At the September meeting, the FOMC decided to cut by 50bps to begin their policy normalisation cycle. The Committee projects another 50bps of cuts to end-2024 (over two meetings), another 100bps of cuts in 2025, then a final 50bps in 2026, leaving the fed funds rate at 2.9%, which is also the Committee’s upwardly revised ‘longer run’ estimate of neutral.

The Committee’s statement and Chair Powell’s remarks in the press conference were worded carefully to highlight that the 50bp cut was not a signal of concern in the outlook, but rather a response to inflation slowing near target and the risks to achieving its employment and inflation goals now being “roughly in balance”.

The revised forecasts provided by FOMC members also speak to confidence in the economy. GDP growth is forecast to be 2.0%yr in 2024-2027, above their ‘longer run’ estimate of trend growth of 1.8%. The unemployment rate is consequently forecast to peak at 4.4% in 2024 then drift down to 4.2% through 2026 and 2027, where the unemployment rate is today. This implies little-to-no further deterioration in employment growth over the forecast period, in contrast to the marked deceleration in payrolls employment growth seen over the past two years – from 320k per month over the year to March 2023 to a 174k average over the 12 months to March 2024 (incorporating the BLS’ initial annual revision guidance) and now 116k in the three months to August. The inflation projections also point to an economy in robust shape over the outlook, with both headline and core inflation to trough at 2.0%yr not below.

It is worth emphasising however, while the ranges for the activity and price forecasts are narrow, the Committee’s views on the fed funds rate at end-2025, 2026 and 2027 are broad. Whereas the vast majority of the Committee see the fed funds rate only 25bps to 50bps below the current level by end-2024, the December projections for 2025 through 2027 are spread across a 150bp range. In 2027, the FOMC’s full range of estimates for the fed funds rate therefore stretches from 50bps below the their neutral estimate to 100bps above. To us, this speaks to considerable uncertainty over how the balance of risks will evolve and, as per Chair Powell’s remarks, a commitment to take “timely” action and “not to get behind” with policy. The FOMC regard the stance of policy as still materially above neutral and expect to return near it in time. How quickly they do so will be determined by incoming data and the perceived balance of risks.

To us, there is reason to be wary over a further deterioration in conditions and associated risks. We expect lower GDP growth in 2025 and 2026 of 1.8%yr and 1.7%yr versus the FOMC’s 2.0%yr. Westpac also expects a greater degree of weakness in the labour market, with the unemployment rate to rise to 4.7% in 2025 and hold there. Still, we also see inflation modestly above the FOMC’s 2.0%yr expectation in 2025 and 2026 as a result of supply-side pressures which are not easily resolved but, for the sake of inflation expectations, must be managed by the Committee. The 3.375% we have forecast for late-2025 speaks to these diverging risks and their persistence. The flow of data in coming months will be critical to assessing these uncertainties and their implications for the policy outlook.

So we get the 50bp interest rate cut that the market had been gunning for despite the economy being described as expanding at a "solid pace" in the accompanying statement.

Expectations of a larger move had been building over the past week despite core inflation coming in at a relatively “hot” 0.3% month-on-month and the August jobs report painting a stronger picture than many thought likely.

The lack of pushback on market pricing from the Fed in sourced media articles suggested it was inclined to go boldly and in the end there was only one dissenter – Governor Michelle Bowman, who voted for a 25bp cut. Being "strongly committed" to supporting maximum employment and returning inflation to target continues to be the theme, but it is clear where the priorities lie; get policy back to a more neutral setting to avert the risk of recession given growing comfort that inflation is on the path to 2%.

Fed funds ceiling with period between last hike and first cut indicated (%)

Source: ING, Macrobond

There was a sense in economist circles that the majority of Fed officials would be reluctant to take such bold action in an environment where the economy is growing at a 2.5-3% rate, equities are at an all-time high, inflation is above target and unemployment is low at just 4.2%. With no financial system stress apparent, unlike in 2007, this too argued for a more cautious 25bp cut.

