September 27th Financial News

Daily News

Summary:

Fed's Kashkari expects a 40% chance of meaningfully higher rates; Two Middle Eastern countries plan to expand refining capacity, which may further tighten crude oil supply; the Japanese yen nears the intervention level...

[Quick Facts]

1. Fed's Kashkari expects a 40% chance of meaningfully higher rates.

2. Two Middle Eastern countries plan to expand refining capacity, which may further tighten crude oil supply.

3. The Japanese yen nears the intervention level.

4. U.S. Congress advances a stopgap spending bill to avoid a government shutdown.

5. A 77.8% probability of the Fed leaving rates unchanged in November.

[News Details]

Fed's Kashkari expects a 40% chance of meaningfully higher rates

Minneapolis Fed President Neel Kashkari said on Tuesday local time that the Fed has two potential options for dealing with inflation in the future. One is a "soft landing" path, in which policymakers may raise interest rates one more time before keeping interest rates stable to fully cool inflation. He believes sees a 60% chance the Fed can bring inflation down to the 2% target, without causing serious damage to the economy. In the other scenario (which he sees as a 40% chance), inflation would be more entrenched and would require further rate hikes to get it under control, perhaps even a significant one. Despite the tightening cycle nearing its end, the Fed's hawkish stance is intensifying, unsettling investors who have been betting on rate cuts as early as the spring of 2024.

Two Middle Eastern countries plan to expand refining capacity, which may further tighten crude oil supply

Oil supplies remain tight as Russia and Saudi Arabia have extended production cuts through the end of the year. It is reported that Oman and Bahrain plan to expand refining capacity and consume more crude oil to produce fuels such as diesel for export, which will lead to a crude oil reduction of more than 300,000 barrels per day in the Middle East, thus further tightening the global oil supply. In addition, due to strong refining and export demand, U.S. crude oil inventories in Cushing, Oklahoma, fell by 828,000 barrels last week to the lowest level in 14 months, which may extend the oil price rally.

The Japanese yen nears the intervention level

The yen is under increasing pressure as the Bank of Japan has set a high bar for exiting its ultra-loose monetary policy. A year ago, when the USDJPY approached the 150 level, Japanese officials strengthened verbal warnings and then intervened in the foreign exchange market to support the yen. This time, however, verbal intervention has yet to occur, which could indicate that the threshold has changed somewhat. However, the yen fell below 149 per dollar on Tuesday, hitting its lowest level since October 2022. Japan's Finance Minister Shunichi Suzuki made two statements on the exchange rate in one day, saying he was closely monitoring forex movements with a strong sense of urgency.

U.S. Congress advances a stopgap spending bill to avoid a government shutdown

On Tuesday, U.S. Senate Majority Leader Chuck Schumer said there would be a cross-party stopgap spending bill in the Senate, which would not contain everything the parties want but could provide short-term funding to prevent a government shutdown. The House, on the other hand, is trying to move forward with a contradictory measure that has only Republican support. U.S. House Speaker Kevin McCarthy said President Joe Biden needs to take action on border security to keep the government running. The split between the House and Senate signaled the growing likelihood that the federal government would enter its fourth shutdown in a decade on Sunday.

A 77.8% probability of the Fed leaving rates unchanged in November

According to the CME FedWatch tool, the probability that the Federal Reserve will keep interest rates unchanged in November in the range of 5.25%-5.50% is 77.8%, and the probability of raising interest rates by 25 basis points to 5.50%-5.75% range is 22.2%. The probability of keeping rates unchanged through December is 64.1%, the probability of a 25 basis point rate hike through December is 32%, and 50 basis points, 3.9%.

[Focus of the Day]

UTC+8 09:30 Australia CPI YoY (Aug)

UTC+8 14:00 Germany Gfk Consumer Confidence Index (Oct)

UTC+8 16:00 Switzerland ZEW Investor Confidence Index (Sept)

UTC+8 20:30 U.S. Durable Goods Order MoM (Aug)

UTC+8 22:30 U.S. EIA Crude Stocks for the Week Ended September 22

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Samantha Luan

Economic

Wall Street on Tuesday buckled under the weight of high and rising U.S. bond yields, leading a steep decline in global stocks and risk appetite that looks certain to push Asian markets lower at the open on Wednesday.

A Bank of Thailand interest rate decision and the latest snapshots of Australian consumer price inflation and Chinese industrial profits are the highlights on the region's economic and policy calendar.

Investor sentiment is weak and fragile.

