Month: September 2024

By Michael Every of Rabobank

2750 Beeps

The market is waiting for the Fed to cut rates today for the first time in years: the economist Bloomberg survey expects 25bps; markets are split between pricing 25bps and 50bps, with the most speculation in Fed Funds futures since they began trading in 1988; some joke the Fed should cut 37.5bps to please everyone; others are shifting ”50-50” to mean “fifty then fifty”, i.e., rates can keep being slashed as in crashes and recessions; and Democratic senators want 75bps.

There were hopes US retail sales data could make the case for 25 or 50bps, but they didn’t. The headline was stronger than consensus, but the ex-autos figure was weaker. That said, industrial production soared 0.8% m-o-m vs. 0.2% expected. Yet it would be ironic if that series, a sector neither the Fed nor financial markets have any interest in, derails interest rates falling as fast as they had hoped. Likewise, the Atlanta Fed GDP survey put its current Q3 estimate at 3.0% with only two weeks left of data before end-quarter, when trend US growth is 2%: either that Fed series is unconnected to the real economy, or the FOMC are, or markets are, or all three. Moreover, concerns grow that east coast US ports might see a crippling strike next month. We already had a report of Asia-East Coast routes commanding a $1,500 premium, working against a general softening of freight rates of late.

Meanwhile, in the Middle East we just got 2,750 beeps (Saudi media reporting as many as 4,000). A killer call triggered the simultaneous explosion of thousands of pagers held by members of Iran-backed Lebanese terrorist militia Hezbollah, choking hospitals with men losing fingers, eyes, and other key anatomy. Even the Iranian ambassador was reported to have been lightly injured – though why did he have a Hezbollah pager? The Middle East is on a knife-edge. However, that obvious analysis aside, there are several key facts to draw from this episode, which rightly takes the main headline in the Financial Times today online ahead of the Fed.

First, both the Lebanese government and Hezbollah have blamed Israel for the attack, the latter promising revenge – and not by email.

Second, the US took its now-usual step of denying any involvement. I’m sure that’s correct as nowadays US allies don’t tell it what they want to do ahead of time, given they never want to do anything: it’s far easier to ask for forgiveness than permission. To a Machiavellian, saying ‘non mea culpa’ does not make the US appear an honest broker, but reduces its perceived power – silence was the better option. That this has to be said partly explains why geopolitical tensions are so high, which matters to markets given the FT saying national security is reshaping economic policy.

Third, Israel hasn’t claimed responsibility, but has dealt Hezbollah a hammer blow. The militia had recently switched to low-tech pagers to avoid interceptions of its comms and GPS locations. This has backfired badly, badly injuring thousands of its men, and now leaving it unable to communicate as rumors swirl of a potential Israeli ground incursion ahead.

Fourth, is how this ‘Mission Impossible’ was achieved. Some say the encrypted pagers ordered from Taiwan –bringing in another geopolitical angle– were interdicted, Mossad injecting a compound into their lithium batteries to allow them to be hacked remotely to then overheat. However, lithium burns and videos show detonations with no flame, suggesting the replacement of some parts with plastic explosives, a far larger supply-chain feat.

This matters for more than the Middle East or pagers. Many of us worry about phone addiction. Others worry about our phones being listened to. Some are pushing for children not to be allowed phones in schools. From now on, we’ll have to be concerned about our devices exploding in our hands or pockets. This will seriously change how some serious business is done.

The weaponisation of common devices within a supply chain opens a Pandora’s box. The US is already trying to remove Chinese technology like Huawei’s 5G as a security threat, and that EVs record all we do is well-known by many. Yet how long will it now be until more banal made-in-China consumer products are also seen as being potentially too risky? If I can make those connections, others paid to worry about such things, and politicians who make money in doing so, will be front-running further national-security onshoring in the near future.

Paging the Fed: that deep China supply-chain deflation helping you consider a 50bps move today may not last long. Things could really overheat at that point. If you think we’ve seen market volatility in the past few years (and weeks on USD/JPY!), imagine normalising 75bps Fed hikes against rising inflation, then 50bps cuts in a fair economy… and then getting that call structurally wrong, and having to U-turn again.

Ironically, as the Fed is considering cutting bigly while some US data looks good, the ECB is playing its hand more cautiously even as the German ZEW survey collapsed like VW’s self-confidence. Relatedly, as the Financial Times editorial says, “Draghi is trying to save Europe from itself”, EU Commission President von der Leyen just named her new team to do that saving. The key thing to note is countries who favour dirigiste market intervention (i.e., France, Spain, and Italy) claimed prime posts like anti-trust, state aid, EU spending, and industrial policy. The outgoing free-market competition commissioner powerlessly warned of allowing pan-EU champions to emerge, as this would also be a “Pandora’s box” for Europe. Just a less explosive one than what we’ve seen in the Middle East; except to free-market purists who don’t understand that violent reality is what much of the world outside their happy bubble looks like.

In Australia, the government and RBA are still at daggers drawn, as a former senior Reserve Bank manager says reform of its board is needed to avoid groupthink: yes, but all the establishment and most of the population daily echo the Aussie TV advert that screamed, “I JUST WANNA SELL RUGS!” (Where for “rugs!”, read “rate cuts!”; or for “sell” read “buy”, and for “rugs!” read “houses!”) The RBA is also going to play with a wholesale banking CBDC for the next three years to try to streamline settlements processes. Nothing for retail or the government yet. But if you want to imagine something truly explosive on the device in your pocket, how about a central-bank controlled digital currency it can print or delete at will as part of an it’s-not-central-planning-when-we-do-it economy. Luckily, one of the last to try and plan the economy will be Australia, we can assume – unless it involves housing.

So, back to waiting for the Fed. Or the next geopolitical bang.

Authored by Steve Watson via Modernity.news,

Former CNN anchor Chris Cuomo has spoken out about how ashamed he feels at the media for pushing the narrative that Donald Trump only has himself to blame for deranged lunatics trying to assassinate him.

Cuomo, now with News Nation, stated that he called Trump personally after the second assassination attempt to say he’s “really sorry that this is going on and it’s being dealt with this way.”

“I called him today because I am ashamed of how we are responding and not responding to the threats on him,” Cuomo said.

He continued, “And I feel for his family, and I know you can roll your eyes and say, ‘Oh yeah, he asked for it.’ Listen, that’s your choice, and I think it’s a wrong choice. Okay? We got to get out of the judgment business, unless it’s judging ourselves, and you’ve got to start rewarding things that are better.”

