No reason to hike

Thoughts of the Day

The headline US CPI data for August rose to 3.7% (EXP 3.6%, PREV 3.2%), a touch higher than expected but the core index, excluding food and energy, eased to +4.3% (same as EXP, PREV +4.7%). This indicates that inflation continues to moderate towards the Fed’s 2% target. Given recent data and the slowing job market, the Fed is likely to keep interest rates unchanged in the upcoming meeting.

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Day Ahead

The ECB is expected to keep interest rates unchanged at 4.25% in its monetary policy meeting.

The US Producer Price Index is expected to show that prices rose +1.2% Year-on-Year, up from +0.8% in July. The core index is expected to moderate to +2.2% YoY from +2.4%.

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What Happened Yesterday

Market Movements as of New York Close 13 Sep 23

The US Consumer Price Index (CPI) showed that prices rose +3.7% Year-on-Year (vs +3.6% expected), up from +3.2% in July. The core index moderated to a +4.3% increase YoY, down from +4.7%. The US Dollar Index jumped 0.21% from 104.75 in reaction to a high of 104.95 but the move quickly faded. The DXY then continued to go lower to the 104.6 level before oscillating around that level after. The S&P 500 futures also exhibited a similar reaction with a -0.27% drop from 4512 to 4500 and then rising to a high of 4517.5. The US 10 yr bond yields rose +0.03% from 4.32% on the release of the data but fell to the 4.29% level after. Risk sentiment remains resilient despite the small upside surprise in the headline number.

The Australian unemployment rate remained at 3.7% as expected while +64.9k jobs were added to the Aussie economy (exp +23K, prev -1.4k [revised from -14.6k]). The AUD jumped 0.54% from 0.6420 to a high of 0.6455, but faded back to 0.6425 in a short time.

The US Treasury Yield curve remained at 0.71% as the US 2 year bond yield and the 10 year bond yield both fell -0.02% to 4.96% and 4.25% respectively.

The US stock futures traded within a small range during the Asian and London trading hours, remaining almost flat just before the release of the US CPI data.

The US stock market opened almost unchanged from Tuesday. The US stock market then attempted to go higher in the early hours of the New York session but reversed course at midday. Consequently, the S&P 500 closed the day slightly higher at +0.12% (intraday high: +0.39%, low: -0.19%) the Dow Jones slipped -0.20% on the day (intraday high: +0.35%, low: -0.39%) while the Nasdaq gained +0.38% (intraday high: +0.82%, low: -0.22%).

The short squeeze in the crypto market continues with Bitcoin up +1.6% on the day and Ether up +1.0% on the day, possibly due to the lack of sellers.

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Headlines & Market Impact

Tech titans meet US lawmakers, Musk seeks ‘referee’ for AI

Notable Snippet: Musk said the meeting was a “service to humanity” and said it “may go down in history as very important to the future of civilization.” Musk confirmed he had called AI “a double-edged sword” during the forum.

Zuckerberg said Congress “should engage with AI to support innovation and safeguards. This is an emerging technology, there are important equities to balance here, and the government is ultimately responsible for that.” He added it was “better that the standard is set by American companies that can work with our government to shape these models on important issues.”

More than 60 senators took part. Lawmakers said there was universal agreement about the need for government regulation of AI.

“We are beginning to really deal with one of the most significant issues facing the next generation and we got a great start on it today,” Democratic Senate Majority Leader Chuck Schumer, who organised the forum, told reporters after the meetings. “We have a long way to go.”

Republican Senator Todd Young, a co-host of the forum, said he believes the Senate is “getting to the point where I think committees of jurisdiction will be ready to begin their process of considering legislation.”

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Fed economists sound alarm on hedge funds gaming US Treasuries

Notable Snippet: Researchers at the Federal Reserve have issued warnings in recent weeks about possible disruptions in U.S. Treasuries due to the return of a popular hedge fund trading strategy that exacerbated a crash in the world’s biggest bond market in 2020.

Hedge funds’ short positions in some Treasuries futures – contracts for the purchase and sale of bonds for future delivery – have recently hit record highs as part of so-called basis trades, which take advantage of the premium of futures contracts over the price of the underlying bonds, analysts have said.

The trades – typically the domain of macro hedge funds with relative value strategies – consist of selling a futures contract, buying Treasuries deliverable into that contract with repurchase agreement (repo) funding, and delivering them at contract expiry.

In two separate notes in recent weeks, economists at the Fed have highlighted potential financial vulnerability risks related to these trades, which are taking place at a time of volatility in the U.S. government bond market due to higher interest rates and uncertainty over future monetary policy actions.

“Cash-futures basis positions could again be exposed to stress during broader market corrections,” Fed economists said in an Aug. 30 note. “With these risks in mind, the trade warrants continued and diligent monitoring.”

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Google is cutting hundreds of jobs in its recruiting organisation

Notable Snippet: Google is cutting hundreds of jobs in its global recruiting organisation as part of a broader pullback in hiring over the next several quarters, CNBC has confirmed.

“We unfortunately need to make a significant reduction to the size of the recruiting organisation,” Brian Ong, Google’s recruiting vice president, told employees in a Wednesday video meeting, a recording of which was obtained by CNBC.

“It’s not something that was an easy decision to make, and it definitely isn’t a conversation any of us wanted to have again this year,” Ong said. “Given the base of hiring that we’ve received the next several quarters, it’s the right thing to do overall.”

In January, Alphabet-owned Google announced it was cutting 12,000 jobs, affecting roughly 6% of the full-time workforce. The layoffs occurred across the company, including in Google’s recruiting organisation. While Google has been in cost-cutting mode since last year, Alphabet reported a 7% increase in second-quarter revenue, which was better than analysts expected.

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Phan Vee Leung
CIO & Founder, TrackRecord