The three major U.S. equity indexes all lost more than 1% on Tuesday, with the Dow Jones Industrials posting its worst day since March and the S&P 500 and Nasdaq both on track for their biggest monthly losses this year of 5% and 7%, respectively.

The move in Treasuries was nowhere near as big as Monday's. But another day of curve steepening, and 10-year nominal and real yields rising to new multi-year highs crushed stocks.

Back to Regularly Scheduled Programming_1

Volatility on Wall Street is finally picking up too, and at 19.0 the VIX 'fear index' of implied vol is closer to long-term averages. Only a couple of weeks ago it registered its lowest daily close since before the pandemic.

U.S. bond market volatility - a key driver of global market stability and liquidity - had its biggest rise since early July. This will reverberate into Asian markets on Wednesday.

Investors in Asia will also note the significance of U.S. crude oil's rise on Tuesday after a few days of consolidation, not for the 1% rise in itself, but because it lifts the year-on-year price rise to almost 20%.

Bearing in mind that as recently as June oil was down 45% year-on-year, this is a remarkable turnaround and helps explain why longer-dated bond yields are rising so much.

In Asia on Wednesday, Thailand's central bank is expected to leave its key policy rate unchanged at 2.25% and likely through 2024, marking an end to a year-long tightening cycle, although a minority of economists polled by Reuters still expect one final hike.

Despite inflation edging up slightly to 0.88% in August, it has been below the central bank's 1% to 3% target range for four months in a row, suggesting the Bank of Thailand can stop hiking.

Back to Regularly Scheduled Programming_2

Add this to the U.S. dollar's global tear higher, the Thai baht has slumped to its weakest level since November. It is down almost 4% this month, on track for its second-biggest monthly fall in two years.

Meanwhile, there is still no sign of Japanese authorities intervening in the FX market to support the yen, which hit a new 11-month low closer to the 150 per dollar level.

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

- Bank of Thailand rate decision

- Australia consumer price inflation (August)

- China industrial profits (August)

Source: Yahoo

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Justin

Central Bank

Economic

Has the ECB hiked for the last time?

Contrary to the other key central banks, the ECB announced another rate hike at its September meeting. The statement and the accompanying press conference did not differ much from the message coming from the recent Jackson Hole gathering as President Lagarde, and numerous hawks after the meeting, has tried to keep the door open to another rate hike if needed. However, the market does not appear convinced as the next rate move is expected to be a rate cut. Understandably, most ECB doves have also come out, insisting that the ECB has done enough.

As the September ECB staff projections showed headline inflation dropping to 2.1% by 2025, and core inflation a tad higher at 2.2%, one can say that the ECB is probably not there yet. And at this point, the discussion about the growth outlook comes in. The market believes that a stagnant economy, and potentially a short-term recession, will persist, increasing the possibility of inflation slowing down even more aggressively. This expectation is mostly confirmed by the most recent PMI figures.

ECB is aware of the grim growth outlook

However, Lagarde made it clear that the ECB is aware that the rough patch will continue in the fourth quarter of 2023, spilling over into 2024 as well. And despite this grim outlook, the ECB opted to hike, potentially fearing that the current inflation deceleration could be temporary. Considering the oil price performance over the past two months, these fears could materialize going forward. Additionally, a couple of weeks ago we got an interesting comment from Bank of Japan member Tamura. He commented that Japan’s inflation is likely to slow for the time being, and then accelerate moderately again. If this applies to the euro area economy as well, then the ECB is probably sensible in keeping an open mind at this juncture.

Inflation still matters

In this context, on Thursday we will get the preliminary print for German inflation with the euro area aggregate figures released on Friday. Regarding Germany, the market is currently forecasting a significant deceleration at the annual pace of increase from 6.1% in August to just 4.6% in September. If confirmed, this will be the lowest headline figure since October 2021, a strong sign that the ECB’s monetary policy stance is working. Consequently, the euro area aggregate print is also expected to record a slowdown but less dramatic. The headline figure is seen easing to a 4.5% YoY growth from 5.2% in August, with the core component forecast to slow to an annual growth of 4.8%.

What does that mean for the ECB and the euro?

Unfortunately for the hawks, the ECB has reached the stage where an upside surprise in inflation is not sufficient justification for a rate hike at the next meeting. Other pieces of the economic puzzle i.e. growth outlook, wage developments and oil price action must align in order to increase the possibility of an inflation overshoot and eventually force the ECB to react. However, in the case of a stronger inflation print this week, the euro stands to benefit against the US dollar. A move towards the 1.0720 area could clearly please the euro bulls but these gains might prove short-lived if the incoming data continue to paint a grim growth picture.

