Summary:
Last Week Review
SLUGGISH US INFLATION WARRANTS A FED RATE CUT THIS WEEK. US CPI (Aug) came in at 2.5% yoy as expected, cooling from 2.9% in the previous month. Initial JOBLESS CLAIMS also picked up, with around 2000 new jobless claims from the previous week. However on a monthly basis, given that CORE CPI & PPI (Aug) were higher than expected, the Federal Reserve’s rate cut bets were higher at 25bps than 50bps (70-80% versus 20-30%). But now reports from the Wall Street Journal and Financial Times last week fueled speculation among investors that the US central bank may decide on a more aggressive rate cut of 50 basis points. Fed Fund Rate futures estimate a 61% chance of a 50 basis point cut, shooting up from around 15% last week.
• Both the S&P 500 and Nasdaq Composite marked their best weekly performance in 2024 as investors await the outcome of this week’s FOMC Meeting. Investors continued to show strong interest in large-cap Technology and Semiconductor stocks, where they contributed to last week’s rally. Over the past week, the S&P 500 gained 4%, while the Nasdaq surged 5.9%, marking the strongest weekly gain this year for both indices. The Dow Jones Industrial Average also gained 2.6% during the same week.
• CURRENCY & FIXED INCOME: The DOLLAR INDEX (DXY), which measures the strength of the Dollar against 6 other major world currencies including the Euro, Yen, and Pound, fell 0.31% to 100.70. The benchmark 10-year US TREASURY yield fell 30 basis points in about 2 weeks. The 2-year yield, which is more closely linked to monetary policy expectations, is at around 3.571% and down from around 3.94% two weeks ago.
• US POLITICAL MAP: On Sunday, there was a second assassination attempt on Donald Trump. This time, the Secret Service spotted a rifle sticking out of a fence next to a golf course in Florida where Trump was playing. The suspect was arrested immediately, and Trump confirmed that he is safe and sound. Regarding the impact on the US ELECTION, Republicans and Democrats should try to avoid politicizing the failed assassination attempt.
• EUROPE & ASIA MARKETS: CHINA’S economic recovery efforts are encountering a steep road as capital inflows shrink and outflows increase, forcing the central bank to act more vigorously to protect the CNH exchange rate. Official Chinese data out on Saturday showed that new home prices fell at the fastest pace in 9 years, industrial production growth slowed to the lowest level in 5 months, foreign direct investment fell 31.5% and retail sales weakened further. Meanwhile, on Friday, the Biden administration imposed steep tariff increases on imports from China, including a 100% duty on electric vehicles.
• EUROPEAN CENTRAL BANK more aggressively cut their benchmark rate to 3.65% from 4.25% previously, in line with GERMAN CPI (Aug) deflation which contracted -0.1% mom (as expected), compared to +0.3% in July. JAPAN’S GDP rose in Q2 this year to 0.7% qoq, albeit missing the 0.8% estimate, but a big improvement from the – 0.6% recession in the previous quarter.
This Week’s Outlook
• This week all the attention is on the FOMC MEETING taking place on SEPTEMBER 17-18, where an interest rate cut of 25 basis points is widely expected. Ahead of the FOMC Meeting decision which is due to be released early Thursday morning at 0100WIB, economists on Wall Street are still divided on the magnitude of the first rate cut.
• JPMORGAN expects the US Federal Reserve to be more aggressive by cutting the Fed Fund Rate by 50bps; followed by 150bps next year. This expectation saw the US DOLLAR fall to a more than 1-year low against the YEN, and US TREASURY yields flatten. Projections for 2026 and 2027 are expected to remain close to long-term rates of 2.75% to 3%. If the Fed opts for a more cautious approach and cuts rates by 25 basis points next week, the median point for the year would likely reflect only 75 basis points of easing, according to economists’ views. Meanwhile, NOMURA economists think that a 25 bps rate cut at the upcoming meeting is the most likely scenario, followed by a further 50bps cut next year.
• Aside from the FOMC meeting, key US economic events this week include US retail sales and industrial production reports on Tuesday, followed by the release of initial jobless claims data on Thursday, as well as a series of housing data such as Building Permits, Housing Starts, and housing starts: Building Permits, Housing Starts, and Existing Home Sales (all for Aug).
• ASIA & EUROPE MARKETS: JAPAN and HONG KONG will release inflation data, investors are also looking forward to INDONESIA, TAIWAN, CHINA, & on Friday’s interest rate decision from the BANK OF JAPAN, where it is expected to keep its short-term policy rate target fixed at 0.25%, after raising rates twice this year. THE EUROPEAN CENTRAL BANK cut rates by 25 bps last week, but ECB President Christine Lagarde dampened expectations for a further cut next month. The ECB will almost certainly have to wait until December before cutting rates again to ensure it doesn’t make the policy mistake of easing too quickly, ECB Governing Council member Peter Kazimir said on Monday.
• THE BANK OF ENGLAND is expected to keep its key interest rate at 5% on Thursday, after initiating monetary policy easing with a 25bps reduction in August. Futures markets estimate a roughly 38% chance of a quarter-point rate cut on Thursday, compared with 20% on Friday. UK & EUROZONE INFLATION (Aug) figures as well as UK Retail Sales for the same Aug month will be the drivers of European market interest.
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