“And I got to tell you, I don’t know how he stays in the race,” Cuomo further noted, adding “I don’t know how he got up after being shot in the head. And you people who try to mitigate that, you need to check yourself. He gets up, pumping his fist, stays in the race, barely even talks about it.”

While qualifying that he is not a Trump supporter, Cuomo urged “I am worried about us. I am ashamed of what’s happening around us right now, and the relative lack of concern about it. I just don’t see how we get anywhere better than where we are right now.”

Chris Cuomo called Donald Trump after second assassination attempt: “I am ashamed of what’s happening”

pic.twitter.com/4emsQ1Ke3g

— The Post Millennial (@TPostMillennial) September 17, 2024

Trump “doesn’t deserve this. A guy pointing an AK-47 at him while he’s playing golf?” Cuomo asserted, adding “And we take solace in the fact that the guy didn’t get any rounds off? That does not work for me.”

He continued, “If I had been through what that guy’s been through in the last two months, you would not know where I am. You would never see me on TV again. No way I would do that. I don’t know how he does it.”

“He’s got kids, they’re adults, but he’s got grandkids. He’s got a wife. People giving crap to Melania Trump, worrying about whether or not there was a plot around her husband. How could she not?” Cuomo further proclaimed in a clear reference to his former colleague at CNN Don Lemon, who created and later deleted a ‘reaction video’ in which he rolled his eyes and acted exasperated at Melania Trump for sharing concerns about her husband being targeted.

“I don’t think she’s right, but I totally get why she feels that way,” Cuomo stated, adding “People mock her? And then her husband has a guy pointed with an AK-47 where are those people apologizing?”

“That’s what it’s time for. ‘I should not have come at you, Melania Trump, for suggesting that maybe there was something more afoot I get your, paranoia, I get your feelings, you have a right to that,’” Cuomo added.

“There’s nothing wrong with saying that,” Cuomo further proclaimed, “with being a basic, decent human being, it has gotten too out of control, too far from where we need to be and how we need to be, and I don’t know what to do about it. I don’t know.”

He’s got a way to go to make up for the establishment hackery he engaged in for years at CNN, particularly as regards Trump, but this is a start at least.

Lets see if he sticks to it.

* * *

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After an unexpectedly large decline in July, August’s data for Housing Starts and Building Permits rebounded dramatically, well above expectations. Starts rose 9.6% MoM (vs +6.5% exp and -6.8% prior) while Permits jumped 4.9% MoM (vs +1.0% exp and -3.3% prior). Both prints are the highest since February…

Source: Bloomberg

The SAAR for starts and permits obviously rose but remains near COVID lockdown lows still…

Source: Bloomberg

Single-Family Starts and Multi-Family Permits dominated the increases…

Source: Bloomberg

This should not be a total surprise as forward-looking permits have tracked (with a lag) rate-cut expectations…

Source: Bloomberg

What happens if The Fed disappoints?

NASA awarded space exploration company Intuitive Machines a multi-billion dollar contract to construct a satellite constellation for communication and navigation services for missions in the near space region, which extends from Earth’s surface and beyond. 

According to a statement by Intuitive Machines, the contract has a base period of five years and an additional five-year option period. Its maximum potential value is $4.82 billion. 

The key highlights of the contract include Intuitive Machines’ lunar satellite constellation, which will allow for commercialized lunar activities. The satellite will provide enhanced data and transmission services and autonomous operations, creating infrastructure for the company’s three pillars to commercialize space:

1. Delivery: Scaling lunar lander capabilities to support cargo and infrastructure delivery.

2. Data Transmission Services: Establishing a network of satellites capable of delivering 4K resolution video data and navigation services, assisting in landing site selection and resource prospecting.

3. Autonomous Operations: Developing infrastructure, logistics, and mapping solutions on the Moon to facilitate exploration and operations.

“This contract marks an inflection point in Intuitive Machines’ leadership in space communications and navigation,” Intuitive Machines CEO Steve Altemus said, adding, “We’re pleased to partner with NASA, as one team, to support the Artemis campaign and endeavors to expand the lunar economy.”

The space exploration company’s shares jumped 52% in premarket trading Wednesday. As of Tuesday’s close, shares were up 111% year-to-date.

The latest Bloomberg data shows that the float is 25% short, equivalent to about 13.4 million shares. 

Intuitive Machines made headlines earlier this year after its lunar lander “tipped over” after touching down on the Moon. Shares were immediately halved from the $11 handle. 

Meanwhile, SpaceX’s Starlink already has a massive satellite internet constellation around Earth and recently tested advanced Starlink laser communication technology.

It’s finally Fed day, and futures are up up small with Tech in line and small-caps lagging having largely priced in a 50bps rate cut already (the risk clearly is to the downside if Powell goes 25bps). As of 8:15am, S&P futures are unchanged and less than 1% from all time highs, with the cash index rising for 7 consecutive days, while Nasdaq futures gain 0.2% with Mag7 mixed, and Semis weaker with NVDA -40bps; GOOG +70bps and MSFT +29bps.

While futures are flat now, they certainly won’t be after 2pm, as the uncertain ahead of today’s Fed decision is unprecedented while wages in a dovish direction are record high. As DB’s Jim Reid notes, “futures are pricing in a 69% chance of a 50bp cut, and given the uncertainty that’s still looming, we can expect a decent market reaction whatever the decision is tonight. You’d have to go back over 15 years to find such an uncertain situation this close to the decision. A lot of money will be made and lost today.“

Bond yields are mixed with the curve twisting steeper; the USD is lower to start the day, trading near 2024 lows. Commodities see weakness in Energy and Metals but strength in Ags. Today’s focus is on the Fed and the press conference.