On the flip side, the barrier for rate cuts remains high. However, certain ECB members have started to mention the word “cut” which suits the market’s intentions. We will gradually see more “rate cut” comments if there is a downside surprise at this week’s CPI figures. This outcome could bring forward the currently priced-in rate cuts and thus allow the euro-dollar pair to continue its aggressive downward trend. A break of the busy 1.0481-1.0571 area could open the door to a more protracted move towards 1.0315.

Could This Week's CPI Prints Diminish the Chances of Further ECB Rate Hikes?_1

Source:XM

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Cohen

Economic

In my column on September 5, I made the case that central banks were likely at or near the end of their rate-raising cycles, and events over the past couple of weeks have borne that out.

The European Central Bank delivered a "dovish hike" that is likely to be its last in the current cycle, the U.S. Federal Reserve managed to upset bond markets with a "hawkish hold" and the Bank of England surprised by keeping rates unchanged on growth concerns.

For the GCC, it is the Fed's decision that matters the most, given the currency pegs to the dollar.

While the Fed kept rates on hold at 5.5 per cent, as the market expected, and retained its forecast of another 25-basis-point hike before year-end, it was the 2024 economic and interest rate projections that unsettled financial markets.

This pushed both the two-year and 10-year Treasury bond yields to their highest levels since 2007 and triggered the worst week for equities since the U.S. banking sector crisis in March.

The Fed raised its U.S. economic growth forecast for next year to 1.5 per cent from 1.1 per cent in June and lowered its unemployment forecast to 4.1 per cent from 4.5 per cent previously.

So far so good: the U.S. economy has proven to be much more resilient in the face of a record pace of rate hikes than had been expected at the start of this year.

As the Fed forecasts suggest – despite chairman Jerome Powell's comments that a soft landing was not the base-case scenario – the central bank now expects the U.S. economy to avoid a recession next year.

Despite the more upbeat economic outlook, the inflation forecast for 2024 was unchanged from June, at 2.5 per cent on headline Personal Consumption Expenditure inflation (the Fed's preferred measure) and 2.6 per cent on core inflation.

Most importantly for the market, the Fed's interest rate projections – the so-called "dot plot" – now show just 50bp of rate cuts next year, down from 100bp in the June dots.

The new dots imply a much higher "real" or inflation-adjusted interest rate – and a much more restrictive monetary policy setting – in 2024 than had been projected just three months ago.

Essentially, the Fed is indicating that given the stronger economic outlook for the U.S. economy, interest rates will need to remain higher for longer to keep inflation coming down towards the 2 per cent target.

Even under this higher-for-longer scenario, the Fed doesn't think its inflation target will be reached until 2026 – more than two years away.

The messaging from the Fed is clear: don't expect rate cuts anytime soon.

The question is why the central bank is so hawkish when there is already clear evidence that the labour market is normalising, activity is slowing and there are significant downside risks ahead, including the resumption of student loan repayments, the car workers' strike, and a looming government shutdown that could last several weeks.

One reason is that policymakers are simply pushing back against an early repricing of rate expectations in the market, which could result in an easing in financial conditions before inflation has been tamed.

Typically, the market prices expected future developments today, so if the Fed had signalled that it was done with raising rates last week, the bond market would most likely have rallied on expectations of rate cuts to come in 2024.

By stressing that there is still a possibility of a further increase in the Fed funds rate this year and removing 50bp of easing that it had previously pencilled in for next year, the central bank has kept bond yields higher and financial conditions tighter – for now.

It remains to be seen how long rates will stay at these elevated levels, particularly if the labour market continues to soften and the downside risks to growth materialise.

Source: The National News

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Owen Li

Commodity

LME copper stocks double

Copper stocks held on the London Metal Exchange (LME) have more than doubled in the space of two months. This shows clear signals of weakening demand. Inventories of the red metal on the exchange now stand at 162,900 tonnes, according to the latest LME daily data, after 7,200 tonnes of the metal were delivered to LME warehouses in Hamburg, Rotterdam and New Orleans. So far in September, inventories are up by more than 50%, following a similar rise in August.

LME copper stocks have been rising since mid-July with more than 100,000 tonnes of the metal having been delivered into the exchange's warehouses. They do, however, remain low by historical standards. We believe low inventories fuel the possibility for spot prices to rise rapidly if consumption picks up sooner than expected.

