Inflation expectations continue to fall

Thoughts of the Day

University of Michigan’s U.S. inflation expectations for the year ahead fell from 3.5% to 3.1%, and for the 5-year horizon, they dropped from 3% to 2.7% in September. The Fed will likely keep rates unchanged, allowing the past hikes to continue impacting the economy. Fed Chair Powell’s statements on Wednesday are

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Week Ahead

Monday: –

Tuesday: The Euro Area Consumer Price Index is expected to show that prices rose +5.3% Year-on-Year, as it was in July. The core index is expected to moderate to +5.3% YoY from +5.5%.

The Canadian Consumer Price Index is expected to show that prices rose +3.8% Year-on-Year, higher than +3.3% in July.

Wednesday: The UK Consumer Price Index is expected to show that prices rose +7.1% Year-on-Year, up from +6.8% in July. The core index is expected to moderate to +6.8% YoY from +6.9%.

The Federal Reserve is expected to maintain interest rates at the 5.25%-5.50% range in its policy meeting. The Fed Chair Powell’s press conference after the meeting will be key as the market will be looking for hints on how likely they will resume hiking in the policy meetings ahead.

Thursday: The Bank of England is expected to raise interest rates to 5.50% from 5.25% in its policy meeting.

Friday: The core inflation rate is expected to moderate slightly to +3% in August from +3.1%. Later in the day, the BoJ is expected to keep to its dovish policy in its policy decision. Risk is that they may speak of policy adjustments before the end of the year if data permits.

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What Happened Yesterday

Market Movements as of New York Close 15 Sep 23 (17 Sept for Crypto)
  • The US University of Michigan Consumer Sentiment fell off to 67.7 (vs 69.2 expected) in September from 69.5 in August, retreating from the 2-year high of 71.6 in July. The Inflation Expectations for the year ahead dipped to 3.1%, the lowest level since MArch 2021, from 3.5%. The Inflation Expectations for the 5-year horizon also moderated, falling from 3% to 2.7%. 
  • The US Treasury Yield curve narrowed to 0.69% as the US 2 year bond yield rose +0.02% to 5.02% while the 10 year bond yield rose +0.04% to 4.33%.
  • The US stock futures were almost flat through the Asian and early London trading sessions. However, risk sentiment started to take a turn for the worse after Reuters reported that TSMC is telling vendors to delay chip equipment deliveries (see article 2 below). As such, the S&P 500 futures were down -0.19% before the New York session started.
  • The US stock market opened lower from Thursday. The US stock market then slipped through the New York session due to weaker consumer sentiment and weaker risk sentiment from among tech stocks due to the TSMC news. Consequently, the S&P 500 closed the day slightly lower at -1.22% (intraday high: -0.16%, low: -1.28%) the Dow Jones decreased -0.83% on the day (intraday high: -0.01%, low: -0.96%) while the Nasdaq sank -1.75% (intraday high: -0.25%, low: -1.94%).
  • The crypto market remained in a small range over the weekend with Bitcoin and Ether down -0.1% and -0.8% respectively.
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Headlines & Market Impact

Japan’s yen in spotlight ahead of ‘live’ BOJ meeting

Notable Snippet: The U.S. dollar and most major currencies were flatlining in early trades on Monday, barring a blip in sterling, as a Japanese holiday and a bunch of upcoming central bank meetings sucked the air out of markets.

The Bank of Japan’s policy meeting on Friday is the highlight of the week in Asia, after Governor Kazuo Ueda stoked speculation of an imminent move away from ultra-loose policy. In a week packed with central bank meetings, decisions are also due from the U.S. Federal Reserve on Wednesday and Bank of England on Thursday.

Carol Kong, economist and currency strategist at Commonwealth Bank of Australia, said she expects the yen to be volatile leading up to the policy meeting.

“In terms of the direction of travel, the dollar/yen can definitely track higher,” Kong said.

Investors may have potentially misinterpreted Ueda’s comments. And the recent spell of weakness in Japanese wages and possibility prices too could soften and push the BOJ farther from its inflation goal, the case for a BOJ policy tightening is still not very strong, Kong said.

“So that means dollar yen can track higher, particularly if Governor Ueda sounds dovish and dashes hopes of policy tightening at the upcoming meeting,” she said.

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TSMC tells vendors to delay chip equipment deliveries, sources say

Notable Snippet: Taiwan’s TSMC (2330.TW) has told its major suppliers to delay the delivery of high-end chip making equipment, as the world’s top contract chipmaker grows increasingly nervous about customer demand, two sources familiar with the matter said.

Shares in TSMC suppliers including Dutch-based ASML (ASML.AS) declined following the Reuters report.

The instruction by TSMC, which is grappling with delays at its $40 billion chip factory in Arizona, is aimed at controlling costs and reflects the company’s growing caution about the outlook for demand, the sources said.

Suppliers currently expect the delay to be short-term, the sources said, declining to be named as the information is not public.

TSMC has been forced to push back production at the Arizona plant by a year to 2025, as it struggled to recruit workers and faced pushback from unions on efforts to bring in workers from Taiwan.

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‘A real big deal’: Biden backs economic corridor as shifting geopolitical alliances fragment the global economy

Notable Snippet: The attraction, particularly for the world’s developing economies, is the promise of investment that would plug infrastructure gaps in low- and middle-income nations. This would in turn secure regional supply chains, boost trade connectivity and economic activity — all similar to objectives underpinning China’s Belt and Road Initiative, a global infrastructure investment strategy that Beijing launched in 2013.

“The problem with ‘counter (China’s Belt and Road Initiative)’ is that it is a U.S. narrative, while local narratives are nearly always about multiplication/addition, not subtraction,” Evan Feigenbaum, a former U.S. diplomat and currently vice-president for studies at the Carnegie Endowment for International Peace, said on X, formerly Twitter.

This Biden-led initiative will comprise two separate corridors, the east corridor connecting India to the Middle East and the northern corridor connecting the Middle East to Europe. It will include a railway that will supplement existing cross-border maritime and road transport routes between India, the UAE, Saudi Arabia, Jordan, Israel, and Europe.

“This is a big deal. This is a real big deal,” Biden said in Delhi at the launch.

Biden also announced a partnership with the European Union in a new greenfield rail line expansion to develop the Lobito Corridor connecting the southern part of the Democratic Republic of the Congo and northwestern Zambia to regional and global trade markets via the port of Lobito in Angola.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord