The Fed continues to wait and see…

Thoughts of the Day

The US Federal Reserve kept interest rates unchanged as widely expected. However, they pushed out the timing of interest rate cuts and expect less cuts than before. In March, they projected that they would cut 3 times this year and 3 times in 2025 and now they expect just 1 cut for this year, but 4 in 2025. 

They continue to stick to being highly data-dependent for their future policy decisions. The market, however, was cheered by the lower-than-expected inflation prints that were released earlier in the day. The data showed that prices rose +3.3% year-on-year (vs expected and previous print of +3.4%). It also showed that prices remain unchanged at 0.0% on a month-to-month basis (which is lower than the expected +0.1% and previous print of 0.3%). 

The inflation data is showing that inflation is resuming its slow but steady path to the Fed’s 2% target. If more data points confirm this in the week ahead, we are likely to see more dovish comments from the Fed.

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German next-generation chip firm bags $274 million in funding as Europe ramps up semiconductor push

The firm, Black Semiconductor, is looking to use graphene to allow communication between chips. Graphene, a single layer of carbon atoms arranged in a hexagonal lattice, is emerging as a superior conductor to silicon for semiconductors..

The most interesting part is that “The system would use light rather than electricity to transmit data, which the company says would boost the efficiency and speed of chips.” 

Considering how fast fibre optics have made our internet compared to cable, this may result in semiconductors that are much faster than they already are.

Day Ahead

  • US Inflation – Producer Price Index (Headline: +2.2% YoY expected and prev, Core: +2.3% expected and +2.4% prev)
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What Happened Yesterday

Market Movements as of New York Close 12 Jun 24

The US Consumer Price Index (CPI) showed that prices rose +3.3% Year-on-Year (vs +3.4% expected and prev) in May 2024, the lowest print in 3 months. The core index, which excludes food and energy prices, showed that prices rose +3.4% YoY (vs +3.5% expected and +3.6% prev). On a month-on-month basis, the headline inflation rate was 0% (vs +0.1% increase expected and +0.3% prev) while the core inflation rate rose +0.2% (vs +0.3% expected and prev). This confirms that the disinflation trend is underway and the market celebrated with the S&P 500 futures rising +0.67% in immediate reaction and the US 2 year yields falling -0.14% from 4.83% to 4.69%.

Australian Labour Data (Employment Change showed +39.7K jobs being added to the economy (vs +30K expected and +37.4K added last month [revised from +38.5k]). Unemployment rate declined to 4% as expected from 4.1% previously. Participation Rate remained at 66.8% [revised from 66.7%] vs a decline to 66.7% expected.) The AUDUSD rose +0.12% from 0.6655 to 0.6662 in immediate reaction to this data that showed that the jobs market is doing better than expected.

The Federal Reserve kept interest rates at 5.5% as expected in its monetary policy meeting decision for the 7th consecutive time. Fed officials do not expect any rate cuts until they are confident that inflation is headed towards their 2% target. The dot plot showed only 1 rate cut this year and 4 in 2025 (compared to 3 this year and 3 in 2025 during the March meeting). The Fed made no revisions to GDP growth projections and still sees the economy expanding 2.1% in 2024, 2% in 2025 and 2026. Meanwhile, PCE inflation was revised higher for 2024 (2.6% vs 2.4% in the March projection) and next year (2.3% vs 2.2%) but was kept at 2% for 2026. Core PCE inflation was also revised up to 2.8% in 2024 (vs 2.6%) and 2025 (2.3% vs 2.2%) but was kept at 2% for 2026. The unemployment rate is projected at 4% for 2024, the same as expected in March, but is seen slightly higher at 4.2% in 2025 (vs 4.1%).

In his Press conference,  Fed Chair Powell emphasised that the policy is well-positioned, and that the Fed will continue to make decisions meeting by meeting. He also explained that the Fed needs time to determine if the current policy is sufficiently restrictive and that rate hikes are not the base case of any officials. He admitted that the latest “strong” jobs data may be overstated and that there may be downward revisions to it. While the latest inflation print has shown that inflation has eased substantially, Powell said that it is still too high and more good data is needed.

The US stock market opened higher from Tuesday following the weaker than expected CPI print. It then continued rising in the opening hour before consolidating as the market awaited the result of the Federal Reserve policy decision. The Fed’s projections of just 1 interest rate cut this year then weakened the market slightly from the highs. The S&P 500 rose +0.85% on the day (high: +1.34%, low: +0.63%), the Dow Jones edged -0.09% lower (high: +0.96%, low: -0.33%) while the Nasdaq spiked +1.33% (high: +1.80%, low: +0.71%). The S&P 500 and Nasdaq closed at record highs once again.

The crypto market was boosted by the US CPI print with Bitcoin up +1.37% and Ether up +1.76%.
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Headlines & Market Impact

Fed leaves rates unchanged, sees only one 2024 cut despite inflation progress

Notable Snippet:  The Federal Reserve held interest rates steady on Wednesday and pushed out the start of rate cuts to perhaps as late as December as policymakers sketched out their view of an economy that remains virtually unchanged across its major dimensions for years to come.

With growth and unemployment lodged at levels better than the U.S. central bank considers sustainable in the long run, Fed Chair Jerome Powell said policymakers were content to leave rates where they are until the economy sends a clear signal that something else is needed – through either a more convincing decline in price pressures or a jump in the unemployment rate.

So far, Powell noted in a press conference after the end of a two-day policy meeting, inflation had fallen without a major blow to the economy, and he said there was no reason to think that can’t go on.

“These dynamics can continue as long as they continue,” Powell said. “We’ve got a good strong labour market. We think we’ve been making progress toward the price stability goal. We’re asking … is our policy stance about right? And we think yes, it’s about right.”

The result is the Fed accepting a slow expected decline in inflation back towards its 2% target, with the central bank’s preferred inflation measure – the personal consumption expenditures (PCE) price index – virtually unchanged at the end of this year from its current level and the number of rate cuts held to a single quarter-percentage-point reduction.

Those rate reductions are projected to gather pace next year, with Powell deferring on the timing.

“We don’t make decisions about future meetings until we get there,” he said. “Really, it’s going to be not just the inflation readings. It’s going to be the totality of the data, what’s happening in the labour market, what’s happening with the balance of risks, what’s happening with the forecasts, what’s happening with growth. You’re looking at all of that.”

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EU hits Chinese EVs with tariffs, drawing stern words from Beijing

Notable Snippet:  Less than a month after Washington announced plans to quadruple duties for Chinese EVs to 100%, Brussels said it would set additional tariffs ranging from 17.4% for BYD to 38.1% for SAIC (600104.SS)  on top of the standard 10% car duty. It said this was to combat excessive subsidies.

That equates to billions of euros of extra costs for the carmakers at a time when they are struggling with slowing demand and falling prices at home, according to Reuters calculations based on 2023 EU trade data.

European automakers, meanwhile, are being challenged by an influx of lower-cost EVs from Chinese rivals. The Commission estimates Chinese brands’ share of the EU market has risen to 8% from below 1% in 2019 and could reach 15% in 2025. It says prices are typically 20% below those of EU-made models.

Andrew Kenningham, chief Europe economist at Capital Economics, said the EU decision marked a big change for its trade policy because, although it used trade defences against China often, it had not done so for such an important industry.

European policymakers are keen to avoid a repeat of what happened with solar panels a decade ago when the EU took only limited action to curb Chinese imports and many European manufacturers collapsed. The EU launched an anti-subsidy investigation into Chineses EVs in October.

Shares in some of Europe’s biggest carmakers which make a big portion of their sales in China, fell on fears of Chinese retaliation. Some like BMW (BMWG.DE) will also now incur duties on their EVs made in China and sold in Europe.

Chinese foreign ministry spokesperson Lin Jian said the EU’s investigation was a “typical case of protectionism” and tariffs would damage China-EU economic cooperation and the stability of the global automobile production and supply chains.

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U.S. is reportedly weighing further limits on China’s access to AI chip tech

Notable Snippet: The Biden administration is weighing actions that would target high-tech chip architecture known as gate all-around, Bloomberg reported, citing sources familiar with the matter. GAA refers to new transistor architecture that could lead to better performance and lower power consumption.

South Korea’s Samsung Electronics has already started production for 3-nanometer chips with GAA technology. Taiwan Semiconductor Manufacturing Company reportedly plans to include GAA in its upcoming 2-nanometer chips.

Bloomberg noted its sources said the U.S. is still “determining the scope of a potential rule” and that it was not immediately clear when that process would conclude. The report said the U.S. measures would seek to make it more difficult for China to put together advanced computing systems required to build and run AI models.

The U.S. Department of Commerce and the Bureau of Industry and Security, which oversees export controls, did not immediately respond to CNBC’s request for comment.

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Phan Vee Leung
CIO & Founder, TrackRecord