US stocks are higher as investors anticipate that a November Fed taper announcement does not necessarily mean higher interest rates next year and as China prepares to contain the potential fallout of an Evergrande collapse. Yesterday, Wall Street thought the Fed was somewhat hawkish as they signaled they can start reversing its pandemic stimulus programs and may be ready to deliver an interest rate hike at the end of next year. A wrath of rate decisions show the global economic recovery has some central banks (BOE, Norges) ready to remove accommodation, while most (SARB, SNB, Philippines, and Taiwan) are still waiting for further progress in their recoveries.
Since the Fed still thinks inflation will be transitory, even if tapering is exhausted in the middle of next year, “liftoff” on interest rates is not a given for 2022. The Fed’s dots showed a split over a 2022 rate hike and now 3-4 hikes in 2023. Wall Street should take these dot plots with a grain of salt and interpret them as dovish as leadership members will keep rates steady in 2022 and that unless inflation gets out of control only a couple of hikes in 2023. The Fed never gets their rate hike forecasts right, which could suggest they may be too optimistic.
The latest round of global flash PMIs broadly showed downside surprises confirmed we are in a September slowdown. Earlier in Europe, manufacturing across the euro zone showed a deceleration but still remained in confidently in expansion territory. The US flash PMIs painted a picture that the slowdown could continue if supply chain bottleneck issues are not resolved. Risk appetite may have gotten a boost from the weaker PMI data as slowing economic data will likely influence both the Fed and ECB in slowly removing stimulus.
Initial jobless claims rose for a second straight week, but the trend is still heading in the right direction. September comes with seasonal factors that impact claims data so investors might not give this report much attention.
The White House is holding a third chip summit as concerns over the shortage of semiconductor chips has not improved. Apple, Intel, Samsung, and car markers will likely see legislation formed to help spur new efforts to increase production. Any breakthroughs from this summit could provide support in the Fed argument that inflation will be transitory.
Evergrande still remains the biggest risk event on the table. The systemic pain from the blowing up of Evergrande will be contained, but who will bear the brunt of the losses. The news flow for China’s second largest real estate developer has been fluid. The latest round of news said that Evergrande may have a path to restructure. Then we heard that Evergrande was told not to default. Lastly, it seems China is considering not bailing Evergrande out and wants local governments to prepare for the worse case outcome.
If Evergrande fails, the exposure outside of China appears limited, and since the government will do whatever it takes to contain it, if China is successful, global risk appetite may not be dealt that much of a blow.
The Swiss National Bank did not deliver any surprises and kept monetary policy unchanged and reiterated they ready to intervene in the FX market to counter rising pressure on the franc. The SNB did acknowledge they are monitoring any spillovers from Evergrande as safe-haven flows could intensify if China was not successful in thwarting contagion risks. The inflation forecasts were revised higher but nothing that would trigger a change in monetary policy.
Norway’s central bank (Norges) became the first G10 country to deliver an interest rate increase during the COVID-19 pandemic. The statement said that the policy rate will most likely be raised further in December. The economy is thriving as the economic upswing will likely continue through autumn. The bank raised their mainland 2022 GDP forecast from 4.1% to 4.5%.
The British pound surged after the BOE rate decision showed policymakers are concerned about inflation. Rate hike expectations dramatically moved forward to March 2022. Currency traders rushed to buy sterling after Deputy Governor Ramsden delivered his first dissent over the bond buying program, joining Saunders.
Turkey President Erdogan was pleased with the CBRT’s decision to cut interest rates. Economists widely expected the central bank to keep rates steady, so the currency reaction was severe. Following the 100 basis point surprise cut, the lira tumbled to a record low. Lira volatility will remain elevated.
Two days ago, the cryptoverse got nervous after bitcoin fell below the USD 40,000 level for the first time since early August. That was a key level that was defended and will likely see some follow through buying. Fed Chair Powell delivered a minor update over the research paper on central bank digital currencies (CBDC), stablecoins and cryptocurrencies, noting that it would come out soon. Powell said that the Fed will “soon” start tapering its asset purchases, which indicates that it could start at the November 3rd FOMC meeting. The Fed could that paper any moment, but at the very latest crypto traders might have to wait till November.
The regulatory risks remain for crypto and that should keep bitcoins gains over the short-term capped around the USD 50,000 level. If momentum grows that a bitcoin ETF in the US is nearing, that could pave the way for a major breakout.
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