In premarket trading, Alphabet gained after its Google unit won a court fight over competition with the European Union. Aperol maker Davide Campari NV’s shares fell 6.7% as its chief executive officer resigned after just five months. Here are some other premarket movers:

• 23andMe co-founder and Chief Executive Officer Anne Wojcicki told employees that she remains committed to taking the genetic testing company private following the resignation of its independent board members. Shares are down 9.7%.
• Applied Therapeutics shares jump 40% after the company completed its late-cycle review meeting with the FDA on the ongoing New Drug Application review of govorestat.
• GE HealthCare shares edge up 1.1% after BTIG upgraded the stock to buy from neutral saying the setup for the medical technology company has improved.
• Intuitive Machines shares rise 54% after the company said it got a contract from NASA with a maximum potential value of $4.82 billion.
• Super Micro Computer rose 0.8% as Needham & Co initiated with a recommendation of buy, saying the chip company has a first-mover advantage thanks to its “design of GPU-based compute systems and liquid cooled rack level solutions.”
• United States Steel shares advance 4.0% after a US security panel granted Nippon Steel permission to refile its plans to purchase the American steel company for $14.1 billion.
• VF Corporation shares rise 3.3% after the North Face owner was upgraded to overweight from equal-weight by analysts at Barclays, who expect to see an improvement in the company’s fundamentals over the next four to six quarters.
• Victoria’s Secret shares gained 1.6% in premarket trading after the lingerie retailer’s stock was upgraded to equal-weight from underweight at Barclays, which said the “worst is behind the company.”

As everyone know, today is when the Fed will cut rates for the first time since March 2020, and all eyes are on the decision at 2pm ET with the FOMC set to deliver their first surprise since the start of the pandemic when the market was debating a 75bps or 100bps cut (in the end nobody remembers it, but what everyone does remember is that that easing cycle sparked the worst inflationary tsunami in generations). In recent cutting cycles, the Fed has surprised on the dovish side during crises (Covid & GFC) but has also under-delivered cuts on some occasions (Sep 2019).

Investors are looking for the Fed to ease policy sufficiently to respond to recent signs of weakness in the economy, achieving a soft landing without stirring concerns that conditions are worse than markets appreciate.

“If they’re doing 25 basis points this time, the likelihood that they can get to a hundred basis points by year end is pretty slim,” said Justin Onuekwusi, chief investment officer at St James Place Management. “So if you don’t get 50, then you’re going to get significant moves in market pricing.”

But while investors see greater scope for the larger adjustment, economist opinions are flipped, and largely anticipate the FOMC will reduce rates by only a quarter point to a range of 5% to 5.25%, though while 114 see a modest cut, 9 economists expect a half-point move.

Fresh quarterly projections in the form of the so-called “dot plot” released at the end of the central bank’s two-day meeting will offer further insight into the path ahead for borrowing costs and the economy. Chair Jerome Powell will also hold a press conference.

“I think they will go 25, but if they do go 50 — how they talk about this will be extremely important,” Torsten Slok, chief economist at Apollo Global Management, said on Bloomberg TV. “That is why the dot plot coming along with the statement today is critical for rates expectations.”

It’s not just the Fed, of course, and we also get the BOJ Friday, although there the market expects nothing from the central bank. Even so, the Japanese yen climbed as much as 0.8%, signaling expectations of a narrowing divergence in policy between the Fed and the Bank of Japan. In the UK, money markets see the Bank of England delivering modestly less easing after services inflation rose to 5.6% in August from 5.2% in July, while the headline figure held at just above the 2% target. The pound strengthened and yields on UK government bonds rose after Wednesday’s data.

European stocks are lower, with technology and heath care stocks falling the most. Auto and banking shares were the biggest outperformers. Stoxx 600 falls 0.4% to 515.48 with 384 members down, 192 up, and 24 little changed. Here are the biggest movers Wednesday:

• Reckitt Benckiser advances as much as 3.3% to hit a six-month high after people familiar with the matter said the company started early discussions with some of the potential suitors for its homecare assets, which could fetch more than £6 billion in a deal
• Ubisoft shares rise as much as 6.2% after BMO Capital Markets raises the video-game maker to outperform from market perform, saying the stock is now “too cheap to ignore” following a selloff triggered by concerns over the Star War Outlaws game
• IHG gains as much as 1.8% after an upgrade to buy at Goldman Sachs, which named the company as its preferred pick among European hotel stocks. Shares in Whitbread edge lower as the broker cuts its rating to neutral
• Campari shares slide as much as 6.7%, hitting the lowest level in more than four years, after the CEO of the Italian drinks maker resigned for “personal reasons”
• Lonza shares fall as much as 2.9% after being downgraded to hold from buy at Intron Health, which says the Swiss company’s recently purchased biologics manufacturing facility in Vacaville, California, could “turn out to be a strategic misstep
• Pandox shares dropsas much as 4.5%, the most in about six weeks, after the Swedish hotel property manager offered 10.8 million Class B shares at a discount via ABG Sundal Collier, DNB Markets, Svenska Handelsbanken, Skandinaviska Enskilda Banken
• Legal & General slides as much as 2.2% after agreeing to sell its UK housebuilding unit Cala Group to funds managed by Sixth Street Partners and Patron Capital for an enterprise value of £1.35 billion
• EQT slip as much as 2.5% after being downgraded to sell from neutral at UBS, with the bank seeing both earnings and valuation risk from the Stockholm-based asset manager

Earlier, Asian stocks traded in a narrow range, with the MSCI Asia Pacific Index steady. Toyota Motor was among the biggest boosts while TSMC dragged on the regional benchmark. Equities fell in India and Taiwan, while key gauges gained in Japan and mainland China. Markets in Hong Kong and South Korea were closed for holidays.

 

The rates market is currently pricing -40bps (60% probability of 50bps), while commentary the last few days has skewed towards 50bps too, including from former Fed official Dudley and Goldman trader Josh Shiffrin who notes broadly weaker data since Jackson Hole should lead the committee to a larger cut, even as the bank’s chief economist Jan Hatzius continues to call for 25bps amid Fed commentary just ahead of the blackout period. While they think a 50bp cut would be a sensible precaution against further labor market softening, the Fed leadership has communicated a sufficiently dovish reaction function for the bond market to price rate cuts between 25bp and 50bp for several meetings, which also lowers borrowing rates today. On the dots, Goldman expects the median dot to imply three 25bp cuts in 2024 followed by quarterly cuts to just above the longer-run rate thereafter.

In FX, the dollar weakened ahead of the Fed decision where market pricing suggests a near coin flip between a 25- and 50-bp interest-rate cut. The Japanese yen and New Zealand dollar vie for top spot among G-10 peers, each rising 0.6%.

