Round up of today’s market news

North American News

Stocks React Negatively to Fed’s Prolonged Low Interest Rate Policy

• NASDAQ index falls -1.53%

The major stock indices are ending the day lower and voting thumbs down to “higher for longer” (for the time being at least).The FOMC in their dot plot are forecasting one more hike in 2023 and raised the end-of-year 2024 rate to 5.1% from 4.6%.

The final numbers are showing:

• Dow Industrial Average fell -76.87 points or -0.22% at 34440.87
• S&P fell -41.73 points or -0.94% at 4402.21
• NASDAQ index fell -209.07 points or -1.53% at 13469.12

The Dot Plot sees the end of year Fed funds rate at 5.6%. The 2023 EOY rate at 5.1%.

• The Fed sees end of year 2023 year rate at 5.6%. Sees 2024 rate at 5.1%

In September 2023, the Median projections now show:

The dot plot for September shows the following skew of projections:

A summary of the Fed Chair Q&A comments by topic

• Fed Chair comments from Powell

Employment/Labor Market:

• Labor market remains tight.
• Labor supply and demand are moving towards a better balance.
• Labor demand still exceeds supply.
• Expects labor market rebalancing to continue, easing upward pressure on inflation.
• Stronger economic activity is the main reason for needing to do more with rates.
• It’s good we’ve seen meaningful rebalancing in the labor market without much increase in unemployment.
• Some softening in the labor market is anticipated.
• Soft landing in the labor market is not guaranteed.

Interest Rates:

• Current policy stance is restrictive.
• The Fed is prepared to raise rates further if appropriate.
• Rates will remain restrictive until inflation is moving down to 2%.
• Real interest rates are meaningfully positive.
• Decision on future rate cuts will be based on the economy’s needs.

Inflation:

• Inflation remains well above the 2% long-run goal.
• Strong commitment to return inflation to 2%.
• Reducing inflation may require below-trend growth and some softening of labor conditions.
• Longer-term inflation expectations seem well anchored.
• Three recent inflation readings have been positive, but more data is needed.

GDP/Economic Activity:

• Growth in real GDP has exceeded expectations.
• Consumer spending has been a significant driver of GDP.
• The economy has significant momentum.
• Risks to the economy include strikes, government shutdowns, and higher long-term rates.
• GDP growth stronger than expected might require higher interest rates.

Other Comments:

• The Fed is focused on its dual mandate.
• Decisions will be based on data and risk assessments.
• The Federal Reserve will make decisions on a meeting-by-meeting basis.
• The goal is to restore price stability for maximum growth potential.
• Energy prices, especially if sustained at high levels, can impact inflation and spending.
• The primary concern is restoring price stability.
• Households are generally in good shape due to a strong labor market and rising wages.

The FOMC keeps the target Fed Funds range at 5.25% to 5.50%

• Highlights of the September 2023 FOMC rate decision
• Target rate 5.25% – 5.5%
• 2023 end of year target rate: 5.6%, unchanged from June
• 2024 end of year target rate: 5.10% from 4.6% in June
• Economic activity has been growing steadily.
• Job gains have decelerated but remain robust; unemployment is low.
• Inflation is currently high.
• The U.S. banking system is stable and robust.
• Stricter credit conditions may impact economic activity, employment, and inflation.
• The exact impact of these conditions is still uncertain.
• The Committee is highly focused on inflation risks.
• The Committee’s goals are maximum employment and a 2% inflation rate over the long term.
• The target range for the federal funds rate is set at 5-1/4 to 5-1/2 percent.
• The Committee will evaluate further information and its implications for monetary policy.
• Factors considered for policy adjustments include the overall tightening of monetary policy, its delayed effects on the economy, and other economic and financial events.
• The Committee plans to reduce its holdings of Treasury securities and other agency debts and securities.
• The primary aim is to bring inflation back to the 2% target.
• The Committee will keep assessing the economic outlook based on incoming data.
• If risks arise that could hinder the Committee’s objectives, they are ready to modify the monetary policy stance.
• Their evaluations will consider various data, including labor market stats, inflation trends, financial, and global events.

Full statement from the September FOMC rate decision

• FOMC statement from the FOMC rate decision.

Recent indicators suggest that economic activity has been expanding at a solid pace.
Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low.Inflation remains elevated.

The U.S. banking system is sound and resilient.Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation.The extent of these effects remains uncertain.
The Committee remains highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run.In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent.The Committee will continue to assess additional information and its implications for monetary policy.In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook.The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Adriana D. Kugler; Lorie K. Logan; and Christopher J. Waller.

WSJ Nick Timiraos: There is a lot of optimism on a soft landing. We are there right now.

• WSJ Timiraos speaking on CNBC
• There’s a lot of optimism on a soft landing
• But there is a concern that inflation could pick up
• There is also a concern the Fed may also be the obstacle to the soft landing pushing rated too high and leading to slower growth
• Next week we will likely see a mild inflation reading
• it is impossible to tell whether the Fed will keep rates higher for longer or cut rates sooner
• The market and the Fed are now on the same side.
• The Fed want to use the interest rate tool to be the primary weapon (not quantitative tightening).

US MBA mortgage applications w.e. 15 September +5.4% vs -0.8% prior

• Latest data from the Mortgage Bankers Association for the week ending 15 September 2023

• Prior -0.8%
• Market index 192.1 vs 182.2 prior
• Purchase index 147.0 vs 143.7 prior
• Refinance index 415.4 vs 367.0 prior
• 30-year mortgage rate 7.31% vs 7.27% prior

US Treasury Secretary Yellen warns over potential yen intervention

Wide-ranging comments from Yellen. On potential intervention in the yen FX market:

• Treasury generally understands need to smooth out volatility in exchange rates but not to influence forex levels
• View on any Japanese yen intervention would depend on circumstances

On other matters:

• Demand-supply imbalances in US labor market have abated
• There may be spillovers from China’s economic difficulties to US
• Morocco strongly wanted IMF, World Bank meetings to proceed, we want to be helpful for people of Morocco
• US growth needs to slow in line with potential due to full employment
• Expects China to use its policy space to avoid a slowdown with ‘major proportions’

BofA revises higher S&P 500 year-end forecast by 7% to 4,600

• The firm previously saw the year-end target for the S&P 500 at 4,300

The new target level is roughly 3.5% from the close yesterday. I reckon as major central banks are all pivoting to the sidelines now, it adds to the upside bias for stocks. But keep an eye out on the bond market of course, as well as oil prices.

Fed ‘insider’ Timiraos previews the FOMC meeting, rates and peak forecast to be unchanged

The Wall Street Journal article is gated. Nick Timiraos says this is likely to be the first FOMC meeting of the current hiking cycle where the Fed neither raises rates nor revises up its forecast for the peak rate.

BOC meeting minutes: Didn’t want to raise expectations of a near-term reduction in rates

• Bank of Canada meeting minutes from September 2023
• The Bank of Canada’s Governing Council did not want to set expectations for a rate reduction in the near future, as per the September 6th announcement minutes.
• The Council’s discussions revolved around either maintaining the current rates or increasing them.
• Given the uncertain trajectory of core inflation, maintaining a stricter policy should be considered.
• The lack of improvement in underlying inflation is a major worry.
• The Council deliberated if high core inflation might continue even as signs show that restrictive monetary policy is dampening demand.
• Many core inflation metrics appear to be persistent, with little change observed since the July rate announcement.
• There’s concern over the proportion of items in the CPI basket that are increasing at an annualized rate exceeding both 3% and 5%.
• The Council anticipates that rising oil and gasoline prices will push inflation up in the coming months.
• The balance between economic supply and demand will play a pivotal role in determining future core and total inflation.
• The large drop in commodity prices will soon be excluded from inflation calculations.
• BOC Minutes: Governing Council observed that the impact of base-year effects will diminish.

Commodities

Gold whips on Fed outlook, sticking with $1,940

• Gold takes a rocky path to $1,940.00 on Fed reaction, decides to walk down on Fed rate call.
• Fed outlook sees inflation slightly higher than predicted and holds steady on rates.
• XAU/USD waffled on market reaction, recovery rally fails to extend.

Gold slipped to $1,940.00 after the Federal Reserve (Fed) held benchmark interest rates at 5.5% for the time being.The FOMC released their inflation expectations looking forward, seeing inflation a little bit higher than it previously forecast.

EIA weekly crude inventory stocks -2.135M vs. -2.200M estimate

• Weekly EIA inventory data for the week of September 15

• Crude all inventories -2.135 million versus -2.200 million estimate. The private data yesterday showed a -5.3 million draw.
• Distillates -2.867M versus a build of 0.217M estimate
• Gasoline -0.831M versus a build of 0.317M estimate
• Cushing -2.064M versus -2.45M last week.
• Weekly refinery utilization -1.8% versus -0.5% estimate
• Weekly production 12.9M versus 12.9M last

Wall Street Journal: The Fed’s Next Challenge: $100 Oil

• Got that right!

