Market Observations - Sep 21
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Econ Brief:?In Washington, officials are grappling with the new debt level topping $33T, a record high, according to data from the Treasury Department. A massive expansion of the government’s balance sheet comes as Congress braces for a potential federal shutdown, the first of its kind since 2019. A shutdown could be avoided if stars align and legislators agree to pass nearly a dozen appropriations bills by month-end or agree to a short-term continuing resolution. Time, however, is rapidly running out, and political analysts on both sides of the aisle are skeptical there is the political will from either side to “work together.”
This morning, before the Fed rate announcement, MBA mortgage applications rose 5.4% in the week ending September 15, following a 0.8% decrease the week prior. The 30-year mortgage rate, meanwhile, gained from 7.27% to 7.31%, matching the highest since 2000. Weekly claims data, the September read on the Philly Fed Index, and the August leading indicators index will all be released today. Finally, to wrap up the week, the S&P global PMIs for manufacturing and services will be released on Friday. While manufacturing has broadly moved into negative territory as of November 2022, services have maintained positive momentum as consumers remain under pressure but remain resilient.
US Wednesday Market Wrap:?The Dot Plot Thickens! While rates were left unchanged, as expected, the so-called dot-plot indicated that some Federal Reserve policy setters would like to raise overnight interest rates again this year from their current level of 5.25% - 5.5% through 2024. The Fed’s new projections also indicated that policymakers expect to cut rates by far less next year than they thought before. They now forecast, on balance, that the federal funds rate will be 5.125% at the end of next year, just a quarter point lower than the midpoint of the current range. The futures market has long indicated that traders think rates won’t rise again and will fall in 2024.
Moreover, the rate-setter’s track record is questionable when it comes to carrying through with their pledges on rates. The DOW suffered a relatively mild 77-point decline, but the Nasdaq, more interest rate sensitive, tumbled 1.53%, closing near the day’s lows. Four S&P sectors closed green. Real estate +0.19% led, and technology -1.57% lagged.
?The Federal Reserve’s hawkish hold, which included 50 bps less of cuts next year than it had signaled in June, has lifted the dollar against most currencies today. The notable exception is the Japanese yen. The dollar did extend its advance to new highs for the year before the market turned cautious ahead of the outcome of the Bank of Japan meeting tomorrow. The Swiss franc is the weakest of the G10 currencies after the Swiss National Bank defied economists’ expectations and left rates unchanged. The Swedish krona and Norwegian krone are little changed after their central banks delivered a quarter-point hike. Attention turns to the Bank of England, which will announce its decision shortly. Ahead of it, sterling has traded below $1.23 for the first time in 5 months.
Rising rates have weighed on equities. Most of the large bourses in the Asia Pacific region fell by more than 1%.
Europe’s SXXP has given back yesterday’s 0.9% advance, and US index futures are trading lower.
The yield of the 10-year JGB rose to a new high near 0.73%. European benchmark 10-year rates are mostly 4-5 bps higher, though Gilts and Italian and Greek yields are up slightly more than 6bps. The 10-year US Treasury yield is near 4.43%, up a couple of basis points, while the two-year yield is off a couple of basis points to 5.15%.
The prospect of higher rates for longer and a strong US dollar has seen gold return to around $1922 after approaching $1950 yesterday.
November WTI reversed lower on Tuesday after reaching almost $92.45. It has been sold to a five-day low today near $88.35, where it is trying to steady.
?Both Sweden’s Riksbank and Norway’s Norges Bank hiked key lending rates to 4.00% and 4.25% respectively. The Riksbank’s future guidance suggested the door is ajar for another move, but it sees the peak at 4.10%. However, it also indicated it would sell a quarter of its reserves (~$8b and 2b euros) after the krona fell to record lows against the euro yesterday. The sales are set to start on September 25 and take four to six months to complete. We had thought Norway was a closer call, but the central bank signaled that it would likely hike rates again by a quarter-of-a-point in December. Its projections put the lending rate at 4.44% in Q1 24 and Q2 24. Economists thought the Swiss National Bank would also hike 25 bp, but the swap market did not. We favored the market over economists. The SNB stood pat, and the Swiss franc weakened by the most in six months against the euro and to its lowest level since mid-July.
The Bank of England is next. Yesterday’s softer-than-expected UK August CPI made many doubt the Bank of England would hike rates today. The swap market has slightly less than half discounted. This seems like an overreaction, and the hike arguably remains the most likely scenario. Moreover, the BOE may also announce it would reduce its balance sheet at a quicker pace from the current GBP80b a month. Top officials have suggested GBP100b would be the max, so the prudent thing to do is increase it to GBP90b. If the BOE does not hike rates, sterling will likely be sold. But as we saw last week with the euro, a hike does not necessarily prevent a further decline.
Consensus expectations were met by the Federal Reserve, which delivered a hawkish hold. The Fed funds target range was held steady at 5.25%-5.50%. The median GDP projection for this year was raised to 2.1% from 1.0% (0.4% in March) and next year to 1.5% (from 1.1%). The median projection of unemployment was shaved by 0.3% this year and next (to 3.8% and 4.1%, respectively). The median forecast for the PCE deflators was tweaked up to 3.3% from 3.2%, but next year was left at 2.5%. The core deflator was reduced to 3.7% from 3.9%), with next year’s remaining at 2.6%. Regarding policy, 12 officials anticipate another hike this year, while seven think the Fed is done. That said, the median dot now looks for two cuts next year rather than four. The takeaway is that the Fed’s forecasts fully endorse the soft landing, which also means the Fed expects rates to remain higher for longer. The risk is that headwinds are accumulating: the tightening of credit conditions, the drawdown in the previous savings build-up, the resumption of student loan debt servicing, the UAW strike, and the risk of a partial government shutdown next month.
?With the FOMC meeting behind us, attention turns to today’s US high-frequency reports. The current account deficit does not typically draw much attention from the markets, though it is interesting to note that assuming a Q2 shortfall of around $221b, the deficit in H1 23 would be about $440b. It has largely been covered by portfolio flows. The Treasury’s International Capital (TIC) report shows a net inflow of nearly $360b in the first half. In the first half of last year, the US recorded a current account deficit of about $532b and net portfolio capital inflows of about $690b.
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Initial weekly jobless claims cover the week of the monthly jobs survey. The median forecast is for a small increase from the previous week’s 220k initial claims, which is a bit lower than the survey week last month, and the four-week moving average is also a bit lower. Still, the early call is for nonfarm payroll growth to slow to around 155k from 187k in August. The September Philadelphia Fed survey is expected to deteriorate from the 12.0 reading in August.
Existing home sales fell 2.2% in July but are expected to have stabilized in August.
Lastly, the Index of Leading Economic Indicators most likely extended its decline, which has been uninterrupted since April 2022. The six-month annualized decline has begun subsiding. It bottomed at -9% in March and was at -7.8% in July. It may have remained there in August, which are levels which in the past have been seen during recessions.
Crypto Market Rundown
The global market cap is still hovering around the $1.07T mark, a -1.50% decrease over the last day.
With BTC and ETH both down in the past 24h, many of the alts that were on the rise have lost momentum. It looked as if BTC was breaking out a bit over the past 72h, but it seemed to be another fake out. BTC lost its $27,000 level around four hours ago, and is now trading at $26,570.
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