Risk of shutdown rising…

Thoughts of the Day

The US faces a potential government shutdown if budget legislation isn’t passed by the September 30 deadline. This could lead to a Moody’s ratings downgrade and would add to the existing pressure on the bond market. Expect increased market volatility as the deadline nears

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Day Ahead

Nothing noteworthy on the horizon today.

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What Happened Yesterday

Market Movements as of New York Close 26 Sep 23
  • In its monetary policy meeting minutes, the BoJ said that members agreed to maintain current monetary easing to stably and sustainably hit the price target of 2%. It also said that there was still a big distance before tweaking negative rate policy and inflation could overshoot expectations as a change in corporate behaviour broadens.
  • The Australian Monthly CPI Indicator showed that prices rose 5.2% Year-on-Year in August as expected, higher than July’s print of 4.9%. Although there was a sudden change in trend in inflation, the print is still lower than the 16 preceding data points. The AUDUSD rose +0.23% from 0.639 to 0.640 in reaction to the print but has since returned below 0.639.
  • The US Treasury Yield curve inversion narrowed to 0.48% as the US bond curve continued to steepen with the 10-year yield rising +0.01% to 4.56% while the 2-year bond yield fell -0.05% to 5.04%.
  • The US Conference Board consumer confidence for September was weaker than expected at 103 (vs 105.5 expected and 108.7 prev [revised from 106.1]. US New Home Sales fell -8.7% Month-on-Month in August, a reversal from July’s growth of 8% MoM [revised from 4.4%]. The US House Price Index rose 4.6% YoY in July, increasing from 3.2% in June [revised from 3.1%].
  • The US stock futures fell through the Asian and London trading sessions with the S&P 500 futures down -0.66% before the New York session began.
  • The US stock market opened the day weaker and continued to trade lower on the back of various factors (possible downgrade of US credit by Moody’s -see headline 2, Fed Kashkari’s comments of higher interest rates- headline 1 and weaker US consumer confidence). Consequently, the S&P 500 closed -1.47% lower (high: -0.56%, low: -1.65%), the Dow slipped -1.14% (high: -0.37%, low: -1.29%) while the Nasdaq sank -1.51% (high: -0.61%, low: -1.78%). The added weakness in the Nasdaq can also be attributed to the U.S. Federal Trade Commission’s landmark monopoly lawsuit against Amazon (-4.03%)- see headline 3.
  • The crypto market continues to trade sideways with Bitcoin down -0.3% and Ether up +0.3% on the day.
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Headlines & Market Impact

Fed’s Neel Kashkari sees 40% chance of ‘meaningfully higher’ interest rates

In an essay the central bank official posted Tuesday, he said there’s a strong case to be made that the U.S. economy is headed toward a “high-pressure equilibrium.” Such a condition would involve continued growth featuring strong consumer spending and “the economic flywheel spinning.”

“The case supporting this scenario is that most of the disinflationary gains we have observed to date have been due to supply-side factors, such as workers reentering the labour force and supply chains resolving, rather than monetary policy restraining demand,” he wrote in a post titled, “Policy Has Tightened a Lot. Is It Enough?”

Noting that rate-sensitive areas such as housing and autos have held strong despite Fed tightening, Kashkari remarked, “These dynamics raise the question, How tight is policy right now? If policy were truly tight, would we observe such robust activity?”

“Once supply factors have fully recovered, is policy tight enough to complete the job of bringing services inflation back to target? It might not be, in which case we would have to push the federal funds rate higher, potentially meaningfully higher,” Kashkari said. “Today I put a 40 percent probability on this scenario.”

Of course, that still means he assigns a 60% chance of the Fed sticking to its “soft-landing” goal, with inflation coming back to the goal without a harmful recession. He cited “the actual progress we have made against inflation and the actual labour market performance” as factors contributing to policymakers reaching their goal.

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Biden calls on Congress to fund government as Moody’s and Wells Fargo warn of shutdown effects

Notable Snippet: President Joe Biden on Tuesday asked Congress in a social media post to fund the government as warnings grew that a looming shutdown could harm the U.S. credit rating and dollar.

Funding appropriation for federal government operations is set to expire Saturday, leaving just days for Congress to pass all 12 appropriations bills and Biden to sign.

Failure to pass the remaining bills would cause federal workers to be furloughed, agencies to shutter and place many essential programs in peril.

Moody’s and Wells Fargo warned this week a shutdown would negatively affect the U.S. economy. Moody’s, the only major credit rating agency to still give U.S. sovereign credit a top AAA rating, on Monday said a shutdown would affect that rating.

Another major credit rating agency, Fitch, last month downgraded the U.S. long-term foreign-currency issuer default rating. “A shutdown would be credit negative for the U.S. sovereign,” Moody’s analysts wrote in a note.

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Amazon faces landmark monopoly lawsuit by FTC

Notable Snippet: The US Federal Trade Commission filed a long-awaited antitrust lawsuit against Amazon.com on Tuesday (Sep 26) and asked the court to consider forcing the online retailer to sell assets as the government accuses Big Tech of monopolising the most lucrative parts of the internet.

The FTC accused Amazon, a company started in a garage in 1994 and today worth US$1.3 trillion, of fighting efforts by sellers on its online marketplace to offer products more cheaply on other platforms. Amazon forces sellers to use its warehouses and delivery services, inflating costs for consumers and sellers, the FTC said.

Amazon is a monopoly and misuses its powers, according to the FTC, which quotes a seller as saying: “We have nowhere else to go and Amazon knows it.”

The lawsuit had been expected after years of complaints that Amazon.com and other tech giants abused their dominance of search, social media and online retailing to become gatekeepers on the most profitable aspects of the internet.

The need to take action against Big Tech has been one of the few ideas that Democrats and Republicans have agreed on, and the FTC chief has been particularly concerned about Amazon’s power.

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Phan Vee Leung
CIO & Founder, TrackRecord