Following Fed Chairman Powell’s appearance at the Jackson Hole Symposium and this indirect announcement of the much-discussed Fed rate cut, the market is counting down to the September 18 meeting. This week’s labour market data could play a role in the size of this rate move with a negative set of prints potentially keeping the door open to a 50bps decrease.

This rate cut will be the first interest rate reduction since the 150bps of easing announced during March 2020 amidst the COVID pandemic outbreak. One must go back to 2019 for the first “normal” monetary policy easing with three consecutive 25bps cuts announced back then. Powell called these rate cuts “mid-cycle adjustment”.

Six initial rate cuts since 2000

Scrolling through the Fed’s actions since 2000, six easing cycles can be identified. Table 1 below shows the details of the initial interest rate cuts with both the 2002 and 2008 reductions featuring in the list. Both moves came after extensive Fed pauses and are hence each treated as the start of a new easing cycle.

The market is currently pricing in a 39% possibility of a 50bps rate move in two weeks’ time. This looks low considering that on five out of the six occasions examined, the Fed commenced its rate cut cycle with a 50bps move. However, such a move might be more difficult this time around since the US data on the whole are satisfactory, and the US presidential election is just around the corner.

Additionally, the market is currently expecting around 103bps of easing until year-end. As there are just three meetings left in 2024, the Fed is expected to announce rate cuts at every gathering, including the November 7 one. Historically, the Fed announced back-to-back cuts on four of the six periods examined.

How did the market perform one week after the initial Fed rate cut?

Chart 1 below presents the performance of key market assets one week after the initial Fed rate cut. Digging through the data, some interesting trends can be identified. Specifically, the S&P 500 stock index dropped by an average of 3.7% in the six periods examined, reflecting the market’s concerns about the overall economic outlook.

Interestingly, the US dollar tends to suffer in the aftermath of the initial Fed rate cut with euro/dollar rallying in five out of the six periods examined. Additionally, with the exception of 2001, WTI oil futures usually fall by 2.3%-27.2%, potentially reflecting the market’s concerns about a significant economic slowdown, and even recession.

Asset performances two months after the first rate cut

The picture becomes less clear when analyzing the market’s performance two months after the first Fed rate cut. However, this timeframe is rather important as it encompasses the November 5 US presidential election and the subsequent Fed meeting (November 7).

As seen in Chart 2 below, WTI oil futures suffered in 2008, 2019 and 2020, while the US dollar had a more mixed performance in the two months after the initial rate cut. On the flip side, based on the analysis’ findings, the 10-year US treasury yield tends to fall by an average of 38bps in the examined timeframe.

Additionally, the S&P 500 index was under pressure in five of the six periods examined as market participants were quite anxious about the state of the US economy. Interestingly, this equities’ weakness was one of the key findings in an earlier special report analyzing the performance of key assets two months ahead of the US presidential election.

KEY points

ADP Employment Change is forecast to arrive at 145,000 in August.

Labor market conditions could influence the Fed’s policy outlook.

The US Dollar stays resilient against its rivals after posting large losses in August.

The Automatic Data Processing (ADP) Research Institute will release its monthly report on private-sector job creation for August on Thursday. The announcement, known as the ADP Employment Change, is expected to show that the country’s private sector added 145,000 new positions in August following the 122,000 increase recorded in July.

The survey is usually released a couple of days before the official Nonfarm Payrolls (NFP) data (not this month, as it will be released the prior day), and despite random divergences in the outcome, market participants tend to read it as an advanced indicator of the Bureau of Labor Statistics’ (BLS) jobs report. 

ADP Jobs Report: Employment and the Federal Reserve

After leaving monetary policy settings unchanged in July, the Federal Reserve (Fed) seemingly shifted its focus toward the labor market, with inflation readings giving enough confidence to policymakers about further progress toward the 2% central bank’s target. In its policy statement, the Fed noted that it is attentive to risks on both sides of its dual mandate, a change from the June statement, in which it said it was 'highly attentive' to inflation risks.