A major catalyst for the move is likely to have been the narrative from the recent Federal Reserve Beige Book. This anecdotal survey on the state of the economy suggested that only three of the 12 Federal Reserve Bank districts reported growth over the previous eight weeks versus seven at the time of the previous report from July. With 75% of the Fed banks reporting flat or contracting activity, corroborated by weakness in ISM and NFIB business surveys, the Fed has taken the view that it needs to move policy from “restrictive” territory towards “neutral” quickly.

Fed forecasts

Source: Macrobond, ING

The Fed’s new forecasts show it still expects the economy to continue growing at 2%, and that unemployment will rise to 4.4% from 4.2% by year-end and stay there for 18 months, but it has trimmed their inflation numbers. The central bank suggests a further 50bp of cuts this year with 100bp more in 2025 and 50bp in 2026, taking the policy rate down to the 2.75-3% range. The market, though, thinks it will end up going harder and faster with a 2.9% Fed funds rate priced a full 12M ahead of when the Fed thinks it will happen. Note yet another incremental increase in where it thinks the long-run “neutral” policy rate is.

Our forecasts are broadly in line with what the Fed is indicating – get rates down to 3.5% or a bit below by next summer on the basis that prompt action from the Fed allows the US economy to avoid recession just as it did in the mid-1990s under Alan Greenspan. That view still holds, but we certainly acknowledge that the jobs market outlook is more concerning and the risks are indeed skewed to the Fed having to do more, more quickly. Remember 3% is not stimulative territory so if the growth story weakens more markedly then we know the Fed will go lower.

For market rates, a steeper curve is the most meaningful follow-on move

Market reaction to the 50bp has been a steeper curve, from the front end. Inflation expectations are up a tad as measured through the 10yr inflation breakeven rate. Reaction in risk space is positive as spreads tighten. Impact reaction had market rates net lower right along the curve. Ahead of the cut, there had been a drift higher in market rates. The 50bp move facilitated the reverse reaction lower.

It’s still too early to conclude that longer tenor market rates will continue to move lower. We’ve noted before that they have made quite some headway in recent weeks, and there is always a risk for a pullback, especially as yields are already quite low relative to the likely terminal rate. The Fed pitches that at 3.4% for 2025, versus 10yr SOFR now at 3.2%.

The steepener makes the most sense here, potentially from both ends, as the 10yr can still decide to baulk at a material move lower from here, and indeed the risk for a reversal higher in rates cannot be ruled out. Perverse yes, on a 50bp move, but not so perverse from a relative value perspective.

Remember, the 10yr Treasury yield is constrained by the spread to 10yr SOFR, currently around 45bp (and for good reason given the supply pressure in Treasuries). Hence, 3.65% on Treasuries coincides with 3.2% on SOFR, and the latter is already through the Fed's end game dot for 2025 (albeit slightly above the 2.9% dot for 2026).

FX: Dollar shorts build-up to accelerate

The surprise 50bp cut is hitting the dollar across the board, with the yen, Norwegian krone and New Zealand dollar up 1%+ on the day. As expected, the Canadian dollar is showing the smallest gains in G10, due to its correlation with USD rates and the growing speculation that the Bank of Canada will follow with a half-point reduction too.

If we had thought a dovish 25bp cut wouldn’t have turned the tide for the underperforming USD, a 50bp move unlocks more downside potential. Our calculations on CFTC data show that aggregate USD positioning against reported G10 currencies (i.e. G9 minus SEK and NOK) moved into net-short territory at the end of August. Still, those net USD shorts amounted to around 6% of open interest, a rather small figure compared to the 24% net-long peak reached last April. If unwinding dollar longs has been the story of the past few months, a steady build-up in dollar shorts may be the narrative into the US election.

Looking at EUR/USD, the move was more contained than in other USD-crosses after the Fed cut, but the pair has also shown good resilience to swings in sentiment lately, and we are ultimately growing more confident about our 1.12 short-term target for the pair. That said, the yen should remain a preferred channel of USD weakness, due to its high sensitivity to UST yields, while also being less at risk from potential Trump protectionism measures. USD/JPY is increasingly likely to be pressured well below the 140.0 line. DXY is on track to break below 100.0 for the first time since July 2023.

Unless jobs figures come in much stronger than expected, and force the Fed into a more cautious easing path, the dollar appears bound to stay soft into the US election. In November, a Trump win could see a sharp dollar rebound, especially if markets have built large USD short positions. Should Harris secure the presidency, we’d probably be looking at a further gradual USD weakening into 2025.

The Malaysian real estate investment trust (M-REIT) industry kicked off almost two decades ago. Since then, the market capitalisation has quadrupled from RM9 billion in 2010 to RM41 billion as of Dec 31, 2023.

When I think about investment, I don’t subscribe to the idea that investment’s sole purpose is to make profit. Milton Friedman’s idea that a company’s sole purpose is making profits for its shareholders has produced disastrous societal outcomes and resulted in very divided societies in the US and many parts of Europe.

The core idea of a REIT is that real estate development does not have to be transacted through the format of the individual ownership model.

In response, many businesses now talk about stakeholder economy; environmental, social and governance (ESG); and impact investing. I hope the REIT community will be ambitious and imaginative in utilising REITs as a mechanism to create a better Malaysia for all.

The world has entered into a new phase. From the time of China's entry into the World Trade Organization in 2001 to the Covid-19 pandemic in 2020, China was the factory of the world and many other countries experienced premature deindustrialisation, including Malaysia.

This has changed due to two major factors:

The disruptions of various forms, including the pandemic, wars and geopolitical tension such as the Red Sea crisis, as well as the impact of climate change, such as floods and typhoons, have forced manufacturers to move from a “just-in-time” logic to a “just-in-case” mindset. Corporations are now thinking about de-risking through a shorter and more secured supply chain.

Those who are involved in industrial parks would know that there are many new interests in industrial land. The REIT community should do more and quickly devise new ways of group ownership so that industrial land development does not have to be through the model of single-owners.

The key to the next phase of industrial success is not through many individual firms exporting vertically to a global supply chain but to form a very strong cluster and a robust supply chain.

I also hope property developers will take the new-found opportunity to transition from selling land to building supply chains to becoming investors in technology themselves. REITs can be of help here.

The new global setting gives Malaysia a second chance to be a high-end manufacturing and services provider, hopefully emerging as an innovative nation.

For the Malaysian economy to grow, we should not be competing with Vietnam to become a cheap manufacturing hub but we should aspire to be a centre of innovation and a hub for regional and global businesses.

Malaysia is not a “Vietnam+” but a “Singapore at a discount”. With such framing and a different value proposition, Malaysia will be the appropriate meeting place and launch pad for regional and global businesses, as well as regional research and development activities.

Costs in Singapore have risen significantly over the past several years, thus justifying a “Singapore at a discount approach” for corporations. A recent Knight Frank report showed that rents for office buildings in Kuala Lumpur are 15% of Singapore's.

As many of Singapore’s establishments are populated with Malaysian workers, a rule of thumb is that if a Malaysian is paid two-thirds of Singapore’s pay, he or she would likely be ready to work in Malaysia instead of Singapore.

Yet the relationship between Malaysia and Singapore is more of a complimentary one as the relocation of the supply chain into Southeast Asia is huge for any country to take all.

The global economy is now seeing “the rise of the rest” and is no longer dominated by just Western money. Kuala Lumpur is well-poised to be a great meeting point and regional headquarters for businesses from China, India, Arab countries, Southeast Asia and even South American countries such as Brazil.

Malaysia should capitalise on its multicultural milieus and multilingual professional workforce as well as its non-aligned geopolitical positioning, and make a concerted effort to make Kuala Lumpur a preferred choice for global and regional businesses to select as a hub.

However, Kuala Lumpur is not without its challenges.

First, after nearly 50 years of urban sprawling, Kuala Lumpur’s suburbs have reached Shah Alam or even Klang to the west and Seremban to the south, basically in all directions. Yet, the Kuala Lumpur inner city has hollowed out.

Second, the sprawling and financialisation of housing (the government-linked investment companies [GLICs] and government-linked companies [GLCs] have a hand in exacerbating both trends) have resulted in younger workers residing in faraway suburbs while leaving the abundant space and buildings in the Kuala Lumpur inner city empty. The newly built TRX and Merdeka 118 will exacerbate the situation.

