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TOKYO (Reuters) – Japan’s exports rose at a much slower-than-expected pace in August and shipment volumes continued to slide, data showed on Wednesday, a sign that slowing global demand was weighing on a fragile economic recovery.Japan is seeking to drive sustainable economic growth, backed by higher wages and solid consumption, though external risks from a potential slowdown in the U.S. and a weak Chinese economy are clouding the outlook.Total exports rose 5.6% year-on-year in August, up for a ninth straight month, data showed, less than a median market forecast for a 10% increase and following a 10.3% rise in July. Overall shipment volumes fell 2.7% last month from the year-ago period, the seventh consecutive month of declines.Exports to China, Japan’s biggest trading partner, rose 5.2% in August from a year earlier, while those to the United States were down 0.7%, the data showed.Imports grew 2.3% in August from a year earlier, versus a 13.4% increase expected by economists.As a result, the trade balance stood at a deficit of 695.3 billion yen ($4.90 billion), compared with the forecast of a deficit of 1.38 trillion yen.A rise in personal consumption helped Japan’s economy rebound strongly in the second quarter from a slump at the start of the year, but the growth was revised down slightly last week.In a sign of the economic fragility, a Reuters monthly poll showed last week that business confidence at big Japanese manufacturers sank to a seven-month low in September, with managers across a wide range of sectors citing soft Chinese demand as a concern. The Bank of Japan is expected to keep monetary policy steady at a two-day meeting that ends on Friday, but signal that further interest rate hikes are coming and highlight progress the economy is making in sustaining inflation around its 2% target. More

SINGAPORE (Reuters) – The dollar steadied on Wednesday as stronger-than-expected U.S. retail sales had traders slightly trimming bets that the U.S. easing cycle will begin with an outsized interest rate cut.The Federal Reserve is expected to make its first interest rate cut in more than four years at 1800 GMT, which will be followed by a news conference half an hour later.The dollar has fallen along with U.S. yields since July and at $1.1119 per euro is not far from the year’s low at $1.1201 as traders anticipate easing at a clip, with more than 100 basis points of rate cuts priced in by Christmas.It briefly fell below 140 yen in a holiday-thinned Asia session on Monday but changed hands at 142.02 yen early on Wednesday as a big week for the currency pair culminates with central bank meetings in the U.S. and, on Friday, in Japan.August retail sales rose 0.1% in the U.S., data showed overnight, against expectations for a 0.2% contraction.The Atlanta Fed’s closely-followed GDPNow estimate was raised to 3% from 2.5% after the data. A rate cut is fully priced, with interest rate futures implying a 63% chance of a 50 basis point cut, after flirting with 70% a day earlier.Traders say the Fed’s tone as well as the size of the rate cut will drive the next moves in the foreign exchange market.”A dovish Fed on a substantial easing path should generally lead to a weaker dollar,” said Nathan Swami, head of currency trading at Citi in Singapore.But an extremely dovish Fed, Swami said, could end up spooking markets if it seems the Fed anticipates a more ominous downturn in the economy than is expected, and in that case risk-sensitive and emerging market currencies may face headwinds.China’s stock, bond and currency markets resume trade on Wednesday after the mid-autumn festival break, though it is a holiday on Wednesday in Hong Kong. Ahead of the onshore open, the yuan traded at 7.1083 per dollar offshore.The Australian dollar traded firmly at $0.6759 early on Wednesday while the New Zealand dollar ticked 0.1% higher, with help from higher milk prices, to $0.6194.Sterling, the best performing G10 currency of the year, held at $1.3161 with its rally being driven by signs of a steadying economy and sticky inflation. British inflation data is due later in the day, while on Thursday the Bank of England is seen leaving rates on hold at 5%, with a 35% chance of a cut.Final European inflation figures are also due, however they are unexpected to deviate much from preliminary August figures and so all eyes will be on the Fed. “With markets wagering on 41bp of cuts, which is a long way from either realistic contender (25bp or 50bp), volatility seems almost assured,” analysts at ANZ Bank said in a note to clients. More

In a conference speech, Reserve Bank of Australia (RBA) Assistant Governor Brad Jones announced the launch of a three-year digital money work plan for the RBA and Treasury called Project Acacia.The project would include industry and focus on opportunities to lift the efficiency, transparency and resilience of wholesale markets through tokenised money and new settlement infrastructure.Subsequent phases could well involve cross-border applications with regional central banks, Jones said.The RBA and Treasury would still reassess the merits of a retail CBDC over time and plan a follow-up paper in 2027. If a retail version were to be adopted, the Australian government would have to make the decision and it would almost certainly require legislative change, he added.”Our assessment is that the potential benefits of a retail CBDC generally appear modest or uncertain at the present time, relative to the challenges it would introduce,” said Jones.The benefits of a wholesale CBDC include reducing counterparty and operational risks, freeing up collateral, increasing transparency and auditability and reducing costs for institutions and customers.Around 134 countries representing 98% of the global economy are now exploring digital versions of their currencies, research by the U.S.-based Atlantic Council think-tank showed this week. More

Housing has been the top political issue for years. A slow rebuilding of the construction sector after a 2009 property crash has led to house prices and rents outstripping income growth at a time when the population is growing faster than expected.While supply reached a 15-year high of almost 33,000 units last year, the central bank estimated on Wednesday that it would dip to 32,000 this year before reaching 39,000 in 2026. It said clear policy changes were needed to go beyond 50,000.This hinges on a number of interconnected areas: revamping of complex planning processes, a near doubling of development finance, improved construction productivity and the availability of more zoned and serviced land, particularly in Dublin, the analysis said. “It is a significant challenge,” the central bank’s director of economics Robert Kelly told reporters, adding that government plans to reach 50,000 units a year will not work without sufficient improvements in each area.The report recommended that public capital investment should be focussed on infrastructure and directly funding more serviced land, that the state should incentivise the adoption of modern construction methods to boost low productivity and scale, and use its balance sheet to boost private equity investment.It said the “significant economic costs” of policy inaction prolonging the supply and demand imbalance included a higher cost of living and a higher cost of doing business that could damage Ireland’s standing as a hub for foreign direct investment.In the regular quarterly update to its economic forecasts, the central bank also said on Wednesday that the outlook for economic growth and inflation were broadly unchanged since June, with modified domestic demand (MDD) – its preferred gauge of economic performance – forecast to grow by 2.4% this year. More

(Reuters) – Traders on Tuesday kept bets the Federal Reserve will start an expected series of interest rate cuts with a half-percentage-point move downward on Wednesday, an expectation that may itself put pressure on central bankers to deliver just that. Futures tied to the Fed policy rate as of Tuesday mid-morning implied about a two-in-three chance of a bigger cut, versus a one-in-three chance of the more moderate 25 basis-point reduction still penciled in by analysts at most major Wall Street firms. The Fed starts its two-day policy setting meeting today, and will meet again in early November and mid-December.Traders expect a total of two half-point rate cuts plus one quarter-point cut over the course of the three remaining meetings for 2024, rate-futures show. The Fed has kept its policy rate in the 5.25%-5.50% range for more than a year as it seeks to squeeze high inflation from the economy. Inflation is now down to 2.5% and most policymakers view it as well on the way toward the Fed’s 2% target. Meanwhile the unemployment rate rose to 4.2% last month. Nearly all Fed policymakers agreed even in July that it would soon be time to start cutting rates to avoid slowing the economy too much.Until late last week, traders were betting on a quarter-point rate cut to begin the series, but flipped to favor a half-point cut after reports by the Wall Street Journal and the Financial Times late Thursday suggested a bigger rate reduction was still an option.Since then, those market expectations have only firmed, barely budging Tuesday as government reports showed U.S. retail sales unexpectedly rose in August, and manufacturing rebounded, signs that the economy still has legs. Still, analysts have speculated that the news reports last week were based at least in part on guidance from the