An article in the Journal (gated) ahead of Wednesday’s FOMC. Not flagging a Fed Funds rate hike this time around, but further head?

• traders and petroleum refiners are draining oil stockpiles at a rapid clip
• Many analysts expect crude prices to keep rising, which would feed into higher fuel bills, quicker inflation—and, potentially, higher interest rates.
• The Federal Reserve is expected to hold rates steady on Wednesday while leaving the door open to further increases. That could prop up price pressures while slowing the economy—the scenario that the Fed and investors hope to avoid.
• “This clearly risks pushing…inflation slightly higher again,” said David Fyfe, chief economist at commodities data firm Argus Media.“It is something that may encourage, through the end of the year, further interest-rate hikes.”

UBS on Brent oil – strong fundamentals to support a $90–100/bbl range in coming months

A UBS analyst note on the oil price says their base case is that the price will not rise above $100 a barrel on a sustained basis over the next year.

Such a rise would draw a step higher in US production as well as weighing on demand.

UBS on supply factors:

• Saudi Arabia and Russia extending their extra supply cuts until the end of the year
• US oil output growth likely to slow as a result of lower drilling activity in recent months
• Global visible oil inventories fell sharply in August, at their lowest since July 2022 (citing International Energy Agency info)

On demand factors:

• Global oil demand is at a record 103 million barrels a day
• reopening of China and solid demand growth in India
• expect the rise in demand to slow back to the long-term growth rate of around 1.2 mbpd in 2024
• demand will continue to rise

JP Morgan says price of oil could rise to US $120 because supply cuts may not be over

JP Morgan flagged a big risk for the global economy, saying the concern is that cuts to the supply of oil “are not finished”.

JPM say this could see the oil price as high as US$120 / bbl.

And that the flow-on effect if this were to happen in the next few weeks would be “the global economy would slow to a near stall” in Q4 of 2023.

JPM have a forecast for the price of oil to fall back to $86 in Q4. The impact of the oil price shock will fade quickly if this is the case says JPM:

• In this scenario, we are not concerned about the pass-through of oil prices into core inflation.
• A bigger concern would be if central banks see themselves less able to look through any oil price shock than they have done in the past.

Talk of $100 too hot to handle for oil bulls?

• WTI crude slides back below $90 on the day

Well, perhaps the spotlight and attention is not something oil bulls are liking at the moment especially after the hot start to the new week yesterday.WTI crude briefly hit above $92 to its highest levels since November last year before a quick retreat and now another over 1% fall back below $90 on the day.

It is a temporary setback after all the hopes and bullish fundamental talks and considering the lack of other major headlines, I’d say this reeks of profit-taking mostly. I mean oil has been on a rather unrelenting push higher since the latter of stages of last month, up from $80 all the way to above $90 last week.

A single oil trading firm sparking price run-up for U.S. physical crude (Bloomberg report)

Bloomberg with the report saying that the trading arm of French oil and gas producer TotalEnergies is bidding up the U.S. physical crude market.

In brief:

• WTI crude for delivery at the Cushing hub in Oklahoma has jumped to its highest premium since November
• TotalEnergies’ willingness to pay up for WTI crude is a reflection that high refining margins are driving competition for U.S. oil as global supplies have tightened significantly
• U.S. refining margins remain historically high at ~$30/bbl even as plants enter seasonal maintenance

EU News

European major indices close higher. Encouraged by the weaker UK inflation data today

• UK FTSE 100 up 1.0% on the day

The major European stock indices are closing higher on the day.The indices are encouraged by the lower than expected UK CPI inflation data today. That has traders paring back expectations for the BOE rate hike tomorrow. The expectations are now 50-50 for a rate hike.

The final numbers are showing:

• German DaX +110.66 points or 0.71%
• Frances CAC +50.01 points or 0.69%
• UK’s FTSE 100 +76.43.4 +1.00%
• Spain’s Ibex +124.28 points or +1.30%
• Italy’s FTSE MIB +501 points or +1.75%

Switzerland ups economic growth forecast for the year but revises lower 2024 projection

• The latest set of economic forecasts released by the Swiss government

• 2023 GDP growth seen at +1.3% (previously +1.1%)
• 2024 GDP growth seen at +1.2% (previously +1.5%)
• 2023 CPI seen at +2.2% (previously +2.3%)
• 2024 CPI seen at +1.9% (previously +1.5%)

UK August CPI +6.7% vs +7.0% y/y expected

• Latest data released by ONS – 20 September 2023

• Prior +6.8%
• Core CPI +6.2% vs +6.8% y/y expected
• Prior +6.9%

BOE rate hike odds for this week now a near coin flip

• The odds of a 25 bps rate hike fall to ~53% now after the softer UK inflation data earlier

It was roughly ~80% prior to the data and here’s how the change looks on the OIS curve:

Essentially, markets are pricing in just one more rate hike for this cycle by the BOE (implied rate currently at 5.18%). It was already the case before the CPI report but the latest pricing confirms that even more, as traders firm up their conviction.

