Higher for Longer?

Thoughts of the Day

The US Federal Reserve’s shift towards the end of rate hikes may hinge on controlled inflation. However, with rising unemployment potentially signalling the impact of previous aggressive rate hikes, the ‘higher for longer’ stance may not last.

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What Happened Yesterday

Market Movements as of New York Close 6 Nov 23
  • Fedspeak:
    Kashkari (current voter, known hawk): “The economy has proved to be really resilient even though we’ve raised interest rates a lot over the past couple of years. That’s good news. We haven’t completely solved the inflation problem. We still have more work ahead of us to get it done.”
    Cook (current voter, known centrist): “Expectations of near-term policy rates do not appear to be driving a rise in long-term rates. Banking sectors remain sound and resilient overall, acute stresses have abated.”
    (Kashkari sticking to his usual hawkish tone, but Cook saying that rise in long term bond yields is not caused by near-term policy rates expectations means that Fed do not have to hike to fulfil those expectations).
  • The US Treasury Yield curve inversion remained at 0.26% as the US 2-year bond yield and the US 10-year bond yield rose +0.10% to 4.93% and 4.67% respectively..
  • The US stock futures traded within a small range through the Asian and London trading hours on the back of little market drivers.
  • The US stock market opened slightly higher from Friday. The market then traded sideways for the early half of the New York session before moving lower as the US bond yields peaked. After which, it started to recover as the US yields eased slightly off the highs.  Consequently, the S&P 500 closed the day a tad higher at +0.18% (high: +0.32%, low: -0.25%), the Dow eked out a small gain of +0.10% (high: +0.31%, low: -0.21%) while the Nasdaq rose +0.37% (high: +0.53%, low: -0.23%).
  • The crypto market traded in a narrow range. Bitcoin is up +0.15% while Ether is up +0.33%.
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Headlines & Market Impact

Japan’s inflation-adjusted wages slip in September for 18th month

Notable Snippet: Japan’s real wages slipped in September for an 18th month, while consumer spending extended a months-long decline, with rising prices squeezing households’ purchasing power, and likely to add to pressure from labour groups for higher wage increases.

Inflation-adjusted real wages, a barometer of consumer purchasing power, dropped in September by 2.4% from a year earlier after a revised 2.8% fall the month before, data from the Ministry of Health, Labour and Welfare showed.

The consumer inflation rate officials use to calculate real wages, which includes fresh food prices but excludes owners’ equivalent rent, slowed to 3.6%, the lowest since September last year.

Still, nominal pay growth in September was 1.2%, after a downward revision of 0.8% in August and only slightly better than in July.

Household spending decreased 2.8% in September from a year earlier, falling for seven months in a row, separate data on Tuesday showed, roughly in line with the median market forecast for a 2.7% decline.

On a seasonally adjusted, month-on-month basis, household spending climbed 0.3%, versus an estimated 0.4% fall.

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Yellen to host China’s He Lifeng for ‘intensive diplomacy’ ahead of APEC

Notable Snippet: Treasury Secretary Janet Yellen will host her Chinese counterpart, Vice Premier He Lifeng, for two days of “intensive diplomacy” in San Francisco on Nov. 9-10, the Treasury Department announced Monday.

The bilateral talks are part of a broader push between American and Chinese officials to make progress on specific issues, ahead of an expected meeting between President Joe Biden and Chinese President Xi Jinping on the sidelines of the Asia Pacific Economic Cooperation forum next week.

“Our two nations have an obligation to establish resilient lines of open communication and to prevent our disagreements from spiralling into conflict,” Yellen wrote Monday in an op-ed for The Washington Post. “But we also know that our relationship cannot be circumscribed to crisis management.”

The Treasury Department is tasked with implementing an August executive order that calls for stricter regulation of high-tech exports to China from U.S. companies that produce semiconductors, quantum technology and artificial intelligence.

“As we take these actions, our policy is to clearly articulate their intent and design to other countries, including China, to reduce the risk of misunderstanding and miscalculation,” Yellen wrote.

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Bank Of Canada seen starting to cut interest rates in April -survey

Notable Snippet: Canadian market participants expect the Bank of Canada (BoC) to start cutting its key policy rate from a 22-year high of 5.00% in April 2024, a month later than the previous forecast, according to a survey released by the central bank on Monday.

The survey showed a median of 27 financial participants expect interest rates to drop to 4.00% in the fourth quarter of 2024, up from an expectation of 3.50% in the previous survey released in July.

The survey was conducted from Sept. 20-28 – before official data showed Canada’s annual inflation rate unexpectedly slowed to 3.8% in September and the economy likely slipped into a shallow recession in the third quarter.

A median of market participants expect inflation to drop to 2.2% by end-2024 and the gross domestic product to grow 1.2% in 2024 versus a year earlier. Both unchanged from the previous survey.

In new projections released last month, the central bank said it expects economic growth to remain muted until the end of 2024, before growth picks up again in 2025.

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Phan Vee Leung
CIO & Founder, TrackRecord