In rates, treasury futures are under pressure in the early US session, following wider losses across core European rates in what’s been a fairly muted session ahead of the fraught Fed announcement at 2pm New York time. Treasury yields are cheaper by 1.5bp-2bp across a marginally steeper curve — spreads remain within 1bp of Tuesday’s close. The 10-year at 3.66% is near session high, higher by around 1.5bp on the day with bunds and gilts in the sector cheaper by an additional 1.2bp and 3bp.  Ahead of the Fed decision, swaps market prices in around 39bp of rate-cut premium and a combined 115bp over this year’s three remaining meetings. Further out, a combined 250bp of cuts are priced in by the end of next year. There’s been a surge in open interest in October fed funds futures over the past three sessions, skewed toward long positions targeting a 50-basis-pointc cut this week. In Europe, gilts fell, lagging German counterparts, as traders pare Bank of England rate cut bets after UK CPI rose in line with expectations.

In commodities, oil turned lower after a two-day gain as signs of higher US stockpiles countered concerns that Middle East tensions may escalate further. WTI drops more than 1.5% to $70.10 a barrel, unwinding Tuesday’s gain.

Spot gold is steady near $2,570/oz. We urge readers to use our partners JMBullion for all their gold-buying needs.

Looking the day ahead now, the main highlight will be the Federal Reserve’s policy decision and Chair Powell’s subsequent press conference. The US economic data calendar also includes August housing starts/building permits (8:30am) and July TIC flows (4pm). We’ll also hear from the ECB’s Holzmann, Vujcic and Nagel.

Market Snapshot

• S&P 500 futures little changed at 5,639.50
• STOXX Europe 600 down 0.4% to 515.30
• MXAP little changed at 183.10
• MXAPJ down 0.2% to 572.52
• Nikkei up 0.5% to 36,380.17
• Topix up 0.4% to 2,565.37
• Hang Seng Index up 1.4% to 17,660.02
• Shanghai Composite up 0.5% to 2,717.28
• Sensex down 0.2% to 82,876.71
• Australia S&P/ASX 200 little changed at 8,142.07
• Kospi up 0.1% to 2,575.41
• German 10Y yield little changed at 2.17%
• Euro up 0.2% to $1.1131
• Brent Futures down 0.9% to $73.05/bbl
• Gold spot up 0.0% to $2,569.66
• US Dollar Index little changed at 100.80

Top Overnight News

• Japan posts soft economic data, w/exports coming in +5.6% Y/Y in Aug (down from +10.2% in Jul and below the consensus forecast of +10.6%), with exports to the US falling for the first time in nearly three years, while machine orders dipped 0.1% M/M in Jul (vs. the Street +0.5%). RTRS
• UK inflation for Aug was inline w/the consensus, including headline CPI (+2.2%, flat vs. Jul), core CPI (3.6%, up 30bp vs. Jul), and services CPI (5.6%, up 40bp vs. Jul). RTRS   
• Citadel Securities shelved plans to join the ranks of bond dealers that trade directly with the Fed. BBG
• Google won a legal fight with the EU over a €1.5 billion fine for preventing rivals from placing online ads. BBG
• They’ll go 50 [today]. The communication has been confusing but if you follow the path of the data, and the language of Jay Powell at Jackson Hole, it leads me to 50. Powell was very dovish at JH. Didn’t want further weakening in labor market, and data since has been broadly weak. If you follow that line, he will push for a bigger cut given how far they are from neutral. GS GBM (Josh Schiffrin)
• US crude inventories rose by almost 2 million barrels last week, the API is said to have reported. That would be the biggest surge in almost three months if confirmed by the EIA. Still, supplies at Cushing fell closer to the level that’s seen as its operational minimum. BBG
• Nippon Steel was allowed to refile its plan to buy US Steel, people familiar said, probably pushing a decision on the takeover past November. Joe Biden, Kamala Harris and Donald Trump have said they oppose the deal. BBG
• China’s Foreign Ministry says it is taking countermeasures against some US firms regarding their weapons sales to Taiwan; measures incl. freezing property within China owned by the firms: RTRS
• Retailers in the US plan to hire fewer seasonal workers this year (~520K people vs. ~564K in 2023). RTRS
• Blackrock will launch a >$30B AI investment fund w/MSFT (Microsoft) to build data centers and energy projects related to the technology. FT  
• Former Atlanta Fed President Lockhart said he sees a normal 25bps rate cut by the Fed but wouldn’t be surprised by 50bps.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly rangebound with participants lacking conviction heading into the crucial Fed policy decision. ASX 200 was contained amid light macro newsflow and a quiet overnight calendar heading into this week’s central bank updates. Nikkei 225 initially rallied on currency weakness but then reversed course and briefly wiped out its gains after mixed data and as the JPY nursed some of its losses. Some BoJ policymakers are reportedly worried that they may not be able to increase interest rates much further as a stronger JPY would result in cheaper imports, slow inflation and impact corporate earnings, via WSJ citing sources. Shanghai Comp initially struggled for direction on return from the holiday closures before retreating below the 2,700 level. Hong Kong participants were absent from the market, while the weak activity data from over the weekend had little impact and the PBoC delayed its MLF operations once again.

Top Asian news

• PBoC said it will conduct a Medium-term Lending Facility loan rollover on September 25th.
• US is urging Vietnam to avoid Chinese cable-laying firm HMN Technologies and other Chinese companies in its plans to build new undersea cables, while Washington shared intelligence with Hanoi about possible cable sabotage.
• China’s Ministry of Culture and Tourism says there was a 6.3% increase in domestic trips during this year’s mid autumn festival holiday since 2019, reaching 107mln trips.
• Japan’s Government says the economy is in moderate recovery; they keep economic assessment unchanged in September from August.
• Chinese FX regulator says global financial environment expected to improve as developed economies start rate cutting cycle. China’s FX market becomes more resilient, it will continue to play a positive role in stabilising market expectations and trading. Foreign institutes continued to increase China bond holdings in August. Foreign willingness to allocate Yuan assets remains stable.