BOE likely to keep bank rate unchanged tomorrow – Goldman Sachs

• The firm says that UK interest rates have peaked

The call comes after the softer inflation data earlier today. At the time of writing, the odds of a rate hike have now fallen to ~41% as opposed to ~80% before we got the CPI report. At best, it now looks like the BOE is set for a one and done case scenario in terms of hiking.

ECB’s de Cos: Risks to inflation in the euro area are now balanced

• Remarks by ECB policymaker, Pablo Hernandez de Cos

Sure, now that they have moved to pausing then all of a sudden the risks have turned to being more “balanced”. Central bankers and politicians. They are all one in the same these days.

ECBs Makhluof: I do think we are there or thereabouts at top of ladder on rates

• ECB Makhluof remarks:
• I do think we are there, or thereabouts, at top of the ladder on rates
• My view at the moment is that March 2024 is probably too early for 1st rate cut
• Not saying at our next meeting that we are going to hold, but we are near the top
• We will have a better sense of 2024 rate profile one we have the next set of projections in December

Other News

China’s NDRC Vice Chair: macro polices effective, still challenges, striving to hit target

This from a Beijing news conference focused on China’s economic situation.

Representatives from the People’s Bank of China will attend, as will the National Development and Reform Commission of the People’s Republic of China (NDRC), the Ministry of Finance, and the Ministry of Industry and Information Technology are present.

NDRC Vice Chairman:

• China’s macroeconomic policies have been effective
• China’s economy faces a lot of difficulties and challenges
• Economic positives are increasing
• Those shorting China will surely be proven wrong
• Fully confident that China is recovering for the long term
• China will strive to achieve annual economic growth targets
• Consumer prices are expected to rise near to their annual average

PBOC official says there is a solid foundation to keep yuan exchange rate basically stable

• Will pay more attention to changes in yuan exchange rate against a basket of currencies
• There is solid foundation to keep yuan exchange rate basically stable
• Will resolutely correct one-sided pro-cyclical behavior for yuan exchange
• Will resolutely curb disruptions to market order, resolutely guard against exchange rate overshooting risks
• China’s monetary policy still has ample policy room to respond to unexpected challenges and changes
• Will continue to implement prudent monetary policy, step up counter-cyclical adjustments

PBOC Loan Prime Rates (LPR) remain unchanged at today’s rate setting, as expected

People’s Bank of China policy rate setting, no change. As expected.

LPRs left at:

• 3.45% for the one year
• 4.20% for the five year
• The 1 year rate was cut last month: PBOC Loan Prime Rates (LPR) CUT: 1-year 3.45% (prior 3.55%) & 5-year 4.2% (prior 4.20%)
• the 5-year was left unchanged, which came as a surprise to most in the market

Shanghai Securities News says the PBOC has space to further cut the RRR this year

Shanghai Securities Journal, officially titled as Shanghai Securities News, is a national securities daily newspaper in China. It’s a state-owned newspaper.

Japan’s August exports and imports both fell y/y, not as much as expected

Japanese trade balance data for August 2023.

Exports to China fell 11% y/y in the month, and to Asia as a whole -8.8% y/y. Otherwise the news was better:

• exports to the EU +12.7% y/y
• to the US +5.5%

Japan former top currency diplomat warns of intervention if the yen falls further

• Some remarks by Takehiko Nakao, who served as Japan’s top currency diplomat from August 2011 to March 2013

• It is fully possible that Tokyo will conduct intervention in case the yen weakens further
• Amid a weakening yen, BOJ may have no choice but to normalise monetary policy
• That includes exiting negative rates and ending yield curve control

Japan’s Kanda says closely communicating with US FX moves

Japan’s Finance Ministry’s Vice Finance Minister for International Affairs Kanda. He is the guy who will instruct the BOJ to intervene, when he judges it necessary. Often referred to as Japan’s ‘top currency diplomat’.

