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Breakfast Bites - Wed Sep 20, 2023

Rise and shine and Happy Fednesday!

The big news today is the Fed’s Rate Decision at 2pm ET followed by the press conference by Fed Chair Powell at 2:30pm ET. The Fed is expected to skip this meeting, i.e., they are not expected to hike rates today.

Instead, all eyes will be on the Summary of Economic Projections (SEP) to be released today. Thus far the Fed’s dot plot shows one more hike in 2023, which will likely be the message during this meeting - leaving the door open for one last hike in November. That would take the rate for 2023 to 5..5%-5.75%. We do expect changes to the SEP to reflect:

  • Slower pace of rate cuts in 2024 in keeping with the Fed’s higher-for-longer theme shifting the 2024 dot plot median higher. We expect cuts to start around June with likely 0.75% cut through out the year. That would bring the Fed Funds rate to 4.75%-5%, assuming one more hike this year.

  • Increase in Growth Estimates

  • No significant adjustments to Unemployment rates

  • Rates in 2026

What will be important to keep an eye on is the inflation estimates. Consensus expects a downward revision but, we’re not so sure if that will actually happen.

We expect that the Fed Chair will continue with the “data-dependency” mantra and “keep at it until the job is done”. There are some who believe that the Fed may even hike into 2024, but this still remains a unlikely scenario for now given 2024 is an election year.

The other major news for today is inflation numbers coming out of the UK right before BoE’s rate decision tomorrow. In a welcome turn of events, both headline and core came in below consensus and below the BoE’s forecast. YoY Inflation declined from 6.8% to 6.7% while Core inflation decline from 6.9% to 6.2%. Services inflation also came in weaker at 6.8% versus 7.4%. This should be welcome news for the BoE tomorrow but, a hike of 25 bps is still expected. UK stocks are higher, while the GBP is lower.

US Equity Futures are trading higher this morning. The US Dollar Index and gold remains flat. Bitcoin lower and Oil has pulled back marginally to below $90. Yields are lower across the curve with the yield curve at -0.73%. Today is also Vix Expiration.

Asia and Australia

  • Asia equities ended mostly lower Wednesday in a risk-off day's trading: Hong Kong again just about held on to its recent support level although still ended lower alongside mainland China markets. South Korea ended a point higher but other major benchmarks fell with Taiwan weaker, India down sharply as its banks fell, Southeast Asia also showed weakness. Japan dipped sharply into the close to challenge its 33K support level.

  • We were waiting for news on the Loan Prime Rates (LPRs) out of China - they were unchanged at 3.45% in 1y and 4.20% in 5y. So, China’s not opting to cut rates to stimulate the economy.

  • Chinese companies are poised to pay out record dividends this year as they try to shore up confidence amid market plunge. Dividends paid by CSI300 companies amounted to CNY1.5T ($206B) YTD, surpassing CNY1.27T for 2022's total and pushing index dividend yields to surpass 10Y sovereign bond yields for first time.

  • Local Government Funding Vehicle (LGFV) domestic bond issuance was nearly CNY620B ($85B) in August, up almost 50% from July and the third-highest monthly tally on record. There were bonds coming due (as we discussed in our recent article on China) and these would need refinancing. But, it’s a welcome surprise to see that investors still consider these bonds safe. However, most of the bonds were short term maturities and that may be where the appeal was.

Europe, Middle East, Africa

  • European equity markets higher. FTSE 100 outperforms after softer UK inflation update. UK housing stocks benefit from increased expectations that the BoE will end its rate hike cycle tomorrow.

  • German producer prices (PPI) posted the biggest fall on record in August. Fell by -12.6% YoY, in line with expectations. July numbers fell by -6%. These numbers filtering through to inflation will be a welcome reprieve.

  • Ahead of this week's Bank of England (BoE) meeting, analyst at Bank of America (BofA) suggest GBP/USD may remain under pressure citing BoE's tightening stance, which may undermine UK's weak but resilient growth, alongside somewhat stale long positioning from investors and hedge funds.

The Americas

  • Auto parts makers facing potential risk of $38B lost revenues if UAW strikes extended. Friday will be key to the negotiations.

  • Disney plans to almost double investment in theme parks to $60B over next 10 years - this is an interesting strategy at a stage when their streaming business probably requires far more focus.

  • Bond Market Volatility (MOVE Index) moves to its lowest levels since the Fed started hiking. If the Fed pauses today, we’re likely to see a longer term yields pull back mildly. However, if the message is hawkish and inflation remains front & center, we could see the entire curve move up. It’s interesting that volatility is this low and oddly, discomforting.


(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)

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