Higher interest rates without a Fed hike

Thoughts of the Day

The yield on long-term US Treasury bonds have surged over 50bps post the FED’s Sept 20 meeting, highest level since the 2007. This tightens credit conditions and raises borrowing costs for businesses & consumers, even w/o official rate hikes. This possibly reduces the FED’s need for more rate hikes if yields continue rising.

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Day Ahead

The US ADP Non-Farm Employment Change is expected to show 160k jobs being added to the economy in September, slightly less than the +177k added in August.

The OPEC+ will be meeting to discuss their oil production limits.

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What Happened Yesterday

Market Movements as of New York Close 3 Oct 23
  • Fedspeak:
    Bostic (2024 voter, known dove):
    “Fed is in restrictive territory and that is helping inflation fall. As long as expectations don’t spike, the Fed can afford to be patient. The Fed should be on hold for a long time.”
    Mester (2024 voter, known hawk): “Likely to favour hike at next meeting if current economic situation holds.”
  • The Reserve Bank of New Zealand maintained the official cash rate (OCR) at 5.5% during its October meeting, as the committee agreed that interest rates may need to remain at a restrictive level for a more sustained period of time. While this extension of the rate pause for the third straight meeting was expected, the lack of reference to a November rate hike was deemed by the market as more dovish than expected. The NZD fell more than -0.8% against the USD from 0.5921 level to the 0.587 level as a result. In the meeting minutes, the RBNZ noted that interest rates are constraining economic activity and reducing inflationary pressure as required and that weakening global demand is putting downward pressure on New Zealand export volumes and prices. The downwards pressure on the NZD is likely due to the fears of weakened export revenue in New Zealand.
  • The US JOLTS jobs opening showed that the number of jobs available jumped to 9.61 million, much higher than the 8.8 mil expected and 8.92 mil previously (revised from 8.827 mil). The 10 year US treasury yields rose +0.05% from 4.70% to 4.75% while the S&P 500 fell more than -0.8% from 4277.69 to the 4240 level in immediate reaction.
  • The US Treasury Yield curve inversion narrowed to 0.34% as the US 2-year bond yield rose +0.03% to 5.15% while the 10-year bond yield spiked +0.12% to 4.81% following the release of the US JOLTS data.
  • The US stock futures traded sideways through the Asian before falling during the London trading session. The S&P 500 futures were down -0.57% before the New York session began.
  • The US stock market opened lower from Monday. It then slid heavily through the New York session due to the stronger than expected US JOLTS job openings data. Consequently, the S&P 500 closed -1.37% (high: -0.17%, low: -1.68%), the Dow fell -1.29% (high: -0.10%, low: -1.55%) while the Nasdaq plunged -1.83% (high: -0.12%, low: -2.25%).
  • Despite the stronger than expected labour data, the crypto market remained unaffected with Bitcoin down -0.3% and Ether down -0.4% on the day.
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Headlines & Market Impact

Yen surges against dollar, leads some to suspect intervention

Notable Snippet: The yen strengthened sharply against the dollar on Tuesday, leading some market participants to believe Japanese policymakers had intervened to support the currency, although others said the size of the move was not convincing enough.

Traders have been on watch for weeks for a possible intervention by Japanese officials to combat a sustained depreciation in the yen.

Tuesday’s move saw the dollar break above the 150 level for the first time since October 2022, before tumbling to a low of 147.30 as the yen surged.

The dollar rose as high as 150.165 against the yen. It was recently at 148.76 yen.

Some analysts noted that Tuesday’s move in the yen was far smaller than when policymakers intervened last year to support the currency. The yen jumped about 4%, peak to trough, when Japan intervened in September and October of 2022, compared to Tuesday’s move of roughly 2%.

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Dalio says China-US relations are ‘on the brink of red lines’

Notable Snippet: Ray Dalio, founder of hedge fund Bridgewater Associates, said on Tuesday that the relationship between China and the United States is “on the brink of red lines,” although he does not see a war on the way.

Speaking at the Greenwich Economic Forum, Dalio said that there are irreconcilable differences between the world’s two biggest economies, citing as examples the independence of Taiwan, the battle for chips and geopolitics.

“U.S.-China relationship relations are in a number of areas on the brink of red lines,” he told the audience of investors, adding that a war is unlikely.

“Neither country wants to go to war. Everybody’s afraid of what that war would be physically and devastating economically and politically.”

“These issues will remain and probably (be) intensified over the next five to 10 years.”

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US Treasury’s Yellen is ‘very optimistic’ about outlook for US economy

Notable Snippet: U.S. Treasury Secretary Janet Yellen said on Tuesday she was very optimistic about the outlook for the U.S. economy, adding that inflation was coming down in the short term and the labour market was “extremely strong.”

“I am very optimistic about the U.S. economic outlook. Short term: inflation is coming down in the context of an extremely strong labour market,” Yellen said at a Fortune CEO event on Tuesday.

“Medium term: we are now engaging in a very substantial program of investments to strengthen our economy, to boost our productive capacity,” Yellen said.

U.S. gross domestic product is still expanding at a pace well above what Federal Reserve officials regard as the non-inflationary growth rate of around 1.8%, often referred to as the “potential” growth rate.

U.S. GDP expanded at a 2.4% annualised rate in the second quarter, and some estimates put the current quarter’s pace at more than twice that.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord