Rate Cut Fever – Currency Thoughts
Rate Cut Fever
September 25, 2024
In the wake of a disappointing and unexpected relapse in U.S. consumer confidence in the Conference Board’s monthly measure this month, financial markets are attaching greater odds to another interest rate cut by the FOMC at its early November meeting following the sizable 50-bp initial reduction made earlier this month. The consumer sentiment index printed at a 3-month low of 98.7 in September, down from 105.6 in August and 101.8 in July.
Reaction to China’s largest policy stimulus since before the Covid pandemic has been mixed. The stock market experienced a knee-jerk show of relief. The Shanghai composite equity index rose 1.2% today on top of yesterday’s 4.2% upsurge. Analysts have given the policy package a more nuanced reaction, since it lacks a badly needed fiscal dimension to promote a rotation of the economy’s growth engine toward personal consumption. Instead, officials used the old playbook of monetary policy changes plus direct stock market support, namely a lower MLF rate, reduced required bank reserves, and about $70 billion equivalent to buttress equities.
In the past 24 hours, central banks in Hungary and Sweden cut their interest rates. Each of those cuts was a reduction of 25 basis points.
The Swedish Riksbank’s cut to 3.25% followed similar moves done in May and August and was accompanied by a notably dovish statement of explanation.
If the outlook for inflation and economic activity remains unchanged, the policy rate may also be cut at the two remaining monetary policy meetings this year. A cut of 0.5 percentage points is possible at one of these meetings. Moreover, the forecast indicates one or two further rate cuts during the first half of 2025. Together, these changes imply a relatively large shift of monetary policy in a more expansionary direction, which will improve households’ finances and make it easier for companies to invest.
The risk of inflation becoming too high has gradually declined. At the same time, the recovery appears to be proceeding somewhat more slowly than expected. It is important in itself that economic activity strengthens, but it is also a necessary condition for inflation to stabilise close to the target. Consequently, it is assessed that the policy rate can be cut at a faster pace than the Riksbank has previously communicated.
Australia reported a piece of news that seemingly points to an earlier inflection point in that country’s monetary policy stance. The monthly measure consumer price inflation fell by roughly three-quarters of a percentage point to a 3-year low of 2.7% in August.
U.S. mortgage applications jumped over 10% for a second straight week, increasing 11.0% last week on top of a 14.2% surge in the prior week ending September 13. This was the fifth straight weekly increase, the total of which was 31.2%. The 30-year fixed mortgage rate dropped another two basis points and, at 6.13%, is down more than a percentage point from 7.24% five months ago.
Equity markets today also closed up 1.5% in Taiwan and 0.7% in Hong Kong, but other stock markets in the Pacific Rim experienced losses of 1.3% in South Korea, 1.1% in Singapore, 0.5% in Indonesia, and 0.2% in Australia and Japan.
Ten-year sovereign debt yields are up five basis points in the United States, three bps in Germany, two bps in the U.K., Spain and Italy, and a basis point in France. The 10-year Japanese JGB yield dipped a basis point to 0.79% amid signs that the Bank of Japan is feeling no urgency to quicken rate hikes.
The dollar today is mixed, with gains of 0.8% against the yen and 0.7% relative to the Swiss franc, but dips of 0.1% against the yuan and euro.
Prices for Bitcoin and oil are 1.2% and 0.8% lower. Gold, by contrast, is steady.
Consumer confidence in South Korea fell to a four-month low this month. Belgian business confidence printed at an 8-month low, and economic sentiment in Switzerland also dropped to an 8-month low. French consumer sentiment, however, improved 2.6 index points in September to a reading of 95.1. That still below the 100 long-term averages but to the least degree since Russia invaded Ukraine in February 2022.
Among price data reports out today,
- Swedish producer price inflation of 1.2% in August was above zero for the third time in four months, having bottomed at -7.7% last December.
- Spanish producer price inflation was its least negative (-1.3% last month) in a year and a half, reflecting less energy price deflation.
- Icelandic producer prices fell 1.0% on month in August but posted their largest on-year rise (6.5%) in 18 months.
- A 2.2% rate of consumer price inflation in Singapore in August was the lowest in 40 months and down from 7.5% touched in September 2022.
Taiwanese on-year retail sales growth of 1.1% last month was the smallest gain in eight months, while the 12-month increase of industrial production (+13.4%) was the most since May.
The Czech National Bank became the third central bank in day’s space to cut its policy interest rate. The reduction of 25 basis points to 4.75% was the seventh cut since December. The peak 7.0% level had prevailed since June 2022. Consumer price inflation by then had slowed to 6.9% from 18.0% in September 2022. At 2.2% in both July and August, CPI inflation remains close to its recent low of 2.0% in June, which was aligned with the CNB target. Low inflation and the fragile European growth situation allows Czech monetary officials to proceed with policy normalization.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Chinese policy stimulus, Czech National Bank, Magyar Nemzeti Bank, Swedish Riksbank, U.S. consumer confidence
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