Should we start fearing

Thoughts of the Day

The Federal Reserve’s hint of prolonged higher rates rattled markets, sending 10-year bond yields to 16-year highs at 4.49%. jumping nearly 0.20% from before the Fed’s policy meeting the day before. The path forward remains uncertain, and the FED is highly data dependent for now. Expect markets to remain volatile

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Day Ahead

JPY: The Bank of Japan is expected to keep policy unchanged. There is a risk that they may speak of a tweak in policy in the months ahead because the ultra-easy policy may not be necessary as the risk of deflation has now abated.

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What Happened Yesterday

Market Movements as of New York Close 21 Sep 23
  • Bank of England Voted 5-4 In Favour Of Maintaining Interest Rates, surprising the market which was expecting a hike of 0.25%. They did, however, increase quantitative tightening by committing to cut bond holdings by 100 billion GBP over the next 12 months as expected (faster than the 80 bio GBP over the past year). With 4 members voting for a 0.25% hike, the decision was a close call, and the BoE reiterated that they stand ready to hike rates further if required to control inflation. GBPUSD dropped -0.5% from 1.2299 to 1.2239 in immediate reaction, but recovered as the day progressed.
  • The US weekly jobless claims fell 20,000 to 201,000 (expected 225K, previous 221K) for the week ending 16 Sep, showing that the job market remains strong as the number of Americans filing new unemployment claims dropped to the lowest level since late January. Continuing Claims also fell to 1662K, an 8-month low, (expected 1695K, previous 1683K), indicating that the unemployed are finding new jobs easier than before. The better than expected job data increased fears that the US Federal Reserve’s case for keeping interest rates higher for longer is strengthening and was one of the factors pushing the US 10-year bond yields to 16-year highs on the day.
  • Japanese inflation showed that prices rose 3.2% (expected 3.0% & previous 3.3%). However, market reaction was muted as investors await the policy decision from the Bank of Japan later today. 
  • The US Treasury Yield curve inversion narrowed to 0.63% as the US 2 year bond yield  stayed unchanged while the 10 year bond yield jumped 0.14% to 4.49% as fears of the Fed keeping interest rates higher for longer spooked bond investors. 
  • The US stock market continued to suffer from the Fed’s hawkish tone from the day before. All 3 of the major indices fell more than 1% (S&P500 -1.64%, Dow – 1.08%, Nasdaq -1.84%) as US bond yields jumped higher and risk sentiment remained weak. 
  • The crypto market weakened as risk aversion took hold on the day. Bitcoin fell 2.08% and Ether dropped -2.3% on the day.
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Headlines & Market Impact

Where key issues stand as UAW closes in on extended strikes against GM, Ford and Stellantis

Notable Snippet: 

With a deadline for expanded strikes by the United Auto Workers against the Detroit automakers closing in, the “serious progress” called for by the union seems all too elusive.

The UAW and General Motors, Ford Motor and Stellantis are all holding their ground on demands, and it appears likely the union will strike additional plants at some, if not all, of the automakers at noon Friday — as it’s warned.

Headline economic issues and benefits such as hourly pay, retirement benefits, cost-of-living adjustments, wage progression and work-life balance remain central to the discussions. All issues play into one another and can change based on demand priorities. In the end, it comes down to money, and how much a deal will cost the companies. Wall Street is currently expecting record costs to come from a settlement, though still below the $6 billion to $8 billion in demands the union would like, according to Wells Fargo.

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Bank of England ends run of 14 straight interest rate hikes after cooler-than-expected inflation

Notable Snippet: The Bank of England on Thursday ended a run of 14 straight interest rate hikes after new data showed inflation is now running below expectations.

The bank had been hiking rates consistently since December 2021 in a bid to rein in inflation, taking its main policy rate from 0.1% to a 15-year high of 5.25% in August.

The British pound dropped 0.7% against the U.S. dollar shortly after the decision.The Monetary Policy Committee voted 5-4 in favor of maintaining this rate at its September meeting, with the four members preferring another 25 basis point hike to 5.5%. 

The Bank of England has been treading a narrow path between bringing inflation back to Earth and tipping the so far surprisingly robust economy into recession. U.K. GDP shrank by 0.5% in July, while a number of British companies issued profit warnings on Tuesday.

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EU trade chief seeks more balanced economic ties on China visit

Notable Snippet: Europe’s trade chief will push Beijing for fewer restrictions on European businesses on a four-day visit to China, when he can expect tough conversations over a planned EU investigation into electric car imports. 

Trade Commissioner Valdis Dombrovskis will take part in a joint economic and trade dialogue, meet Chinese officials and European companies active in China and deliver two speeches during his Sept. 23-26 trip to Shanghai and Beijing.

The enquiry may result in a frostier reception in China, but sources with knowledge of the trip say it could usefully lead to a more focused discussion on “trade irritants”. The EU blames its 400 billion euro ($426.32 billion) trade deficit partly on Chinese restrictions on European companies and says the EU market is largely open.

The EU is also expected to be asked during the visit to clarify what it means by “de-risk” in the context of China.EU officials say the bloc is seeking to curb its reliance on the world’s second largest economy, particularly for materials and products needed for its green transition, but wishes to retain trade ties.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord