Articles

• Empire Fed Sept manufacturing survey +11.5 vs -4.75 expected
• Canada July manufacturing sales +1.4% vs +1.1% expected
• ECB’s Lane: Incoming data on wages and profits have been in line with expectations
• ECB’s Kazaks: Interest rates will continue to be lowered
• WH Brainard: It is now important to safeguard progress in US labor market
• Former NY Fed Pres Dudley says it’s time for 50 basis points
• Jon Hilsenrath: The Fed will cut by 50 bps
• Canada extends 30-year mortgage ammortization for newly-built homes

Markets:

• WTI crude up $1.82 to $70.46
• US 10-year yields down 3 bps to 3.61%
• S&P 500 up 0.2% in sixth straight gain
• Gold up $6 to $2582
• AUD leads, USD lags

The newsflow was light today but it wasn’t exactly lifeless. USD/JPY broke through 140.00 and fell to a 2024 low of 135.59 early in the European session before finding a bottom. It grinded all the way back to 140.65 late with the biggest part of the move coming after the stronger Empire Fed.

Elsewhere though, the US dollar couldn’t get much traction and it’s on track to close at the lows against the pound and Aussie with the euro near the top of the daily range as well. The talk of 25 vs 50 is deafening with the latest pricing at 63% for 50 bps. Eyes are attuned to WSJ leaks and I would keep them there. By the same token, the Fed may be teed up for a lively debate and Powell isn’t sure yet what to leak.

The implications for the dollar aren’t straightforward beyond the initial kneejerk. Frontloading cuts could ultimately mean the terminal rate is higher and Powell could touch on those kinds of talking points on Wednesday.

This article was written by Adam Button at www.forexlive.com.

The investing world has largely given up on China as a growth driver this year and the outlook for 2025 continues to dim, with officials showing no urgency to turn the tide.

On the weekend, new house prices fell for the 15th consecutive month. And not y/y drop but monthly. The last three months of data show monthly declines of:

• June -0.67%.
• July -0.65%
• August -0.73%

Existing home sales are no better and are down for 16 straight months.

On the industrial side it’s just as bleak with steel activity cratering once again.

The growth target of 5% for this year looks unachievable at this point, even with stimulus. Goldman Sachs, Citigroup and Morgan Stanley all lowered forecasts.

So the focus will shift to 2025 and the PBOC may be prepared to act. The People’s Bank of China released a rare statement alongside disappointing credit data and indicated upcoming easing.

“We
will make maintaining price stability and pushing for the mild rebound
in prices an important consideration for monetary policy and meet
reasonable financing demand for consumption in a more targeted way,” the PBOC said, adding that it is “preparing to launch some additional measures, further lower the
financing costs for businesses and households, and keep liquidity
reasonably ample.”

How they plan to stimulate is unclear but I would expect leaks in the week or so ahead. Even with that, I think it will take coordinated and surprisingly strong action from the central government to turn the tide as weakness becomes entrenched.

If they do come out with a sledgehammer, it could overshadow Fed easing this week. That said, they may want to keep the powder dry until after the US election.

This article was written by Adam Button at www.forexlive.com.

The days of high yielding safe investments may be over for a generation.

Jamie Dimon is continuing to warn about inflation but the bond market has moved on. Breakeven rates are below 2%, implying that the Fed is more likely to undershoot its target and nominal rates continue to fall, despite swelling deficits.

US 10-year yields are down another 3 bps today to 3.62%.

I will refer back to what I wrote in early June with 10s at 4.35%:

I believe this is a rare moment to lock in investments with high rates
for a long duration in the same way that the pandemic was a
once-in-a-lifetime to lock in low borrowing rates.

That chance has now largely passed.

The next leg in bonds will be driven by the growth outlook. There are some big warning signs on global growth, particularly in China but the US still looks solid. However it could import some of that weakness or feel the lagged effects of monetary policy. The political situation in the next 50 days is certainly a challenge but I tend to think that once the dust clears in early November, people will go about their jobs.

The super-trend though is in AI and the latest model from OpenAI is impressive. That should keep the downward pressure on prices and boost productivity, potentially causing massive disruption in business and the labor market. Ultimately, I think that drives overnight rates below 1% again but the timeline on that is uncertain.

For now, there are still some high yields out there but it requires going a bit further down the risk curve.

This article was written by Adam Button at www.forexlive.com.

WH economic advisor Lael Brainard is no the news wires saying:

• It is now important to safeguard progress in US labor market.
• US economy has reached important turning point in fight against inflation.
• Inflation is coming back down close to normal levels.
• It is critical to continue work to address affordability challenges and create opportunities for working families.

Brainard was a former FOMC board member before becoming Biden’s economic advisor.

This article was written by Greg Michalowski at www.forexlive.com.

Closing changes in Europe:

• Stoxx 600 -0.2%
• German DAX -0.4%
• Francis CAC -0.3%
• UK’s FTSE 100 flat
• Spain’s IBEX +0.4%
• Italy’s FTSE MIB flat

This article was written by Adam Button at www.forexlive.com.

We’ve seen this pattern a few times recently: Positioning data released late on Friday shows extremely negative positioning in oil and on Monday there is a squeeze higher.

