The DXY Index depreciated 0.4% to 100.47, its weakest closing level for the year. The futures market is not ruling out another 50 bps cut at the FOMC meeting in November after the US Conference Board’s weak consumer report. The headline consumer confidence index declined to 98.7 in September from an upwardly revised 105.6 in August; consensus had expected a slight improvement to 104 from the previously estimated 103.3. Despite the overall index nearing the bottom of its two-year range, the present situation index fell to its lowest level since March 2021. Conducted before the last FOMC meeting on September 18, consumers turned negative on current business conditions and were less complacent about the labour market. The weak consumer confidence report validates the Fed’s decision to deliver a larger 50 bps rate cut to 5% to avert a further cooling in the labour market. We maintain the view for the DXY to head below 100 based on our expectations for more Fed cuts to 4.5% by the end of this year and 3% by the end of 2025.
On a positive note, the consumer confidence index’s expectations index remained above the 80 threshold, which usually signalled a US recession ahead. Investors drove the Dow Jones Industrial Average and the S&P 500 Index to new lifetime highs, hopeful that more Fed rate cuts would result in a soft landing of the US economy and underpin profits. They also brushed aside Fed Governor Michelle Bowman’s explanation against her colleagues’ larger 50 bps cut, which she viewed as a premature declaration of victory over inflation. More attention will likely be paid to Fed Chair Jerome Powell’s remarks tomorrow, most likely about the Fed’s recalibrated stance that a further loosening of the labour market was no longer necessary to bring inflation down to the 2% target.
Apart from a rebound in tech stocks, investors were also heartened by the positive spillover effects of China’s stimulus measures announced yesterday. The People’s Bank of China cut the reserve requirement ratio and 7-day repo rate to boost liquidity, lowered the home loan rates and downpayment ratios to underpin the property sector, and announced new swap facilities and a relending programme to stabilize the Chinese stock market. The Shanghai Composite Index surged 4.2% to 2863, rebounding a second time from this year’s critical support level around 2700. Against the prospect of more Fed cuts amid China’s policy support for its economy and markets, CNY has scope to play catchup to the recovery in Asian currencies. Yesterday, the offshore USD/CNH hit 7.00 for the first time since May 2023, trailed closely by the onshore USD/CNY ahead of the Golden Week holiday (October 1-7). We see USD/CNY and DXY eventually breaking below their psychological 7.00 and 100 levels, respectively.
Quote of the day
“Obstacles are those frightful things you see when you take your eyes off your goal.”
Henry Ford
September 25 in history
In 1926, Henry Ford announced an 8-hour, 5-day work week for workers at the Ford Motor Company.
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