. The network now reaches block finalization about 15 minutes after a block has been proposed. This is an extra layer of security not found in proof of work. It says that for a block to be altered or removed after reaching finalization at least 33% of the total staked Ether must be burned, effectively imposing a cost of at least $13bn for doing that. On top of that, the network can slash validators by burning some of their Ether in case they behave dishonestly or against the objectives of the network. In other words, by having collateral in something of great value from validators, in this case, Ether, the network can enforce much stricter rules for strong security.

Decentralization is another matter. This highly depends on who you ask. In our view, it is roughly the same as before the merge, as it is now. The challenge of the present staking distribution is that the largest staker is the liquid-staking provider Lido with around 32.5% network penetration, but still growing slowly. The Ether staked by Lido belongs to thousands of holders and is spread across 31 independent validators by smart contracts, so it is considerably better than if it was a single entity. The challenge, however, is that Lido may capture the consensus layer of Ethereum if it continues to grow, so the governance token of Lido suddenly decides much of the future of Ethereum. You had a somewhat similar situation during proof of work, as miners mingled their computational power to form so-called mining pools to enhance their chances of creating a block.

In both instances, the market operates with strong economies of scale. For mining pools, there are scale economies, as the capital flows to few but large mining pools to boost the chances of proposing a block. In proof of stake, there are no such advantages, but instead, large liquid-staking providers attain an upper hand in terms of liquidity. This enhances the ability of users to buy and sell the given liquid staking token without much price impact. The fear is that if Lido is not limited sooner rather than later, then it will continue to devour Ethereum with ever-increasing advantages for users by choosing Lido over other much smaller liquid staking providers.

Another challenge facing Ethereum in proof of stake is that its staking ratio continues to rise, meaning more and more Ether is staked. Most critically, this may lead to fewer Ether than optimal to be left to be paid in transaction fees to maintain the ecosystem, while liquid-staking providers, particularly Lido, archive damaging network penetration. Ethereum's core developers decided last week to slow down the acceptance of new validators in Ethereum's next upgrade to allow the community more time to figure out a proper solution. One Year Later: How Proof of Stake Has Changed Ethereum_2

One Year Later: How Proof of Stake Has Changed Ethereum_2

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Damon

Economic

Central Bank

Stocks

Bond

The Bank of Japan on Friday rounds off one of the most intense weeks in recent memory for central bank policy decisions, with global markets still reverberating from the shockwaves that have followed the Federal Reserve's 'hawkish pause' on Wednesday.

World stocks and risk assets tumbled for a second day on Thursday and U.S. bond yields soared to fresh multi-year highs, as investors adjusted to the Fed's revised rate outlook that hammered home its 'higher for longer' stance on interest rates.

MSCI's World Index plunged 1.5% for its biggest fall in six weeks, and its fifth decline in a row marked its worst run since March. MSCI's Asia ex-Japan index also had its worst day since early August, and Wall Street slumped to a three-month low.

In a sign of how much the landscape is shifting HSBC's fixed income research team led by Steven Major - one of the strongest advocates of a 'lower for longer' view on rates and yields - raised its U.S. Treasury yield forecasts on Thursday.

Further complicating the picture for investors, however, were the surprisingly dovish decisions from the Bank of England and Swiss National Bank. Both kept rates on hold on Thursday, confounding expectations they would both hike.

All eyes now turn to the BOJ.

None of the 26 economists polled by Reuters expect any change to its easy stance on Friday but nearly 80% of them said the central bank will also abolish the 10-year yield control scheme by the end of 2024. More than half reckon negative interest rate policy will end next year too.

The fog of uncertainty, and pull of opposing domestic and global forces, continue to hold sway over Japanese assets.

The 10-year Japanese Government Bond yield hit a 10-year high of 0.75% on Thursday, and while the yen rebounded too, it did so from a new 2023 low of 148.45 per dollar earlier in the day.

Speculation that Tokyo will intervene in the FX market to support the yen is unlikely to cool. Prime Minister Fumio Kishida said on Thursday that no option is ruled out in addressing "excessive volatility", adding that "authorities are in close communication internationally."

While the BOJ's meeting is the marquee event in Asia on Friday, there is a raft of other indicators that could give local markets a steer, including the latest inflation data from Japan and Malaysia, and New Zealand trade figures.

The first purchasing managers index reports for September begin filtering out on Friday, starting with Australia and Japan, then Germany, France and Britain later in the day.

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

- Bank of Japan policy meeting

- Japan inflation (August)

- Japan, Australia PMIs (September)

Source: Yahoo

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Warren Takunda

Forex

Sweden's central bank, the Riksbank, recently implemented a 25-basis point interest rate hike in a bid to curb persistently high inflation. However, rather than strengthening, the Swedish Krona (SEK) faced depreciation, leaving analysts to question whether the central bank has fallen behind in addressing the nation's economic hurdles.

Riksbank's Interest Rate Hike

The Riksbank's decision to raise interest rates sent a clear signal that it was committed to tackling inflation. The central bank even hinted at the possibility of another rate hike in November, emphasizing its determination to control rising price levels.

Currency Valuation Concerns

In a surprising turn, the Riksbank expressed frustration over the SEK's undervaluation. The central bank suggested that speculative behavior by investors contributed to this undervaluation and indicated its expectations for an SEK appreciation in the near future.

SEK Reaction

Following the Riksbank's decision, the SEK initially strengthened against major currencies. For instance, the Euro to Krona (EUR/SEK) dipped before regaining pre-decision levels, indicating market uncertainty regarding the central bank's ability to influence the SEK's value.

Policy Rate Path

Magnusson highlights a potentially dovish signal in the Riksbank's policy rate path projections. These projections suggest only a 10-basis point rate increase by Q2 of the following year after the recent 25-basis point hike, fueling concerns that the central bank might not be keeping pace with inflationary pressures.

Challenging Outlook

The Riksbank faces a complex scenario as it may need to further increase interest rates while grappling with deteriorating macroeconomic data. Recent unemployment figures in Sweden exceeded expectations, signaling potential economic challenges ahead. A combination of rate hikes and economic downturn could lead to a flatter yield curve for Sweden, posing additional policy challenges.

In the face of these complexities, the Riksbank will need to strike a delicate balance between addressing inflation and fostering economic growth, all while navigating the uncertain waters of global financial markets.

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