Monday Morning Update

Economists at Goldman Sachs are now forecasting the Federal Reserve to start loosing their monetary policy by cutting rates in the second quarter of next year. From there, Goldman analysts are expecting to see incremental 25bps rate cuts to lower the benchmark policy rate, which is currently at its highest level since 2001. Economists from GS, Jan Hatzius and David Mericle, noted that “The cuts in our forecast are driven by this desire to normalize the funds rate from a restrictive level once inflation is closer to target,” they continued by stating that “Normalization is not a particularly urgent motivation for cutting, and for that reason we also see a significant risk that the FOMC will instead hold steady”. Hatzius and Mericle’s comments follow the FOMC’s decision to bring the central bank’s benchmark target rate to 5.25%-5.5% last month. This comes as US headline CPI came in softer-than-expected hitting 3.2% on an annualised basis last week.

Yields on the Chinese Government 10-year have sunk to their lowest level in 51 weeks, as investors consider the PBoC’s next moves. Markets are weighing up the possible prospect of Beijing conducting further monetary loosening, as they attempt to stimulate economic activity. Last week we saw China slip into deflationary territory for the first time February 2021 as headline CPI fell 0.3% between July 2022 and July 2023, as the cost of food fell 1.7% and transport sunk 4.7%. Chinese deflation follows weakened businesses and consumer demand as the economy dips following the initial surge in spending following easing Covid restrictions. Last week we also saw Chinese exports slump 14.5% on an analysed basis, raising investors’ fears of a slowdown within the World’s second largest economy.  The downside move in Chinese bonds comes as analysts look for clarity over Beijing’s possible fiscal stimulus package.

The latest move in Chinese government bonds also comes as investors try to weigh up the health of the Chinese property landscape. Presently, one of the country’s largest property developers, Country Garden, is on the edge of default with Bloomberg reporting that “three firms said late Friday they failed to receive payments on products issued by companies linked to Zhongzhi Enterprise Group, which has about 1 trillion yuan ($138 billion) in assets under management”. Focus now turns to Chinese Retail Sales figures released tomorrow morning at 0300 am.

Wednesday morning will see the latest release of UK inflation, as markets try to consider the Bank of England’s next move. Presently, the general market consensus is projecting a headline CPI print of 6.8%, which if realised would mark a deceleration of over 1.1 percentage points relative to June’s figure. On a month-on-month basis, markets are projecting to see a print of -0.5% which would mark the first deflationary print since January, where prices fell 0.6% from December 2022. Presently, money markets are pricing in around a 86% chance of a 25bps hike at Threadneedle Street’s next policy meeting on 21 September. This follows Governor Bailey stating that it “was too early to conclude that the economy was at or very close to a significant turning point”, following their policy meeting earlier this month.