Meanwhile, loose nearby spreads indicate an ample supply of available material. The discount for near-term delivery versus the three-month contract continues to rise, which signals more deliveries might be on the way. It last stood at $64.25, compared to $4.50 on 5 September. This is the widest discount in data going back to 1994.

With rising LME inventories and loosening nearby spreads, more weakness may lie ahead for copper prices. Copper Prices Slump as LME Stocks Continue to Pile Up_1

Copper Prices Slump as LME Stocks Continue to Pile Up_1

LME prices struggle for direction

Copper has been struggling for direction lately amid concerns over Federal Reserve policy and a disappointing Chinese economic recovery.

Copper prices fell to their lowest level in five weeks earlier this week, hitting $8,110.50/t, after the Fed indicated that its policy would remain restrictive for longer, which pushed the dollar to a six-month high. Further rate hikes could add more headwinds during a time of already weakening demand for copper.

Meanwhile, worries over China's real estate sector continue to escalate after Moody's Investors Service put two of the country's strongest property developers – China Jinmao Holdings Group and China Vanke – on review for possible downgrades.

China's new home prices fell for a third month in August and at a slightly faster pace, according to the latest government data. New home prices in 70 cities, excluding state-subsidised housing, declined by 0.29% last month from July, when they fell 0.23%.

At the end of last month, Beijing rolled out a set of stimulus measures, reducing down-payment requirements for homebuyers and allowing lenders to lower rates on existing mortgages, resulting in a spurt of homebuying earlier in the month, however that is already losing momentum.

Still, there are some signs of economic activity picking up in August. Industrial production rose by 4.5% from a year earlier while retail sales jumped 4.6%, the latest data show.

However, China's recovery is still uncertain, with anything related to real estate continuing to struggle. For copper, risks remain to the downside heading into the year's end on China's uncertain outlook for the property sector. We believe commodity-intensive stimulus is needed to support short to medium-term demand growth. We maintain our price forecast of an average of $8,582/t in 2023. Copper Prices Slump as LME Stocks Continue to Pile Up_2

Copper Prices Slump as LME Stocks Continue to Pile Up_2

Source: ING

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Damon

Economic

U.S. Federal Reserve Chair Jerome Powell said emphatically last week that people "hate inflation, hate it," but he left another fact unspoken - they also punish the politicians in charge when prices rise.

The central bank's quest for a "soft landing" of more slowly rising prices and continued economic growth looks increasingly probable. In fact, the U.S. may hit a sweet spot just as the 2024 presidential election campaign crescendos next year.

It's the sort of benign outcome that academic studies and high-ranking economists had called virtually impossible after inflation hit 40-year highs in June of 2022. Some warned that millions of workers might need to be rendered jobless to reduce the pace of price increases in a flashback to the central banking experience of the 1970s.

Rather than cheering, though, after years of economic turbulence since the coronavirus pandemic erupted in 2020, Americans grumble, at least if you ask them about the economy.

More than 40% of U.S. voters who backed Joe Biden in the 2020 presidential election say they think the economy is worse off than it was then, a Reuters/Ipsos poll published last month found.

The front-runner for the Republican presidential nomination, former President Donald Trump, faces a string of criminal indictments related to his attempts to overturn the 2020 election. Still, several recent polls show him tied with Biden in a hypothetical 2024 matchup.

That's because things on the ground don't feel as good as the positive inflation trend would indicate. With fast rising prices and the end of an array of pandemic-era government benefit programs, inflation-adjusted household income fell last year, and the poverty rate increased.

Borrowing costs also have risen sharply in the past 18 months as the Fed ratcheted up interest rates to tame the surge in inflation, adding to consumers' sour mood.

Past presidential elections have often seemed to turn on pocketbook issues. High inflation and a Fed-induced recession hampered President Jimmy Carter's 1980 reelection campaign against Republican candidate Ronald Reagan; President George H. W. Bush was hobbled by rising unemployment, a spike in prices, and a recession in his 1992 bid for a second term against Democrat Bill Clinton, the race in which a Clinton adviser famously framed campaign strategy around "the economy, stupid."

The Biden administration has worked to lower costs by releasing stores of the country's strategic petroleum stockpile, pushing down health insurance premiums, negotiating the cost of common prescription drugs, and trying to end monopolies in meat processing and battling "junk" fees paid by consumers.

They've also touted hundreds of billions of dollars in infrastructure investments during Biden's term as increasing the capacity of the U.S. economy going forward by easing supply chain constraints. Critics say that spending and the associated deficits may actually be fueling higher prices.