Making some verbal intervention remarks:

• Dealing appropriately with FX moves
• Closely communicating with us, overseas FX authorities
• Closely watching FX moves with high sense of urgency
• Says Japan is closely communicating with US authorities over forex on regular basis
• Shared mutual understanding that excessive forex move undesirable

Japan’s PM Kishida to allow overseas asset management firms’ entry to domestic market

Details have slowly trickled out ahead of Kishida’s announcement, adding some info now via Nikkei:

• Japanese Prime Minister Fumio Kishida is scheduled to speak at the Economic Club of New York on Thursday
• He will urge investors to “evaluate what we are doing in my country, look at the underlying strength of our economy and our plans for the future and then invest in Japan.”
• will seek to attract fund managers and other professionals from abroad
• Kishida will pledge that the country will “decisively carry out structural reforms” to attract foreign asset managers

South Korea wholesale level inflation surging again, biggest jump since April 2022

South Korea PPI data for August has risen at its fastest m/m since April of 2022.

• +0.9% m/m (prior +0.3%
• +1.0% y/y (prior -0.3%)

Australian data – Westpac Leading Index for August -0.04% m/m (prior +0.01%)

• WPAC son the upcoming RBA meeting – almost certain to hold rates steady for another month.

Westpac comments on the data.

• The six-month annualised growth rate in the Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, rose slightly to -0.50% in August from -0.56% in July
• Leading Index growth rate still negative at –0.5%.
• Negative reads have now persisted since August 2022.
• Indicator correctly predicted growth slowdown in 2023.
• Growth outlook for next 3–9 months remains poor with per capita GDP declines likely to continue.

WPAC also include their outlook for the next Reserve Bank of Australia meeting, which is on October 3:

• The Board is almost certain to hold rates steady for another month.
• In the minutes to the September Board meeting it was again noted that “… some further tightening in monetary policy may be required should inflation prove more persistent than expected”. In making this decision, the most critical update will be the September quarter inflation report, which will not be available until the November Board meeting.
• Given the overall tone of the minutes, it seems that the ‘hurdle’ for a further rate hike will be high and certainly not consistent with our current forecasts for inflation.

New Zealand data, current account beats estimates

Data from New Zealand for Q2 2023:

BOP Current Account Balance -4.2bn NZD

• expected -4.56bn, prior -5.22bn

Current Account to GDP YTD -7.5%

• expected -8.0%, prior -8.2%

Cryptocurrency News

Ripple CEO calls out SEC and Chair Gary Gensler, saying, “Everything the SEC cares about, they lost”

• Ripple CEO calls out SEC and Chair Gary Gensler, saying, “Everything the SEC cares about, they lost”
• Ripple founder Brad Garlinghouse spoke against SEC chair Gary Gensler during the Messari Mainnet event.
• Garlinghouse stated that Gensler was simply pursuing power and politics and not sound policy.

XRP price has been holding strong for the past few days despite the token being removed from NYDFS’ approved tokens list.

Ripple has seen considerable support from the community since it partially won the lawsuit filed by the Securities and Exchange Commission (SEC). Interestingly, since the win, the overall criticism against the regulatory body has grown, with people speaking up against the agency and its Chair, Gary Gensler.

Ripple CEO fires at SEC chair

The founder and Chief Operating Executive (CEO) of Ripple, Brad Garlinghouse, has always been vocal against SEC and Gensler. This confidence grew tenfold following the partial win by the payment processing network.

So much so that Garlinghouse recently publicly named Gensler a bully. According to lawyer and crypto enthusiast Jess Roberts, during the recent Messari Mainnet event, the Ripple CEO said,

“You have to stand up to a bully … he’s pursuing power, he’s pursuing politics. Not sound policy.

The official X (formerly Twitter) account of the event host Messari also tweeted Garlinghouse’s words from the event, quoting him saying,

“Everything the SEC cares about, they lost… A freight train was driven through Gensler’s arguments that these are all securities.

Guilty plea on charges of misappropriating funds from investors promised big crypto return

News crossing of a guilty plea from a former investment banker who was charged in April with misappropriating funds from investors he wooed with promises of big returns from cryptocurrency trading.

From the article:

• Russell told prospective investors that he was a licensed broker who worked in investment banking and could help them earn large and sometimes guaranteed returns from a cryptocurrency fund he claimed to run.Prosecutors said Russell transferred some funds into a trading account but siphoned the rest,
• faces up to 30 years in prison when sentenced
• will be required to pay restitution of more than $1.5 million

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