European bourses, Stoxx 600 (-0.3%) began the session mixed/modestly lower, and slowly dipped lower as the morning progressed. European sectors hold a strong negative tilt; Optimised Personal Care tops the pile, propped up by gains in Reckitt, amid asset-sale related reports. Healthcare is found at the foot of the pile, hampered by losses in Novo Nordisk (-2.1%) after it was reported that Ozempic is “very likely” to be part of the next US price cut negotiations. US Equity Futures (ES +0.1%, NQ +0.1%, RTY +0.1%) are indicative of a very modestly firmer open, with traders mindful of today’s FOMC Policy Announcement, where the Fed is expected to deliver its first rate cut in 4 years. Alphabet’s Google (GOOGL) wins court challenge against EUR 1.49bln EU antitrust fine

Top European news

• Irish Central Bank lowered its 2024 HICP forecast to 1.6% from 1.7% and 2025 HICP forecast to 1.9% from 2.0%, while it cut its 2024 GDP forecast to -0.9% from 1.9% and raised 2025 GDP forecast to 4.6% from 4.4%. Furthermore, it stated that economic growth risks are tilted to the downside and risks to the inflation outlook are broadly balanced.
• The Times’ BoE Shadow MPC said the Bank should leave rates unchanged whilst increasing the rate at which it reduces its balance sheet from GBP 100bln per year to GBP 120bln.
• ECB’s Villeroy says the ECB is likely to continue cutting rates. Regarding France: the plan to cut the deficit would need a balance of around 75% from savings and 25% from higher taxes; for some big firms, could envisage extra effort being made in relation to their taxes.
• Maersk (MAERSKB DC) says due to significant terminal congestions in the Mediterranean and Asia ports, are experiencing substantial delays in vessel schedules. These congestions have resulted in extended waiting times at various ports, impacting ability to maintain a regular schedules.
• UK ONS says house prices increased by 2.2% to GBP 290,000 in 12 months to July 2024.
• Spain’s Economy Ministry revises down 2023 debt-to-GDP ratio by three percentage points, to 105%

FX

• USD is softer with all focus today on the FOMC rate decision. Heading into the release, markets assign a circa 60% chance of a 50bps reduction and a 40% chance of a 25bps move. DXY is currently within yesterday’s 100.56-101.02 range. The YTD low sits at 100.51.
• EUR is a touch firmer vs. the USD with fresh EZ drivers lacking as policymakers continue to downplay the chances of a rate cut next month; currently trading around 1.1130.
• GBP is firmer vs. the USD and EUR in the wake of the latest UK inflation data which printed in-line on a headline Y/Y basis but slightly firmer for core and services. Cable is now back on a 1.32 handle but below yesterday’s 1.3230 peak.
• JPY is firmer vs. the USD on a day which will contrast the respective policy paths of the Fed and BoJ. An extension of the downside could see the pair revisit the sub-140 levels.
• AUD/USD has extended its rally seen since the start of the week which has taken it from a 0.6697 base to a 0.6779 peak. NZD/USD is also on the rise with the pair gaining a firmer footing on a 0.62 handle.
• PBoC set USD/CNY mid-point at 7.0870 vs exp. 7.0828 (prev. 7.1030).
• BoC Deputy Governor Rogers said that the Bank wishes to see more progress on core inflation measures, adding that “there is still work to do”, according to Bloomberg.

Fixed Income

• USTs are lower and towards the bottom end of today’s 115-06+ to 115-13+ parameters. All eyes are on the Fed. The odds of a 50bps cut are currently just above the 60% mark with just under a 40% chance of a 25bps move.
• Gilts are underperforming. Despite an in-line headline print and mitigating factors from base effects and the prior survey period, slightly hotter-than-expected core and services Y/Y UK inflation points have sparked a modest hawkish reaction in Gilts.
• Bunds are pressured, in-fitting with peers. Specifics are somewhat light for EGBs with markets generally awaiting the FOMC. Bunds at the low-end of a 134.49-134.86 band, similarly to Gilts there is now limited support until the 134.00 mark. EZ HICP (Final) passed without reaction.
• German Debt Agency says issue of green federal security scheduled for November 5th has been cancelled.
• UK sells GBP 2.75bln 0.875% 2033 Green Gilt: b/c 3.55x (prev. 3.52x), average yield 3.731% (prev. 4.072%) and tail 0.9bps (prev. 0.7bps).
• Germany sells EUR 0.814bln vs exp. EUR 1bln 1.80% 2053 Bund and EUR 0.82bln vs exp. EUR 1bln 2.50% 2054 Bund.

Commodities

• Softer trade across the crude complex after the weekly Private Inventory data showed a surprise build in headline crude and larger-than-expected builds in other components of the release, which helped to pare some of the geopolitcal induced headlines seen in the prior session. The complex then took another leg lower amid Reuters reports which suggested Russia could hold off oil export cuts in October due to domestic refineries maintenance. Brent’Nov trades towards the bottom end of today’s USD 72.42-73.77/bbl intraday parameter.
• Flat/slightly firmer trade in precious metals as traders bide time ahead of the FOMC announcement whereby the main question around the Fed’s decision is the magnitude of the rate cut to kick off its easing cycle, with a 25 or 50 basis point cut under consideration.
• Base metals are on a firmer footing following early weakness as the DXY eased off best levels and after sentiment around Chinese markets recovered on their first day back from the long weekend, with Mainland China offered the first chance to react to its sub-par activity data from the weekend.
• US Private Energy Inventories (bbls): Crude +2.0mln (exp. -0.5mln), Distillate +2.3mln (exp. +0.6mln), Gasoline +2.3mln (exp. +0.2mln), Cushing -1.4mln.
• PBF’s 166k BPD Torrance California refinery reports unplanned flaring due to malfunction.
• Russia’s Kremlin, on Norway and elevated levels of caesium-137, says there is no alerts from Russian services about the high levels of such isotopes in the atmosphere.
• Russia could hold off oil export cuts in October due to domestic refineries maintenance, according to traders cited by Reuters; sources expect a small rise of exports by around several hundred thousands. Primorsk and Ust-Luga for September has been revised higher by 0.2mln tons to 6.2mln tons, sources state.

Geopolitics: Middle East

• At least 2,750 were injured and 9 died in the pager detonation incident across Lebanon, while the Lebanese Information Minister said the government condemned the pagers detonation as ‘”Israeli aggression”. Furthermore, Hezbollah promised to retaliate after blaming Israel for detonating pagers on Tuesday and Hezbollah Chief Nasrallah was reportedly not harmed in the pager blasts, according to a Senior Hezbollah source cited by Reuters.
• Israeli press cited sources that warned Hezbollah will pay a heavy price if it chooses escalation, according to Al Jazeera. It was also reported that senior Israeli military officials are preparing for a third Hezbollah War which is expected to begin almost immediately, according to Israel’s Channel 14. Furthermore, the security and military weight will shift from the Gaza Strip to the northern front, according to Al Jazeera citing Israel’s Channel 14.
• US officials cited by NYT stated that Hezbollah’s communication devices are Taiwanese and were hacked before they reached Lebanon, while they added that Israel hid explosives inside a batch of Taiwanese pagers imported into Lebanon.
• Taiwan’s Gold Apollo founder said the pagers in the Lebanon explosions were not made by the company and had their brand but production had been outsourced and were made by a company in Europe. Gold Apollo later stated that a company called BAC made the pagers used in the Lebanon blasts.
• “IDF Radio: Raising the alert level in air defense systems and air forces in anticipation of an attack by Hezbollah”, according to Al Jazeera.
• “Israeli media: The commander of the Northern Command presented the Chief of Staff and the political level with a series of plans to launch a ground operation in Lebanon”, according to Cairo News.

Geopolitics: Other

• Russia’s Tver regional governor ordered a partial evacuation of Toropets town after a Ukrainian drone attack sparked a fire.
• North Korea fired suspected ballistic missiles which fell shortly after and appeared to have landed outside of Japan’s Exclusive Economic Zone.
• Taiwan’s Defence Ministry said a Chinese aircraft carrier group sailed through waters to the northeast of Taiwan on Wednesday and then sailed to the southeast of Japan’s Yonaguni island, while NHK reported that a Chinese navy aircraft carrier temporarily entered Japan’s contiguous waters in a first such entry.

US Event Calendar

• 07:00: Sept. MBA Mortgage Applications, prior 1.4%
• 08:30: Aug. Housing Starts, est. 1.32m, prior 1.24m
  • Aug. Housing Starts MoM, est. 6.5%, prior -6.8%
  • Aug. Building Permits, est. 1.41m, prior 1.4m, revised 1.4m
  • Aug. Building Permits MoM, est. 1.0%, prior -4.0%, revised -3.3%
• 14:00: Sept. FOMC Rate Decision (Lower Bound, est. 5.00%, prior 5.25%; Upper Bound, est. 5.25%, prior 5.50%
• 16:00: July Net Foreign Security Purchases, prior $96.1b
• 16:00: July Total Net TIC Flows, prior $107.5b

DB’s Jim Reid concludes the overnight wrap

Do you think the Fed will cut 25bps or 50bps today? If you feel like taking part in our flash poll click on the hyperlink underneath these two numbers above to provide a one click response. It’ll be great if you can take a second to take part. It’ll be interesting to see how far this is away from current market pricing. I’ll publish the answers in a CoTD today later.

As it stands right now, futures are pricing in a 69% chance of a 50bp cut, and given the uncertainty that’s still looming, we can expect a decent market reaction whatever the decision is tonight. You’d have to go back over 15 years to find such an uncertain situation this close to the decision. A lot of money will be made and lost today.

I’ve waivered both ways over the last few days and I’m surprised the Fed has left pricing so uncertain at this stage. However in an era of heavy forward guidance it’s refreshing to see a little less certainty. If that was more widespread I think it would be more rather than less helpful. If you think you know exactly what the central bank will do it is likely to promote more over exuberance in markets which in turn requires a bigger opposite reaction later. I’m sure they’ll be those taking the opposite view though.
In terms of what our US economists expect, their view is the Fed will go for a 25bp cut today but Matt Luzzetti agrees its an incredibly balanced call. He decided against changing his view to 50bps as he believes that even though there’s a compelling risk management case for a larger cut, Fed communications before the blackout period and the balance of data don’t clearly argue for a larger cut. If the Fed do cut by 25bps, then they expect the median dot to show two further 25bps cuts this year, and then a string of reductions in 2025 that take the fed funds rate much closer to neutral by end-2025. Either way, they think Fed Chair Powell will face a communications challenge, as a 25bp cut would raise questions about the Fed falling behind the curve, whereas a 50bp cut would mean Powell needs to avoid sending negative signals about the economy. Click here for their full preview.

If the Fed do go for the larger 50bp cut today, it wouldn’t be the first time that they’ve begun a cycle of rate cuts with a larger move. In both 2001 and 2007 they opened with a 50bp cut, although in those two cases a recession followed within 3-4 months, so that’s hardly inspiring from the Fed’s perspective. The most recent example of a 50bp rate cut came in March 2020, again as the economy was deteriorating sharply given the pandemic, which was then followed up by a 100bp cut just 12 days later. So this is partly why there’s the theory that a dovish decision could panic the markets today, with the argument saying that if the Fed do go for a 50bp cut, that implies they’re pretty worried about where the economy stands right now.

The market dial between 25bp and 50bp continued to waver over the last 24 hours. It had marginally shifted it back towards 25bps earlier yesterday, as neither the retail sales nor the industrial production data suggested the economy was heading into a sharper downturn. In fact, the Atlanta Fed’s GDPNow estimate was updated on the back of those, and it now expects Q3 growth to come in at an annualised +3.0%, up from +2.5% before. So well away from recession territory as it stands. In terms of the specifics, the headline retail sales print was stronger than expected at +0.1% (vs. -0.2% expected), and the previous month was revised up a tenth to +1.1% as well. Then on industrial production, the headline figure was up +0.8% in August (vs. +0.2% expected), and that outperformance more than outweighed the three-tenths downward revision to the previous month. That led futures to initially dial back the chance of a 50bp cut, with the probability falling from 71% at Monday’s close down to as low as 62% intra-day. However, the pattern of a drift towards 50bp pricing in the absence of newsflow then re-emerged, with the probability rising to 66% by the close and further up to 69% as we type this morning.

This backdrop led to an up-and-down session for US equities. The resilient data saw the S&P 500 reach an all-time intra-day high of 5670 (+0.67% at the peak) early on but it later gave up those gains to close little changed on the day (+0.03%). This did still represent a 7th consecutive advance, and the equal-weighted version of the S&P 500 (+0.14%) advanced to a new all-time high. As we pointed out in yesterday’s Chart of the Day (link here), if you look at the Fed rate cut cycles since 1957, this one has seen the strongest advance for the S&P 500 in the year leading up to the cuts. So it’s unusual to see monetary policy eased against the backdrop of such buoyant equity gains.