Unfortunately, the gains haven’t lasted, at least not recently. There are already signs of that with WTI rising as high as $70.70 but now pulling back to $69.79.

Still, WTI is up $1.18 on the day and the net spec position in US crude futures and options contracts has reached an all-time low. The sellers are evidently betting on a slowdown in the global economy and soft Chinese growth in particular as a catalyst.

Rory Johnson at Commodity Context today highlights past troughs in sentiment since 2019 and finds that over the following 50 days, the average gain is $8/barrel.

Admittedly, that’s not many data points and includes covid but it’s something to consider.

This article was written by Adam Button at www.forexlive.com.

The Canadian housing market is not looking healthy, particularly the Toronto condo market.

The government is reacting with finance minister Chrystia Freeland extending 30-year loan amortization to all first-time home buyers and buyers of newly-built homes, all with CMHC insurance.

Canada has gone back-and-forth on 30-year mortgages since the financial crisis.

• 2008: The government reduced the maximum amortization period from 40 years to 35 years.
• 2011: The maximum was further reduced to 30 years for insured mortgages.
• 2012: The maximum amortization period for CMHC-insured mortgages was reduced to 25 years

This article was written by Adam Button at www.forexlive.com.

The strongest NY Fed manufacturing PMI since April 2022 helped to lift USD/JPY off the floor. The pair touched as low as 139.59 today but rose around 40 pips on the PMI and has continued to track higher, rising to 140.55.

Aside from JPY, the US dollar is broadly lower with the euro, pound and antipodeans near the best levels of the day despite middling performance in equities today.

One part of the yen story that deserves some attention is the race to be the next Prime Minister. Sanae Takaichi is a leading candidate in the LDP leadership race and on the weekend she pushed back against the BOJ’s rate hike talk.

“Frankly, it was too early,” she told a news conference. “Interest rates ought to be kept low.”

A new LDP leader will be chosen on Sept 27 and will take over as Prime Minister. The BOJ is expected to hike in December but it can be swayed by political pressure.

The dollar side of the trade will swing heavily based on what the Fed does on Wednesday and what Powell signals going forward. However I think it’s increasingly clear that he wants to get closer to neutral quickly, no matter what happens on Wednesday. The groundwork for that was laid at Jackson Hole.

This article was written by Adam Button at www.forexlive.com.

US stocks are mixed to start the trading week. The Dow is higher (and trading at a new all-time high), but the broader S&P and NASDAQ indices are lower. Recall that last week both of those indices rose each of the trading days for the week. That came after sharp declines the prior week.

The snapshot of the market today is currently showing:

• Dow industrial average up 205.50 points or 0.50% at 41599.28
• S&P index -10.51 points or -0.19% at 5615.51.
• NASDAQ index -153.63 points or -0.87% at 17530.35.

A snapshot of the small-cap Russell 2000 shows a modest up 2.65 points or 0.12% at 2185.14.

Yields are now higher after trading lower earlier in the day. The Empire manufacturing index came in at 11.5 versus -4.75 expectations and -4.7 last month. The rise was the best since April 2022. HMMM. Rates were down 3-5 basis points earlier today. Those declines have been erased.

• 2-year yield 3.578%, +0.2 basis points
• 5-year 3.436%, +1.2 basis points
• 10 year yield 3.660%, +1.2 basis points
• 30 year yield 3.983%, +0.7 basis points

in other markets:

• Crude oil is trading up $1.54 or 2.23% at $70.18.
• Gold is continuing its move to new record highs with a gain of $7.32 or 0.30% at $2585.40. A new intraday high of $2589.68 was reached today
• Silver is trading up $0.21 or 0.67% at $30.90
• Bitcoin is trading at $58,180. On Friday the digital currency closed at $60,545. Over the weekend, the high price came in at $60,655.

This article was written by Greg Michalowski at www.forexlive.com.

It’s been quite a turn for former New York Fed President Bill Dudley. Back in late May, he was calling for the Federal Reserve to hike rates further but now he’s saying they should be cutting by 50 basis points.

The two objectives of the Fed’s dual mandate — price stability and
maximum sustainable employment — have come into much closer balance,
suggesting that monetary policy should be neutral, neither restraining
nor boosting economic activity. Yet short-term interest rates remain far
above neutral. This disparity needs to be corrected as quickly as
possible.

He cites the 0.8 percentage point rise in the unemployment rate and fading inflation and argues the downside risks to employment outweigh the upside risks to inflation.

“I expect the Fed will do 50,” Dudley writes. “Monetary policy is tight, when it should be neutral or even easy. And a
bigger move now makes it easier for the Fed to align its projections
with market expectations, rather than delivering an unpleasant surprise
not warranted by the economic outlook.”

This article was written by Adam Button at www.forexlive.com.

• Prior was -2.1%
• Sales at $71.0 billion vs $69.6 billion prior
• Sales -1.1% y/y vs -1.8% y/y prior
• Total inventory levels +0.9% vs +0.1% prior
• Inventory to sales 1.73
• Unfilled orders +0.6% vs -0.8% prior

This is a good number and a nice rebound but inventories are swelling.

This article was written by Adam Button at www.forexlive.com.