Since many of those vacant buildings are owned by GLICs and GLCs, they need to repopulate the Kuala Lumpur inner city to generate sufficient yield for these buildings and also to prevent these buildings from rotting away.

Third, due to the lack of bus-based public transport, aggravated by urban sprawl, most commutes are done by privately owned single-passenger cars, which is a huge financial burden on the working population. It is also bad in terms of carbon emissions.

However, we have an extensive network of public transport infrastructure within a 3km radius of Kuala Lumpur's inner city. The inner city is also walkable. This makes a convincing case for the working population to move back into Kuala Lumpur inner city, nearer to their workplaces.

Fourth, at some point the government will have to remove petrol subsidies, which will make travelling from the sprawled suburbs with private cars a lot more expensive than it is now.

Fifth, wages for the general population are still low in Malaysia, and one of the ways to raise disposable income quickly is to reduce the burden of the cost of living, especially housing and transport costs that usually make up a big part of their expenditure.

The Kuala Lumpur inner city should be given a lot of attention by the government so that the city plays the following roles:

•The new regional headquarters for corporations from the developed world and, importantly, the Global South;

• The new centre of research and development;

•Creation of rental housing stock through repurposing older buildings, especially those owned by GLICs and GLCs; and

•A city where the population can work, live, learn and play.

To achieve all these, a major paradigm shift is needed. Just like Melbourne was hollowed out until the 1990s, it took the city around 30 years to repopulate the inner city. It is time for Kuala Lumpur to bring the people back to the inner city and make Kuala Lumpur a major regional city.

A rejuvenated inner city powered by REITs will also allow current building owners — many of the buildings are owned by GLICs and GLCs — to generate income from their old assets and create new asset classes for the GLICs and other funds to invest in, while solving the problems of housing the young, climate, and the current hollow state of our city.

Source: Theedgemarkets

Source: AP

US Bancorp (NYSE: USB), the nation’s fifth largest bank, has one of the best dividends in the banking industry and it just got a little better.

Last week, U.S. Bancorp., the holding company for U.S. Bank, boosted its quarterly dividend by 2% to 50 cents per share. For the full year, U.S. Bancorp pays out $2.00 per share. This marks the 13th consecutive year that the bank has raised its dividend payout.

In addition, the bank launched a $5 billion share repurchase program that will begin in 2025.

Best dividend among big banks

The dividend increase gives U.S. Bancorp one of the best dividends in the banking industry, with a yield of 4.48%. That is higher than the 3.21% average dividend yield in the banking industry, according to Seeking Alpha.

Among the 12 largest U.S. banks, only Truist Financial (NYSE: TFC) at 4.94% and TD Bank (NYSE: TD) at 4.70% have higher yields.

However, U.S. Bancorp, at 13 years, has a longer streak of raising its annual payout, so it could be argued that its stability and consistency, along with its high yield, make it the best large bank dividend stock.

One concern about U.S. Bancorp’s dividend is its payout ratio, which sits at 61.9%. That means that the company pays out nearly 62% of its quarterly earnings to fund the dividend. That is higher than the average banking industry payout ratio of 41%.

Typically, a payout ratio over 60% is considered on the high side, because it could mean that the company is paying out too much of its earnings, at the expense of other investments, to its dividend. It also could mean that the company may not be able to keep raising its dividend if the payout ratio gets too high.

U.S. Bancorp’s 61.9% is not too bad, and nothing to be too worried about, but it bears watching.

Is US Bancorp stock a buy?

In addition to the dividend increase, U.S. Bancorp announced plans to buy back $5 billion of the company’s outstanding common stock.

Typically, when companies buy back stock, it increases the value of existing shares and has the effect of raising the stock price.

U.S. Bancorp stock has struggled this year, up just 1.7% in this high-interest-rate environment, which has raised the costs of deposits and eaten into its interest income. With rates expected to move lower, the bank should be better positioned to increase earnings.

The stock currently has a median price target of $49 per share, which represents about 10% growth over its current price.

But the real value of U.S. Bancorp stock is its dividend. If you are an income investor looking for a solid dividend payout, this stock would be a decent choice.

Otherwise, if you are looking for a good dividend and capital appreciation, you’ll find better options elsewhere.

Source: FXSTREET