There was some divergence across sectors yesterday, with cyclical stocks including energy (+1.41%) and consumer discretionary (+0.62%) leading the way within the S&P 500. By contrast, defensive sectors declined, including healthcare (-1.01%) and consumer staples (-0.93%). The outperformance of small-caps was another continued theme of recent days, as the Russell 2000 (+0.74%) outpaced the S&P 500 for a 4th consecutive session. Meanwhile in Europe, equity markets closed before the US gave up its gains, with the STOXX 600 (+0.40%), the DAX (+0.50%) and the FTSE 100 (+0.38%) all moving higher.

In the meantime, sovereign bond yields moved off their recent lows, as the strong US data saw investors slightly dial back the likelihood of rapid rate cuts. By the close, that meant the 2yr yield was up +5.4bps to 3.61%, whilst the 10yr yield was up +2.8bps to 3.65%. The uptick in rates was echoed in Europe, where yields on 10yr bunds (+2.1bps), OATs (+2.7bps) and BTPs (+2.0bps) each moved a bit higher as well.

The rise in US rates was led by breakevens, which ticked up for the 5th session in a row as oil prices continued to recover from their post-2021 low seen last week. Brent crude was up +1.31% to $73.70/bbl, in part amid renewed concerns over Middle East escalation after a wave of pager explosions in Lebanon that appeared to target Hezbollah, which in turn blamed Israel for the attack.

In Asia markets are pretty flat with most just above or below the flat line including China where markets have resumed trading after the early week holiday. Hong Kong and South Korea are still closed for holidays.

Early morning data showed that Japan’s export growth slowed sharply in August, rising +5.6% y/y (v/s +10.6% expected), up for a ninth straight month and against a downwardly revised +10.2% y/y increase the previous month. Meanwhile, the value of imports grew +2.3% y/y in August, versus a +13.4% increase expected by Bloomberg. As a result, the trade deficit stood at -695.3 billion yen (v/s -628.7 billion yen last month) compared with the forecast of a deficit of -1.43 trillion yen. A reminder that the BoJ are widely expected to keep interest rates on hold at its two-day meeting ending Friday.

Looking at yesterday’s other data, the German ZEW survey came in noticeable lower than expected, with the expectations component down to an 11-month low of 3.6 (vs. 17.0 expected). The current situation also fell back to -84.5 (vs. -80.0 expected), which is the lowest reading since May 2020. Meanwhile in Canada, inflation fell a bit more than expected in August, with CPI coming down to +2.0% (vs. +2.1% expected).

To the day ahead now, and the main highlight will be the Federal Reserve’s policy decision and Chair Powell’s subsequent press conference. Data releases include the UK CPI for August, along with US housing starts and building permits for August. We’ll also hear from the ECB’s Holzmann, Vujcic and Nagel.

Taiwanese pager manufacturer Gold Apollo Co., at the center of the exploding pagers incident used by Hezbollah fighters in Lebanon—resulting in nine deaths and nearly 3,000 injuries—shifted the blame onto Budapest-based BAC Consulting Kft. 

The Washington Post cites Hsu Kuang, the founder of Gold Apollo, who told reporters that BAC Consulting “entirely handled” the AR-924 pager manufacturing process. 

On Wednesday, Kuang told reporters at the company’s headquarters in New Taipei City that BAC has been selling Gold Apollo’s pager brand for less than two years. He was completely stumped by how a pager could be weaponized into an explosive device. 

“I’m just doing my business, why am I getting involved in a terrorist attack?” he told reporters, adding, “The product was not ours. It was only that it had our brand on it.”

CEO of Gold Apollo, Hsu Ching-Kuang denied manufacturing the explosive pager. When asked abt AR-924, he said “it is produced & sold by BAC…we only provide brand trademark authorisation & have no involvement in design or manufacturing of this product.” See my exchange w him. pic.twitter.com/eb6k65oyKl

— Tingting Liu 劉亭廷 (@tingtingliuTVBS) September 18, 2024

A statement from Gold Apollo noted that it authorized “BAC to use our brand trademark for product sales in specific regions, but the design and manufacturing of the products are entirely handled by BAC.” 

On Tuesday, at around 330 local time across Lebanon, the pagers from hell exploded. Sources told Reuters that Hezbollah fighters began recently using pagers to evade Israeli tracking of their locations. 

Here’s more about the exploding pagers from Bloomberg: 

One of the outstanding questions is how the blasts were planned and then triggered with such coordination. Small amounts of explosive were planted in beepers that Hezbollah had ordered, the New York Times reported, citing US and other officials briefed on the operation. Just one or two ounces of the material was added next to the battery of each pager, and a switch was embeded to trigger the detonation, the newspaper reported. Devices exploded simultaneously around the country at about 3:30 p.m.

Meanwhile, the Lebanese government has identified “Israeli aggression” as being behind the attack, while Hezbollah also says it holds Israel “fully responsible.” Israel has yet to issue an official comment, but there are several reports from the region that war preparations are underway.

According to a report prepared by the American Center for Levant Studies (ACLS), early estimates suggest 4,000 Hezbollah fighters were injured in yesterday’s attack, affecting about a quarter of leadership. 

Around 4,000 Hezbollah operatives in Lebanon were injured after their communication pagers exploded. Eleven members of Hezbollah, including leaders, were confirmed dead in today’s attack with 400 in critical condition and 500 losing their sight. This significant blow left 10% to 25% of the party’s leadership out of service, marking a major disruption in Hezbollah’s command structure. Experts in the region are calling the incident a “checkmate” for Hezbollah. Explosions spread into Syria as devices detonated in a car in Damascus, injuring 18 fighters.

ACLS noted that pentaerythritol tetranitrate explosives were embedded into each of the pagers:

The pagers, acquired as part of a technological upgrade, were brought to Lebanon five months ago from the Taiwanese company Gold Apollo. The explosive material was inserted before the devices arrived in Lebanon. Initial reports indicate they contained PETN, a powerful explosive material. Each device had no more than 20 grams of PETN, known for its strength and sensitivity. While PETN doesn’t explode on impact or ignition, it can be triggered by continuous vibrations. For reference, 1 kilogram of PETN equals 1.25 kilograms of TNT. Repeated, continuous messages sent to the pagers caused prolonged vibrations, leading to the explosion.

Now, everyone is checking their electronic devices for explosives.

By Charles Kennedy of OilPrice.com

Power prices in France turned negative for hours on Tuesday morning amid tepid demand in a struggling economy and increased renewables generation.

French intraday power prices traded at as low as -$22.25 (-20 euros) per megawatt-hour (MWh) on the Epex Spot exchange, according to data compiled by Bloomberg.