A Biden adviser said the White House understands that the economy and inflation are a critical issue, and the campaign has a big media push planned on "Bidenomics." The adviser added that many voters see threats to democracy and their rights as vital, too, and the strong performance of Democrats in the midterm elections last year shows that.

'Moral indignation'

Analysts, economists and the media closely track the main inflation gauge, the U.S. Consumer Price Index, for its monthly window on how much prices have risen from a month or a year ago.

In the 12 months through August, the CPI accelerated 3.7%, a sharp drop from its peak of 9.1% in June of 2022.

But that's not what voters care about. Even as the pace of price hikes recedes, the sticker shock from previous increases remains. Just because inflation falls, in other words, it doesn't mean prices fall back to where they were - only that they are growing less quickly.

Anyone in a grocery store is less likely to appreciate that meat, poultry, fish and eggs are slightly less expensive now than they were at the start of the year - inflation among those goods was negative for several months - than to grimace at the fact that those core sources of protein still cost about 24% more than they did on the eve of the pandemic in early 2020.

In a mid-1990s survey, Yale University economics professor and Nobel Prize winner Robert Shiller found that inflation associated with no less than "a tone of moral indignation."

"People tell of businesses trying too hard to pursue profits, the Fed behaving stupidly, people trying to live above their means, or politicians trying too hard to get reelected," Shiller wrote.

In another telling survey in the summer of 2022, management consulting firm McKinsey & Company found that the onset of inflation had promptly doubled the percentage of respondents seen in previous polls who felt pessimistic about the economy - dwarfing the numbers seen even at the depths of a pandemic that would go on to kill 1.1 million people in the U.S. and throw the economy into chaos.

"Now that inflation has accelerated to its highest rate in four decades, the mood has turned darker," the McKinsey study said.

The headline to the American Psychological Association's "Stress in America 2022" report from October of last year was headlined "Concerned for the future, beset by inflation."

How could paying more at the grocery store or the gas station compare with a mass catastrophe like the pandemic?

In the latter case, a multi-trillion-dollar government safety net had given people a bridge through the initial spike in unemployment and provided a buffer for them to stay away from jobs until they regarded the workplace as safe.

There is no similar buffer from higher prices, a stretched family budget, or an eroding retirement. Inflation is universal and efforts to combat it with things like price controls or subsidies typically don't work.

Biden promised this month to get gasoline prices down again, a rash vow for any president given the limited impact an administration has on prices at the pump.

The question is how long the inflation scar will last from here, whether the pace of price increases continues to moderate, and whether, as the Fed seems to anticipate, the rest of the economy remains on track.

Still Spending

If it goes according to the central bank's current expectations, there may even be interest rate cuts thrown into the mix next year, letting Biden test the premise of whether running on a strong economy in an environment of easing credit works as well as running against an economic downturn, financial tightening, and rising prices.

There's some indication a turn in public sentiment could be in the making even before that happens. The U.S. Census Bureau's most recent Household Pulse survey, for the two weeks ending Sept. 4, showed that while 80% of respondents were still "somewhat" or "very" concerned about future inflation, the number had fallen from earlier peaks in every state.

As Powell noted last week, there is a schism between what people say in surveys and how they behave.

When asked a question, they are sour.

When left alone, they go shopping.

"It's a very hot labor market ... You're starting to see real wages are now positive by most metrics ... Overall, households are in good shape," Powell said in his Sept. 20 press conference after the end of the latest Fed policy meeting. "Surveys are a different thing. Surveys are showing dissatisfaction. I think a lot of it is people hate inflation. Hate it. And that causes people to say the economy's terrible. At the same time, they're spending money. Their behavior is not exactly what you'd expect from the survey."

Source: Reuters

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Karar Ali

Energy

Oil prices down, with investors focusing on expectations of supply shortages after Moscow issued a temporary ban on fuel exports amid continuing concerns about raising interest rates again, which could weaken demand, according to Reuters.

The Federal Reserve (US central bank) maintained interest rates, but stuck to its position on tightening monetary policy and expected a quarter-point increase before the end of the year.

This led to growing fears that higher interest rates may stabilize economic growth and demand for fuel, while the US dollar rose to its highest levels since early last March, and the rise in the dollar results in oil and other commodities becoming more expensive for buyers. In other currencies.

Technical analysis of oil

We notice the presence of a resistance area at levels 92.61/93.65. We expect the price to reach those levels and then fall to the specified targets. The first target is at levels 88.32 and the second target is at levels 84.84. Oil rises amid expectations of tight supplies_1