While speaking at the Jackson Hole Economic Symposium on August 23, Fed Chairman Jerome Powell acknowledged that the time has come for the monetary policy to adjust. "We will do everything we can to support a strong labor market as we make further progress toward price stability,” Powell said. 

According to the CME FedWatch Tool, markets are currently pricing in a nearly 30% probability of the Fed lowering the policy rate by 50 basis points (bps) at the upcoming policy meeting. In case the ADP report suggests that employment in the private sector increased at a stronger pace than forecast in August, market participants could refrain from pricing in a large rate reduction in September.

On the other hand, a disappointing ADP print, close to 100,000, could feed into growing fears over cooling conditions in the labor market and allow markets to remain hopeful about a 50 bps rate cut, at least until the BLS publishes the jobs figures for August on Friday.

Source: FXSTREET

Malaysia should capitalise on the Asean open market to showcase its products and services, keeping itself at the forefront of a bloc projected to reach one billion consumers, Economy Minister Rafizi Ramli said.

He said Malaysia is already leading in the region, offering significant opportunities as Asean is projected to become the world's fourth-largest economic power within the next 10-15 years.

"This 10-15 year period is brief. Asean currently has around 700 million consumers, and within this timeframe, the number is expected to grow to one billion.

"China has emerged as a major economic power, and India is also on track to become one, with a market exceeding one billion consumers," he told reporters after attending the Kick-Off Conference for the 13th Malaysia Plan (2026-2030) here on Thursday.

He added that, aside from the major global economies, Asean is the only region experiencing strong, sustained growth, with a consumer base on track to surpass one billion.

Rafizi further highlighted that many experts predict Asean will surpass Europe as the world's third-largest consumer market.

"In terms of our regional peers, Malaysia consistently ranks second in gross domestic product per capita, following Singapore. While our population may not be vast, it is projected to grow to 40 million, and our market remains significant.

"We have the right balance, with strong growth, abundant resources, and a strategic location at the heart of Asean. The potential is enormous. That is the future we aim to chart, which is why RMK-13 is a crucial planning document that aligns with this trajectory," he said.

In his earlier speech, Rafizi explained that RMK-13 would echo RMK-1, a concise and comprehensive strategic document where every word aligns with specific policy directions.

The minister also emphasised the government’s aim to collect diverse ideas and feedback to foster an environment where concerns can be raised and the government can be guided in the right direction.

Source: Theedgemarkets

Here is what you need to know on Thursday, September 5:

The US Dollar (USD) finds it difficult to stage a rebound after weakening against its major rivals on Wednesday. The US economic docket will feature ADP Employment Change for August, weekly Initial Jobless Claims and August ISM Services PMI data later in the day. Ahead of these releases, Eurostat will publish Retail Sales data for July.

On Wednesday, the data published by the US Bureau of Labor Statistics showed that job openings stood at 7.67 million on the last business day of July. This reading came in below the market expectation of 8.1 million and caused the USD come under selling pressure. After touching a fresh two-week high at 101.91 on Tuesday, the USD Index turned south and lost 0.5% on Wednesday. In the European morning, the index holds steady above 101.00. Meanwhile, the benchmark 10-year US Treasury bond yield dropped below 3.8% and Wall Street's main indexes closed the day mixed. Early Thursday, US stock index futures trade marginally lower.

While speaking at an event organized by the Anika Foundation earlier in the day, Reserve Bank of Australia (RBA) Governor Michele Bullock said that they need to see inflation slowing in the actual numbers before acting on interest rates. AUD/USD showed no reaction to these remarks and was last seen moving sideways above 0.6700.

The data from Germany showed on Thursday that Factory Orders expanded by 2.9% on a monthly basis in July. This reading came in much better than the market expectation for a contraction of 1.5%. Following Wednesday's rebound, EUR/USD holds its ground in the European morning and trades slightly below 1.1100.

