Mixed Expectations on Fed's Future Cuts: Labor Data Holds the Key
The Fed’s rate cut cycle, which has been the main focus of global markets for a while, kicked off with a jumbo cut. Pre-meeting debates on whether the cut would be 25 basis points or 50 basis points have now shifted to discussions on the pace of the Fed's future cuts.
Nearly all policymakers supported the 50 basis point rate cut with an 11-to-1 vote. However, the dot plot reveals that policymakers are projecting two additional 25 basis point cuts for the remainder of the year, implying that this 50 basis point cut was a front-loaded move to support the labor market.
On the other hand, expectations about future rate cuts remain mixed in the markets. Economists from Wall Street’s largest banks have different views on the Fed’s policy path. Goldman Sachs economists foresee quarter-point cuts at each meeting from November through June next year. Meanwhile, JPMorgan and Citi economists anticipate another half-point cut at the November meeting.
Many other economists, meanwhile, point out that the possibility of another 50 basis point cut will depend on the labor market's condition. Indeed, the key takeaways from the statement's revised language and Chair Powell’s remarks made it clear that the labor market data will be the primary catalyst influencing the Fed’s next moves.
During the press conference, Powell mentioned that they aim to restore price stability without the kind of painful rise in unemployment that usually accompanies disinflation. Officials also highlighted that they consider the current state of the labor market to be solid, but they won’t remain indifferent if it cools further or if unemployment rises significantly.
Yesterday’s U.S. weekly labor market data showed that the number of people filing initial claims for unemployment benefits in the week ending September 13 fell below expectations. Claims came in at 219K, lower than all estimates in a Bloomberg survey of economists, which had a median forecast of 230K. The figure also came in below the four-week average of 227K. Continuing claims also dropped from 1.84 million to 1.83 million.
Following the data, the pressure on the U.S. dollar eased slightly. However, reports suggesting that the drop in claims may have been influenced by the Labor Day holiday, with claims expected to rebound next week, caused the markets to shrug off the data's impact.
Futures market data shows that markets are pricing in another 70 basis points of cuts by the end of the year. Economists are projecting another 50 basis point cut in November, contingent on labor market data, while the markets are pricing in a 57% probability of a 25 basis point cut in November and a 50% probability of a 50 basis point cut in December.
In conclusion, while rate cut expectations are keeping the U.S. dollar under pressure, U.S. labor market data are expected to be the primary catalyst for global markets in the upcoming period.
Gold Rallies to Historic Levels: China’s Demand Drops, India’s Rises
Gold prices have surged to a new all-time high, nearing $2,600 per ounce, benefiting from the Fed’s major move. This record has pushed gold’s rise this year to over a quarter.
Global major central banks have entered a rate-cutting cycle, reducing the opportunity cost of holding gold, which opens the door for further gains.
However, high prices are dampening retail demand in China, the world’s largest gold buyer. Chinese gold jewelry traders report that sales at the end of August and the beginning of September have dropped by at least 50% compared to the same period last year. Besides, China’s gold imports in August also fell to their lowest level since 2021.
On the other hand, the situation is the opposite for India, the second-largest gold importer. Following a reduction in import duties on gold, India’s gold imports surged to a peak in August, and demand is expected to remain strong ahead of the festive season.
PBoC Holds Rates Steady Amid Growing Expectations for Easing
Earlier today, the People's Bank of China (PBoC) decided to maintain the status quo. The PBoC kept the one-year loan prime rate at 3.35% and the five-year rate, which serves as a reference for long-term loans, including mortgages, at 3.85%. On the other hand, expectations for imminent easing are growing following last week’s announcement by the PBoC that it is preparing additional policies to stimulate the economy.
The Fed’s aggressive start to rate cuts has narrowed the rate differential between the U.S.
and China, easing pressure on the yuan. However, China's ongoing struggles to recover have made the 5% growth target almost unattainable, further fueling expectations that the PBoC will continue easing.
Bloomberg Economics expects a reduction of at least 10 basis points in the policy rate during the fourth quarter and more room for banks to lower long-term rates. Banks had lowered long-term rates shortly after the PBoC cut its seven-day policy rate in July. However, banks are reluctant to reduce lending rates further unless easing continues, as interest rate margins have already fallen to a historic low of 1.54%.
In conclusion, given the ongoing property downturn and deflation threats across China, more stimulus measures from authorities, including the PBoC, are necessary. Following previous measures that fell short of reviving the property market, China is reportedly planning to lift some restrictions on home purchases.
According to people familiar with the matter, the government may lower down payment requirements and offer lower mortgage rates for second-home purchases. Additionally, to support China’s stock market, which has dropped nearly 7% this year and is among the worst performers, plans for further stimulus steps are reportedly in the works.
BoJ Keeps Rates Steady: Ueda Hints at More Time Before Policy Shift
The Bank of Japan (BoJ) made no adjustments to its policy rate today, in line with market expectations, keeping the reference rate at 0.15%-0.25%.
The primary focus of the markets for this meeting was the guidance that Governor Ueda would provide regarding the BoJ’s future policy path. While BoJ officials have reiterated their hawkish messages since the July meeting, market pricing indicated that investors were not fully convinced the BoJ would continue with rate hikes. Economists expect another rate hike in December, while markets are pricing in only a 33% chance of another hike this year.
Inflation data released before the meeting showed that the consumer price index rose to 3% in August, up from the previous 2.8%, with core inflation rising to 2%. In the press conference following the meeting, Governor Ueda stated that prices remain elevated but noted that the Japanese economy is recovering moderately. As wages have increased, the assessment of private consumption was also upgraded.
Ueda's comments linking the market turbulence after the July meeting to concerns about the U.S. economy, along with the insufficient communication from BoJ officials, have been heavily criticized. Ueda acknowledged the criticisms of the BoJ’s insufficient communication and said that they aim to convey the reasoning behind policy decisions to the markets carefully.
Additionally, Ueda stated that there has been no change in their stance on continuing to raise interest rates if the economy evolves as expected. However, Ueda stated that upward price risks have diminished in light of recent currency movements and added that there is still some time before making a decision on monetary policy.
When asked about Deputy Governor Uchida's remarks, which were seen as the main factor behind the criticism of the BoJ’s communication and reduced the credibility of their hawkish stance, Ueda commented that markets remain unstable. This suggests that the BoJ is unlikely to hike rates as long as markets remain volatile. Following Ueda's comments, the yen declined, signaling that markets remain unconvinced by the BoJ’s rate hike messages.