Monday Sep 16 2024 14:01
5 min
The US dollar faced broad selling pressure on Monday as it retested multi-month lows on market pricing in a higher likelihood that the Federal Reserve is about to go for a jumbo rate cut this week. Stocks were mixed early doors but have broadly recovered their September wobble. The FTSE 100 traded flat and the DAX started the week a bit firmer, whilst US futures were steady. The Bank of England is also in action this week and is expected to play it safe.
The gold price cannot be held in check, with spot breaking through $2,600 at last on a combination of a weaker US dollar, more inflation, lower real and nominal yields — plus the geopolitical risk premia that we have seen evident since last October. More broadly, and more importantly, it’s all about the “4D trade” I talked about before – debt debasement and dollar devaluation.
The yield on the 10yr TIPS is down to 1.56% from 2.20% as recently as June this year – the speed of the move in real rates has taken some by surprise but not all the gold bugs who have seen this coming since 2020. Bitcoin traded lower – presumably because the pro-crypto Donald Trump is going to be lucky to see the election at this rate.
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The Federal Reserve this week faces a test of nerve and of communication. Markets see a 59% chance of a 50-basis-point (bps) cut, and 41% for 25bps. Does it really matter either way? A 50bps cut suggests they have waited too long, and a recessionary vibe is apparent – stocks won’t like that.
25bps could be interpreted as staying too tight. Even with 100bps of cuts this year – as the market thinks – the Fed funds rate would still be way above neutral at a time when the labour market is clearly showing signs of weakness, and the economy is on a less sure footing than it could be.
The Fed’s decision will be accompanied by fresh economic projections. The Fed’s economic projections from its June meeting indicated GDP growth of 2.1%, an unemployment rate of 4%, and just a single interest rate cut this year. These assumptions have surely changed but it is unclear whether policymakers will indicate as many cuts as are being priced in by markets.
I’d think that the 2024 Fed funds rate projection will be cut from 5.1% predicted in June to at least 4.6%. Even if they can slice a bit off the inflation forecasts it seems they will have to bump up their unemployment forecasts for this year and next – remember it’s a dual mandate.
A look at US dollar index futures – bearish and flaggy look about the daily chart from a long-term perspective.
Yenmageddon? Japan’s national core CPI inflation report is going to be closely watched for the impact on JPY crosses ahead of the Bank of Japan (BoJ) decision at the end of the week. Policymakers have been offering some clues as to what to expect.
Last week, the BoJ’s Nakagawa said the central bank will continue raising rates if inflation remains on track. However, markets expect the BoJ to refrain from back-to-back hikes after surprising the market with a hike in July that contributed to the broader market sell-off in early August. Traders should stay on watch for hawkish comments from policymakers however, as this could see the yen strengthen and pressure equity markets…remember to keep calm and carry trade on.
USDJPY: The yen trades decidedly stronger this morning with the breach below 140 and the December low, corresponding to the 61.8% retracement, suggesting we could see a 137 handle before long and retest of the July 2023 lows.
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