Bank of Japan (BoJ) Board Member Hajime Takata noted on Thursday that Japan's current real interest rate is below estimated natural rate of interest, adding that this means monetary conditions remain accommodative. USD/JPY registered large losses for the second consecutive day on Wednesday and lost over 2% in that time frame. The pair stays under modest bearish pressure and trades at its lowest level since early August at around 143.50.

GBP/USD benefited from the selling pressure surrounding the USD and closed in positive territory on Wednesday. The pair holds steady near 1.3150 on Thursday.

Gold registered small gains on Wednesday and continued to stretch higher during the Asian trading hours on Thursday. XAU/USD was last seen trading above $2,500.

Source: FXSTREET

A popular retail stock saw its share price plummet more than 6% after it posted strong Q2 earnings. What caused the dip, and should investors view it as a buying opportunity?

The stock market can be a fickle thing, as Dick’s Sporting Goods (NYSE: DKS) found out Wednesday. The leading sporting goods retailer had blowout second quarter earnings that topped estimates and raised its guidance for the rest of the fiscal year — and still, the stock was down more than 6% on the day.

It is not typical for that combination of results – earnings beat and raised guidance – to cause the stock price to plummet. But that’s exactly what happened. Here’s why.

Blowout Q2 earnings

Dicks Sporting Goods has been on a great run over the past several years. The stock price is up about 50% year to date and over the past 12 months, as of Sept. 3, it has returned 95%. Further, over the past five years it has generated an average annualized return of 45%. It has undoubtedly been one of the best retail stocks over that stretch.

The momentum seemed to be continuing after the retailer released its fiscal second quarter earnings report on Wednesday.

In the second quarter, Dick’s generated $3.47 billion in net sales, a 7.8% year over year increase, with same store sales rising 4.5%. This was better than the $3.4 billion in revenue that analysts had predicted.

The company’s net income jumped 48% year over year to $362 million, while earnings per share rose 55% to $4.37 per share. That crushed estimates of $3.83 per share.

Dick’s Sporting Goods grew its number of transactions as well as the average ticket, or price paid by the average customer for goods. In addition, it lowered its cost of goods sold as a percentage of revenue to 63.3% from 65.6% and reduced selling, general, and administrative expenses as a percentage of revenue to 22.9%, from 23.7%. It also boosted gross profits and operating income in relation to percentage of sales

“Because of our strong Q2 performance and the confidence we have in our business, we are again raising our full year outlook,” President and CEO Lauren Hobart said.

Dick’s raises its guidance, but not by enough?

The company raised its guidance for both comparable store sales and earnings per share, while maintaining its outlook for net sales.

Specifically, it boosted its comparable store sales growth to 2.5% to 3.5%, from the previous range of 2% to 3%. Overall, the net sales target for the full year remained the same at $13.1 billion to $13.2 billion.

However, Dick’s raised the earnings outlook, calling for EPS of $13.55 to $13.90, up from $13.35 to $13.75 the previous quarter. This was apparently not a high enough raise, even though the median estimate called for EPS of $13.79, which would be in the range, but higher than the midpoint.

Investors might have been expecting a higher EPS raise, given the strong Q2 and the 55% year over year earnings boost. It may suggest to some investors that second-half sales growth could be a bit slower.

Then again, Dick’s could just be playing things close to the vest and staying cautious with its guidance, as it has raised its earnings outlook twice already this year.   

Is Dick’s Sporting Goods stock a buy?

Wednesday’s selloff looks like a good opportunity for investors to pick up some shares of Dick’s Sporting Goods stock.

I tend to think Dick’s leadership is playing it cautious with its guidance, as it has all year. Its growth numbers remain impressive and it has lowered its expenses as a percentage of sales.

The stock is already up 50% YTD, yet it remains a decent value, trading at 17 times forward earnings.

Wall Street analysts have a median price target of $246 per share for Dick’s Sporting Goods stock, which would be another 14% increase over the next 12 months. I think with interest rates poised to drop, it could lead to an unexpected surge in consumer spending, particularly over the holidays.

Dick’s Sporting Goods stock is definitely a hold if you own it, and looks like a solid buy, particularly after Wednesday’s selloff.

Source: FXSTREET