More central banks are turning dovish…

Thoughts of the Day

The Swiss National Bank cut interest rates by 0.25% to 1.25%, as expected, because of disinflationary pressure and the strong Swiss franc. The Bank of England, on the other hand, kept interest rates unchanged by noted that the decision between cutting or keeping interest rates unchanged was “finely balanced”. Two of the 9 committee members voted for a cut.
These are signs that the central banks of the western economies are starting to believe that inflation may be a problem of the past and interest rates are likely to head lower in the months ahead.
If the US Federal Reserve follow suit in the weeks ahead, risk asset prices will start to do even better when the data confirms that the disinflation process is well underway in the US.

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Tradertainment

This effect was named the “Thatcher effect” as it was first demonstrated on a photo of British prime minister Margaret Thatcher back in 1980.

Day Ahead

  • Nothing noteworthy
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What Happened Yesterday

Market Movements as of New York Close 20 Jun 24
  • The Bank of England decided to keep the Bank Rate at 5.25% as expected during its June meeting. Two out of the nine committee members voted to cut interest rates to 5%, and some policymakers noted the decision was “finely balanced.” Recent economic data indicates that inflation has returned to the 2% target, influenced by moderating inflation expectations and lower energy prices. Although GDP growth has surpassed expectations, economic surveys suggest a slower pace ahead. The Monetary Policy Committee (MPC) acknowledged a looser labour market but committed to maintaining a restrictive monetary policy until inflation risks diminish sustainably. They remain cautious about persistent inflationary pressures and will adjust policies as necessary based on future economic data and forecasts. Reaction in the GBPUSD was insignificant.
  • The Swiss National Bank cut its interest rates by 0.25% from 1.50% to 1.25% during its June meeting as expected. This follows a cut done in its March meeting earlier this year. The move was done in light of disinflationary pressure and a stronger Swiss Franc. Additionally, the SNB also forecasted inflation rate at an average of 1.3% in 2024, 1.1% in 2025, and 1.0% in 2026 if rates remain at 1.25%. The USDCHF traded +0.64% higher in immediate reaction to the rate cut, rising from 0.8839 to 0.8896. The EURCHF rose +0.58% in immediate reaction from 0.9488 to 0.9543.
  • The US stock market opened slightly higher from Tuesday.  The S&P 500 and Nasdaq took a breather as Nvidia fell -3.54% on the day, dragging the tech sector lower. The energy sector and utilities sector rose +1.86% and +0.89% allowing the Dow Jones index to climb through the session  The S&P 500 was down -0.25% on the day (high: +0.34%, low: -0.57%), the Dow Jones rose +0.77% (high: +1.02%, low: -0.15%) while the Nasdaq slipped -0.79% (high: +0.36%, low: -1.12%).

The crypto market traded slightly lower along with the tech stocks. Bitcoin was down -0.25% while Ether is down -1.33%

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Headlines & Market Impact

Japan’s demand-led inflation slows, clouds BOJ rate hike path

Notable Snippet:   Japan’s core inflation accelerated in May due to energy levies but an index that strips away the effect of fuel slowed for the ninth straight month, data showed on Friday, complicating the central bank’s decision on how soon to raise interest rates.

The slowdown in so-called “core core” inflation, which is closely watched by the Bank of Japan as a key gauge of demand-driven price moves, casts doubt on the bank’s view that rising wages will underpin consumption and keep inflation on track to durably hit its 2% target.

The core consumer price index (CPI), which excludes volatile fresh food, rose 2.5% in May from a year earlier, government data showed, accelerating from the previous month’s 2.2% gain due largely to a hike in the renewable energy levy. It was roughly in line with a median market forecast for a 2.6% gain.

But inflation as measured by an index stripping away both fresh food and fuel slowed to 2.1% in May from 2.4% in April, marking the lowest year-on-year increase since September 2022.

Private-sector service inflation slowed to 2.2% in May from 2.4% in the previous month, suggesting companies remained cautious about passing on labour costs.

Recent weak signs in consumption remain a concern. Japan’s economy contracted in the first quarter due in part to a 0.7% drop in consumption as rising living costs discourage households from boosting spending.

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US labour market, housing data point to slowing economy

Notable Snippet:  First-time applications for U.S. unemployment benefits fell moderately last week, while new housing construction dropped to the lowest level in nearly four years in May, suggesting that economic activity remained moderate in the second quarter.

The data on Thursday combined with tepid retail sales last month to keep a September interest rate cut from the Federal Reserve on the table. Financial markets are anticipating one or more rate cuts this year despite policymakers’ more hawkish outlook. Momentum is ebbing under the weight of the higher borrowing costs engineered by the U.S. central bank.

Initial claims for state unemployment benefits declined 5,000 to a seasonally adjusted 238,000 for the week ended June 15, the Labor Department said. That reversed only about a third of the surge in the prior week, which had pushed up claims to a 10-month high. Economists polled by Reuters had forecast 235,000 claims in the latest week.

Claims had soared in the prior week, with a dozen states reporting significant increases. Some states reported a rise in layoffs in the education, transportation and warehousing, accommodation and food services, manufacturing as well as agriculture, healthcare and retail industries.
The four-week average of claims, which smoothes out some of the volatility in the data, increased 5,500 to 232,750 last week. That was the highest reading since mid-September.

A separate report from the Commerce Department’s Census Bureau showed housing starts fell 5.5% to a seasonally adjusted annual rate of 1.277 million units last month, the lowest since June 2020. Economists had forecast that it would rebound to a rate of 1.370 million units.

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TikTok says US ban is inevitable without a court order blocking law

Notable Snippet: TikTok and Chinese parent ByteDance on Thursday urged a U.S. court to strike down a law they say will ban the popular short video app in the United States on Jan. 19, saying the U.S. government refused to engage in any serious settlement talks after 2022.

“This law is a radical departure from this country’s tradition of championing an open Internet, and sets a dangerous precedent allowing the political branches to target a disfavored speech platform and force it to sell or be shut down,” ByteDance and TikTok argue in asking the court to strike down the law.

TikTok says any divestiture or separation – even if technically possible – would take years and it argues that the law runs afoul of Americans’ free speech rights.

Further, it says the law unfairly singles out TikTok for punitive treatment and “ignores many applications with substantial operations in China that collect large amounts of U.S. user data, as well as the many U.S. companies that develop software and employ engineers in China.”

ByteDance recounted lengthy negotiations between the company and the U.S. government that it says abruptly ended in August 2022. The company also made public a redacted version of a 100-plus page draft national security agreement to protect U.S. TikTok user data and says it has spent more than $2 billion on the effort.

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Phan Vee Leung
CIO & Founder, TrackRecord