The Weekend Edition # 149 - The Battle of the Cuts

Welcome to another issue of the Weekend Edition!

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Here's what we cover

• Market Recap - World Events

• Macro - The Battle of the Cuts

• Closing Thoughts - Bumpy October

• Calendars

Market Recap - World Events

31 Sep - 04 Oct, 2024

So much going on as we enter the first week of October, which is historically a volatile month ahead of the elections. Geopolitical tensions and natural disasters seem to top the list - so more unfortunate events. While markets were large ignoring these risks (or at least had already price in much of the risk), we’re now seeing further reactions after the situation has escalated.

We also got a number of huge announcements on the macro side from Central Banks, which helped markets defy downtrodden September seasonality. October however, will likely be more volatile, as we head into the US elections and start earnings season.

Commodities

This week saw commodities gaining a lot of ground. First, we had the industrial metals start to spike on China’s stimulus announcements. Aluminum is surging, taking out its previous peak from earlier in the year.

And then we had escalations of geopolitical tensions and the threat of a full blow US port strike which also hit oil prices, pushing it significantly higher in just a week.

Macro - The Battle of the Cuts

We usually cover global markets every week in our Monday Dashboard Post where we also highlight positions we’ve taken. This weekend, I thought it might be interesting to share some of that research, given Central Banks have begun a global easing cycle and these events certainly move the macro.

As the Fed starts to ease, and with the particularly aggressive rate cut path laid out, we’re seeing Emerging Markets (EM) breathe a sigh of relief. A weak US Dollar means a stronger domestic currency for these countries and less cause for alarm with regard to inflation.

This makes it easier for the EM Central Banks to start easing. The Philippines, for example, went ahead and started cutting before the Fed, after it was certain that the Fed cuts were forthcoming. Earlier in the year, they had to stop their easing cycle and do an emergency rate hike in fact, because the Fed was holding rates higher for longer.

Indonesia also started cutting, as did South Africa. For the South African Reserve Bank, things fell into place in quite a timely manner. inflation numbers came down to within target and the Fed started cutting.

And then we have China.

The timing of China’s PBoC rate-cutting decision and other stimulus measures seems to have lined up with that of the Fed. It’s almost as if they were waiting for the Fed to make a move, to start their own measures. Whether these measures are sufficient, is a discussion for another day.

But I am inclined to believe that this makes the Fed’s job more challenging. China’s presence is formidable in the global markets and if these policies can even mildly induce consumption, we may be facing higher commodity prices and higher inflation. We’re already seeing industrial metals and a few agricultural commodities catch a bid in prices.

However, this is perhaps not an imminent problem because:

• monetary policy works with long and variable lags

• we still need to see what measures are being implemented and how much fiscal stimulus will be released in China

But you know whose job just got easier?

Japan!

The BoJ has been significantly hawkish since that fateful 31 July when they raised rates and announced the taper of Quantitative Easing (QE).

But the September BoJ meeting that took place right after the Fed meeting brought us a less hawkish Governor Ueda. With the Fed’s jumbo cut and 200bps rate cut path, the USD is projected to weaken, which reduced the worry of a weaker Yen for the BoJ.

Even the new Japanese PM, who is thought to be a hawk, has softened his tone on rate hikes.

Finally, we look at the other Developed Markets (DM). Most DMs started easing even before the Fed, and the only one not easing yet is Australia. We question whether the Reserve Bank of Australia is now overdoing the hawkish stance, since we’re seeing weaker numbers for the economy.

The ECB has now hinted towards a cut in October. The market was expecting November. However, given that inflation has now decelerated to within the 2% target and economic activity is slowing meaningfully, the ECB can ease sooner, all the while knowing the Fed has already caught up to their 50bps of cuts thus far.

The bottom line: We should be watching Emerging Market Equities and Bonds. It’s also prudent to watch currency pairs because they react quite quickly to Central Bank rate decisions.

We have positions for clients on MacroVisor for both the Philippines and South Africa. Both have done well.

Closing Thoughts - Bumpy October

Friday’s US Employment data coming in stronger than expected makes the Fed’s job more challenging now. It also adds more uncertainty for investors.

The Fed may not have to cut as aggressively as they’ve laid out. That gives us higher rates, and a higher dollar, which isn’t altogether a bad thing because that may avoid any resurgence of inflation. But it also means lower multiples and if earnings are slowing because of a slowdown in the economy then defensives is the way to go.

We also have upcoming elections and geopolitical risks that add to the uncertainty for October.

This coming week we start to get some of the more early reporters kicking off earnings season. Pepsi, Delta and Fastenal will report. The following back we start in full flow with the banks. So while we have fewer central bank meetings, October will still be quite an exciting month.

[We wrote a preview of earnings season last week here: https://www.macrovisor.com/p/the-weekend-edition-148-the-era-of-easy-money]

Have a great week ahead!

Sincerely yours,

Ayesha Tariq, CFA

There’s always a story behind the numbers.

Calendars

US Earnings Calendar

US Economic Calendar in Eastern Time (Source: Trading Economics)

None of the above is Investment Advice. I may or may not have positions in any of the stocks or asset classes mentioned. I have no affiliation with any of the companies other than explicitly mentioned.