Trail 141 — Rates and Tax Cuts
Markets Update by Aashish Singh
Business Update by Sylvia Lo
Financial markets are fascinating. They are constantly evolving, they follow no predetermined path and much like humans, their behaviour at times is completely irrational. Every day their movements are thoroughly analysed, yet their next steps are a complete mystery. They follow a random walk and therein lies their beauty. Each week I briefly recap a few stories that captured my interest.
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This week the ECB delivered the interest-rate reduction it was flagging for months, becoming the first to break away from the pack of central banks who have hiked or held rates near record highs. It lowered the key deposit rate by a quarter-point to 3.75% after having held it at a record high of 4% for nine months. It however stated that it will “keep policy rates sufficiently restrictive for as long as necessary” after also raising projections for prices.
What surprised markets however was the jump in US Nonfarm payrolls to 272k last month, a print that no one had expected. It sent the yield on the 10-year Treasury surging amidst concerns that the Fed may not cut rates as soon as expected. The yield on the 10y treasury jumped nearly 15 basis points to 4.43% while the 2y treasury yield rose about 17 basis points to 4.89%. This in turn, led to a sharp strengthening of the dollar with the DXY closing just shy of the 105 handles. Gold slumped below 2,300 on the dollar’s strength and also from China’s central bank not buying any gold last month, ending a massive buying spree that ran for 18 months and helped push the precious metal to a record high in May. Volatility was subdued for most of the week as bullishness rebounded.
In the coming week, we will see where the Fed is really at, as policymakers update the Dot Plot for the first time in three months. They are likely to back away from a longstanding forecast for 3 rate reductions this year, but it’s a close call on 2 or 1. The swap market is currently closer to pricing 2 cuts before year end. Outside of this with Trump’s odds going strong into the election, his promised tax cuts and its impact on the ballooning US debt will become focal, as bond investors weigh that data point alongside Fed policy. Republicans are clearly backing those cuts by believing the subsequent economic gains will offset the deficit in tax receipt. The bullishness in the street mirrors that expectation, as hopes on a soft landing is unabated, with higher for longer rates barely denting the risk on sentiment that is across all risk asset — particularly equities, crypto and credit.
US Rate Cut Outlook
Economists are divided over how many interest-rate cuts Federal Reserve officials will signal for 2024 at their policy meeting next week, following a pop in recent inflation figures. Policymakers are likely to back away from a longstanding forecast for three rate reductions this year, but it’s a close call on whether they will still pencil in two or less. A 41% plurality of economists expect the “dot plot” to show two cuts, while 41% expect the forecasts to show just one or no cuts at all, according to a Bloomberg survey.
China Bond Volatility Subsides
China’s efforts to rein in a sizzling bond rally are bearing fruit, as once wild swings in the nation’s ultra-long sovereign notes have all but evaporated. The yield on the 30-year government bond traded within one basis point every day this week, marking its smallest weekly movement since August, excluding holidays. The calm stood in contrast with a global sovereign debt rally spurred by bets on further easing after authorities in Canada and the euro zone cut interest rates.
Great Bank Asset Sale
Banks are dumping assets and many of them are turning to a booming sector of the bond market to do so. The latest round of global capital rules, known as Basel III endgame, is expected to make a whole slew of loans more expensive for banks to hang onto. In response, the lenders are bundling more auto loans, equipment leases, and other kinds of debt into asset-backed securities.
In the US alone, ABS sales have topped $170 billion this year, up ~38% from this time in 2023, according to data compiled by Bloomberg News. Europe has seen similar gains: issuance was about €21 billion ($22.9 billion) this year, up about 35% from the same point last year, according to data compiled by Bloomberg that excludes mortgage securities.
In The World of Business
This week, Shein, the Chinese fast-fashion giant, is planning a high-profile IPO in London, potentially valuing the company at £50 billion ($63.7 billion), which could boost the London Stock Exchange despite ongoing scrutiny over its business practices.
Workday has achieved significant growth, entering the Fortune 500 with $7.3 billion in revenue, driven by its cloud-based HR and finance solutions, the pandemic’s push for digital transformation, and a strong focus on innovation and employee development.
Despite rising concerns on Wall Street about the $34 trillion U.S. debt, economist Paul Krugman argues that stabilising debt as a share of GDP is manageable with modest adjustments, and the real obstacle is political dysfunction rather than economic feasibility.
A Game Changer
Shein, the Chinese fast-fashion giant, is making waves again, and this time it’s not just about its $5 dresses. The company is gearing up for a significant milestone: an initial public offering (IPO) in London. The IPO is anticipated soon, with Shein preparing to file a prospectus that could value the company at around £50 billion ($63.7 billion), according to Sky News. This would mark one of London’s most high-profile IPOs in recent years. Initially, Shein planned to list in the U.S. but faced significant hurdles, including allegations of using cotton from China’s Xinjiang region and concerns about its environmental practices. Despite Shein’s insistence on a zero-tolerance policy for forced labor, these issues prompted a strategic shift to London.
Shein’s IPO is poised to be a landmark event in the retail sector. With a valuation that once surpassed $100 billion in 2022, Shein has outpaced competitors like H&M and Zara’s parent company Inditex, driven by Gen Z’s appetite for affordable fashion and Shein’s savvy use of social media. Listing in London could provide Shein with increased credibility among investors and regulators, along with essential growth capital. Yet, whether this will suffice to mitigate ongoing concerns about its business practices remains to be seen.
Workday Joins Fortune 500
The Fortune 500 list for 2024 has arrived, showcasing familiar giants like Walmart and Apple, but also introducing some fresh faces. Among the newcomers is Workday, a finance and HR software company that has made its debut at number 490. This milestone follows a breakout year for Workday, which reported $7.3 billion in revenue and nearly $1.4 billion in profits. Workday’s journey began 19 years ago as an idea from founders David Duffield and Aneel Bhusri, who envisioned a software company “born in the cloud” to support HR and finance operations. Today, the company remains anchored by the six core values the founders established: employees, customers, innovation, integrity, fun, and profitability.
Under Eschenbach’s leadership, Workday has not only weathered the pandemic but thrived, helping businesses adapt to a digital and a decentralised workforce. With more than 65 million users across 10,500 organisations, Workday serves over 60% of the Fortune 500. Looking ahead, Workday’s AI transformation is well underway, with around 50 AI features already rolled out and another 25 planned for later this year, positioning the company for continued success in the evolving landscape of work.
US Debt
As the U.S. national debt reaches a staggering $34 trillion, Wall Street is increasingly alarmed, but Nobel laureate economist Paul Krugman urges calm. In a recent New York Times op-ed, Krugman emphasises that while the debt level is unprecedented, its proportion to GDP is comparable to levels seen at the end of World War II, which did not trigger a crisis. He explains that most historical debt crises occurred in countries that borrowed in foreign currencies, a scenario that doesn’t apply to the U.S.
Krugman points out that the solution lies in stabilising the debt as a share of GDP rather than paying it down entirely. Despite concerns from financial leaders like Bill Gross and Larry Fink, who warn about rising deficits and interest expenses, Krugman argues that the primary obstacle is political dysfunction, particularly within the GOP, rather than economic feasibility.
Until next week.
