Fed to join rate-cut club

The timing of the Fed’s first interest rate cut of the cycle has been the dominant market theme all year, but since the summer, the narrative has changed to the size of the cut, not when. Nevertheless, after much frenzied speculation, the moment of truth has arrived, and the Fed is almost certain to begin its long-awaited easing cycle on Wednesday.

Until a few days ago, investors had all but priced out the probability of a 50-basis-point rate cut, as the July payrolls report that sparked fears of a possible US recession was not followed up by similarly weak data. But that hasn’t stopped some market participants to worry that the Fed has left it too late to start trimming borrowing costs and that a hard landing may now be inevitable.

What recession?

So how likely is a recession? The US economy clearly appears to be slowing, particularly the labour market. But there’s few signs in the hard data that currently point to a significant risk of an outright recession (although it’s worth remembering that jobs numbers tend to be lagging indicators) and inflation isn’t exactly falling off a cliff either.

The Atlanta Fed GDPNow model’s latest estimate is growth of 2.5% in the third quarter and the core PCE measure of inflation has been stuck at 2.6% for the past three months. These are hardly red flags that would prompt policymakers to slash rates by 50 basis points. Yet, markets remain jittery and even former New York Fed President Bill Dudley has joined calls for the central bank to cut rates by half a point this week, arguing that policy is too restrictive.

Fed is flip-flopping

The Fed may have started to take on board some of the criticism. Both the Financial Times and Wall Street Journal published articles last week suggesting that the Fed is debating whether to cut rates by 25 bps or 50 bps, despite no strong hints from officials that they saw the decision as such a dilemma before going into the blackout period.

This dramatically flipped expectations for Wednesday’s announcement back towards a 50-bps reduction. Not only that, but investors have also priced in rate cuts of almost 250 bps over the next 12 months, 120 of which are expected by year-end. Unsurprisingly, the US dollar has taken a dive in FX markets while shares on Wall Street just had their best week since last October.

A communications challenge

The problem is that there’s a danger traders have misinterpreted the Fed’s motives in ‘prepping’ the markets for the possibility of a 50-bps cut. By creating the impression that the September decision is going to be a close call, policymakers may have simply wanted to send a strong signal that they’re ready to adjust rates aggressively should it be warranted. Moreover, by setting a dovish backdrop for the meeting and additionally using the dot plot to flag multiple rate cuts in the months ahead, any reduction, whether it’s 50 bps or only 25 bps, would be perceived as a ‘dovish cut’.

But a potential challenge for the Fed, or more specifically for Chair Jerome Powell, to cutting rates by 50 bps is how to communicate a larger cut. Powell and his colleagues have gone out of their way to brush off concerns that the American economy is about to hit the rocks. So how would they go about justifying the reasoning behind a 50-bps move without setting off alarm bells that they see trouble ahead?

Frontloading may be the way to go

One argument is that if they increasingly view the risks to the labour market as being tilted to the downside, frontloading the rate cuts now would give them an insurance policy against a sharp slowdown and they could always pause if the worst case scenario doesn’t materialise. But again, even if Powell can convince investors why it was necessary to act aggressively without triggering any recession panic, it would still be an admission that the Fed kept rates too high for too long.

Thus, whatever the decision, it’s hard to see Powell’s press conference, scheduled 30 minutes after the announcement, to pass without any episodes in financial markets. With the odds for a 50-bps cut now standing at around 60%, the dollar could reverse sharply higher if the Fed disappoints.

Is the dollar set for a rebound?

The upside risk is particularly high for dollar/yen, which has been on the slide since July and is therefore looking a little oversold. The lower highs of 147.20 and 149.39 are potential targets for the bulls. The latter also happens to be close to the 50-day moving average, while the 200-day moving average is flatlining in the 151.00 region.

However, if the Fed does go ahead with a 50-bps cut or pleases markets with a very dovish dot plot, the dollar could soon be headed for 138.00 yen before testing the 135.00 mark.

Ahead of the Fed decision, investors will be watching the retail sales numbers for August, out on Tuesday at 13:30 GMT.

Australia, one of the world’s biggest natural gas exporters, expects to start shipping green hydrogen abroad by the end of this decade, seeking to spur sluggish progress in a global trade for the low-emissions fuel.

Government incentives of about A$8 billion (US$5.4 billion or RM23.3 billion) over the next decade are expected to unlock A$50 billion in private investment, according to an updated National Hydrogen Strategy released last Friday. That would allow annual production of at least 500,000 tonnes of hydrogen made with renewable energy and minimum exports of 200,000 tonnes by 2030.

Australia has sought to kick-start the production of green hydrogen — seen as key to cutting emissions in energy-intensive industries such as steelmaking. While its vast open spaces give it a geographical advantage to build the solar farms and wind turbines needed to power the electrolysers, BloombergNEF expects the US, Europe and China to account for 80% of supply by 2030.

“Hydrogen will play an important complementary role to electrification by opening net zero pathways for hard-to-abate industries,” Energy Minister Chris Bowen said. “By using our world-leading renewable energy resources to make renewable hydrogen, we can deliver new domestic manufacturing opportunities such as green metals and chemicals, low carbon liquid fuels, and energy exports to our international partners.”

Still, the country has struggled to develop a green hydrogen sector. Billionaire Andrew Forrest — the founder of iron ore miner Fortescue Ltd and one of the fuel’s biggest advocates — in July put on hold a target to produce 15 million tonnes a year by 2030, citing high energy prices.

Demand is also lagging. Only about 12% of production capacity planned to be commissioned by the end of the decade currently has an identified offtaker, and just a small percentage of those deals are binding, BNEF said in a May report.

Australia put out its first rendition of a hydrogen strategy in 2019. The updated blueprint includes four objectives for the country’s market, including identifying the most promising demand sectors and building an industry that is cost competitive.

The government also inked an agreement with Germany that will unlock A$660 million of shared investment in Australian hydrogen projects.

Source: Theedgemarkets

Source: EuroNews

Prime Minister Narendra Modi trumpeted India’s potential in technology, saying the country aims to increase its electronics sector to US$500 billion (RM2.17 trillion) by the end of the decade.

Modi touted the country’s advantages in areas such as semiconductors as he addressed a chip conference on the outskirts of capital New Delhi on last Wednesday. The country currently estimates its electronics market at about US$155 billion.

India is trying to woo more chipmakers into the country, much the same way subsidies have encouraged Apple Inc to assemble US$14 billion in iPhones in the South Asian nation. Modi’s administration has so far approved more than US$15 billion worth of semiconductor investments. These include a proposal by conglomerate Tata Group to build the country’s first major chip plant and US memory maker Micron Technology Inc’s envisioned US$2.75 billion assembly facility in Modi’s home state of Gujarat. Israel’s Tower Semiconductor Ltd is seeking to partner with billionaire Gautam Adani for a US$10 billion fabrication plant in western India.

“This is the right time to be in India,” Modi said. “In the India of the 21st century, the chips are never down.”

Semiconductors have grown into a crucial resource, especially as the geopolitical chasm between Beijing and Washington continues to widen and importers look to reduce their reliance on overseas producers in locations such as China and Taiwan. Several countries including the US, Germany, Japan and Singapore are investing aggressively to boost domestic chipmaking, ensuring supply of the components needed for technologies from AI to electric cars.

At the same event, chip industry executives from India and abroad outlined their growth plans in the country. NXP Semiconductors NV chief executive officer Kurt Sievers said the Dutch chipmaker will invest more than US$1 billion in India over the next few years to widen its research and development efforts in the region.

Source: Theedgemarkets

Pre-Market U.S. Stock Movers

Source: Barchart