So far this year, France’s power demand has been undershooting projections by grid operator RTE as the French and European economies are seeing little – if any – growth.

France, which derives about 70% of its electricity from nuclear energy, returned last year to the top spot of Europe’s net power exporters, as its nuclear fleet returned from maintenance and domestic demand was lower. Even with high levels of electricity exports, power supply in France is set to exceed demand for several hours on Tuesday.

European wholesale electricity markets have seen zero or negative power prices for the most hours on record this year amid soaring renewable energy generation and a mismatch between supply and demand hours for solar power.

Negative pricing occurs when there is more electricity supply than demand, a scenario becoming more frequent as Europe continues its aggressive push toward renewable energy.

The number of tradable hours in which power prices were zero or negative have jumped so far this year in major wholesale power markets, including Germany, France, the Netherlands, Spain, Finland, and southern Sweden, per LSEG data cited by Reuters.

Zero or negative wholesale power prices have started to slow investment in capacity additions and make the case for the need for higher investment in energy storage, through which power producers would avoid curtailing electricity output or having to pay to offload electricity.

The rapid expansion of wind and solar capacity is reshaping the continent’s energy landscape. On days when both sources are generating at high levels, the market can become saturated with inexpensive power, driving prices down to the point where they even turn negative. While this benefits consumers in the short term, it also highlights the challenges of managing an energy grid increasingly reliant on intermittent renewable sources.

Lazard Chief Executive Officer Peter Orszag doesn’t seem to be bothered by recent complaints of junior bankers being overworked on Wall Street. As a matter of fact, he took to Bloomberg yesterday to proclaim his young bankers are actually asking for longer hours, providing the work is interesting.

Whether its just PR spin aside, Orszag’s comments come days after we reported that JPMorgan is now capping junior bankers’ hours at 80 per week, while Bank of America is rolling out a tool requiring detailed time tracking. 

Those moves come years after the infamous Goldman Sachs slide deck, wherein junior bankers complained about working long hours on…of all places, Wall Street. Despite this, we wrote back in July that junior bankers were working 100 hour weeks again

Orszag said in an interview this week: “There are many, many people who would rather work whatever number of hours per week on interesting, important things rather than fewer hours on things that are not that interesting. And that’s what we’re looking for. That’s the trade-off.”

The Bloomberg report says Orszag attributes his ability to ask for 80-90 hour weeks to giving remote work two days a week and offering “flexibility to ensure staff still have the agency to focus on other important things in their lives”. 

Employers must offer junior bankers more meaningful work, not just “make-work,” said Orszag, though professions do require effort at the end of the day.

As we noted last week, the debate over junior bankers’ hours resurfaced after Bank of America associate Leo Lukenas died in May, with complaints that hours were exceeding 100 a week despite prior commitments to protect worker health.

Orszag concluded by hailing the company’s diversity as its strength: “The evidence is clear that more diverse teams produce better outcomes when the problems are not routine. We’re going to be better on behalf of our clients as a result.”

By Charles Kennedy of OilPrice.com

The price of the U.S. WTI crude oil has finally stayed in the low $70s per barrel for a sustainable period of time, allowing the Biden Administration to ramp up the refill of the Strategic Petroleum Reserve (SPR), which it had said would do at prices of $79 a barrel or below.

WTI Crude is now at $70 per barrel as of Tuesday morning, after spending days below that threshold.

But the Energy Department has just $841 million left to buy crude for the SPR, Bloomberg reported on Tuesday, citing an estimate by ClearView Energy Partners, a consulting firm. That money would be enough to buy only around 12 million barrels of crude at today’s prices, per Bloomberg’s calculations.

This would be a drop in the ocean, considering that the SPR is only just over half full compared to its capacity of 700 million barrels.

DOE’s Office of Petroleum Reserves has recently announced a call for bids to supply up to 1.5 million barrels of oil to the Bayou Choctaw site in January 2025. An additional solicitation will follow on August 12, 2024, for another 2 million barrels destined for the Bryan Mound site, also for delivery in January 2025.

The replenishment strategy comes in the wake of the SPR’s critical role in stabilizing the market during global supply disruptions, notably the release of more than 180 million barrels of oil from the SPR starting in 2021, as gasoline prices remained high. The Department of Treasury claims that these releases, along with coordinated international efforts, helped reduce gasoline prices by up to 40 cents per gallon in 2022.

The SPR currently houses 375 million barrels of crude—a figure that is 263 million barrels less than oil in the SPR at the beginning of President Joe Biden’s term in office. The SPR, capable of storing as many as 714 million barrels of crude oil, is kept in underground salt caverns at four sites in Texas and Louisiana and was designed to protect the economy and American livelihoods during oil shortages.

Ghosting isn’t just for dating apps anymore. It’s also happening in the world of hiring…

“Ghost jobs” are defined as job listings for roles with no hiring activity. And a new Bloomberg report says that those types of listings have hit a two year high, citing data from Greenhouse.

In the world of consulting, these ‘ghost’ listings rose to 31% in Q2, up from 26% two years ago, the report says. These jobs are seen as “a bellwether for the white-collar economy”, the report says.

Consultants have also reported being “ghosted,” where recruiters abruptly stop communication during the hiring process without explanation, according to Bloomberg. The shift has left many jobseekers frustrated.

One job seeker told Bloomberg: “It can be so awful. I don’t care for automated rejection letters, but would prefer that, just to have closure.”

Declining demand for traditional consulting services has led to job cuts and slower hiring at firms like Accenture, Ernst & Young, and McKinsey.

Growth in the U.S. consulting market slowed to 5.2% last year, down from 14%, with many firms scaling back or canceling projects. This year’s growth is projected at around 6%, according to Source Global Research.

Jon Stross, co-founder and president of Greenhouse said: “When the economy is hot, you have to treat job candidates better and make decisions faster.”

He continued: “When it flips and there are way too many candidates, it slows down decision making. Recruiters can wait for that perfect person, so they treat people worse and get away with it.”

The report notes that some consultants are applying to hundreds of jobs without success, as many roles are put on hold or canceled.

According to industry expert Hung Lee, this is partly due to recruiters being overwhelmed and outdated job postings remaining online.

Meanwhile, wage growth in consulting is slowing, with salary increases projected to rise only 3.85% next year, down from nearly 5% in 2023.