central bank. The lack of apparent pushback from the Fed since then has served only to fortify those assumptions. “As time passes with no apparent effort by the Fed to contest market pricing that has moved odds on for a 50 basis point cut at the September FOMC meeting we confirm we think the Fed likely will cut 50 though it is still not a slam dunk,” wrote Evercore ISI’s Krishna Guha, among the minority of economists who had called for a bigger rate cut even before last week’s change of expectations in financial markets. With markets now leaning heavily into a bigger policy easing, he wrote, “it is much harder to surprise hawkish than to surprise dovish, and no way the Fed thinks this is a good moment to introduce more (volatility).” A half-point rate cut could draw a dissent or two from within the Fed, Guha predicted; but so, too, could a smaller quarter-point cut. Fed policymakers by mutual agreement do not make public statements on monetary policy or the economy during the 10 days leading up to a rate-setting meeting. “We think the Fed is trying to course correct at an unfortunate time,” wrote SGH Macro Advisors’ Tim Duy. “The blackout period prevents conventional communications, and the Fed is left with something clumsier.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The US dollar is languishing near one-year lows in the latest sign of uncertainty gripping Wall Street traders as they brace for the Federal Reserve’s looming interest rate decision.The US dollar index, which measures the greenback against a basket of six rival currencies, has fallen 3 per cent since the start of August, leaving it teetering just above August’s lows, which were its weakest point in more than a year.The dollar is sensitive to interest rate expectations as well as predictions about the health of the US economy. It has moved lower in recent weeks as weakening US data has cemented bets that the Fed will loosen monetary policy for the first time since 2020 on Wednesday at the conclusion of the central bank’s September meeting.Putting more pressure on the greenback, traders have cranked up their expectations in recent days of a 0.5 percentage point interest rate cut — double the size of a more traditional 0.25 percentage point decrease that markets had previously priced in. Any such reduction would knock US borrowing costs down from their current range of between 5.25 per cent and 5.5 per cent, a 23-year high.“Two things have helped drive the dollar lower: bets on the Fed trade and long dollar positioning to begin with, which has been squeezed out,” said Mark McCormick, global head of FX and EM strategy at TD Securities, referring to traders scaling back their bets on a rising US currency.At the same time, the appreciation of other major currencies has put downward pressure on the dollar, with the yen strengthening past ¥140 to the greenback this week for the first time since July last year. The Japanese currency’s advance underscores increasing divergence between traders’ expectations for US and Japanese monetary policy, with the Fed expected to cut borrowing costs just as the Bank of Japan starts raising its own benchmark lending rate.The dollar’s recent decline has contrasted with US stocks moving sharply higher, with the benchmark S&P 500 touching a fresh intraday record on Tuesday, highlighting ongoing division among investors across different asset classes about the outlook for the world’s biggest economy.The dynamic suggests the dollar is focused solely on the fate of the US economy, neglecting bigger and more recent declines in China and Europe, which could ultimately drive global cash stateside, as foreign investors favour better-performing US stocks and traditional safe havens such as the dollar and US Treasury bonds. “The dollar is priced for a US-only slowdown,” said McCormick. “The dollar is ignoring what is happening in China and what is happening in the eurozone. Just because US equities underperformed for two months doesn’t mean there is a better place to put your money: China and Europe are underperforming.” Strategists also noted that the US economy, unlike peers such as Japan, is not particularly reliant on exports, meaning limited implications for US companies with international operations from the dollar’s recent weakness.“We’re too big and too insular an economy to be impacted by the kind of moves in the dollar that we’ve seen so far,” said Ajay Rajadhyaksha, global chair of research at Barclays.This all suggests to Karl Schamotta, chief market strategist at Corpay, a global payments and foreign exchange risk management company, that the dollar is poised for a move higher soon. He pointed to a historical trend in foreign exchange trading referred to as the “dollar smile”, a dynamic that illustrates the US currency’s exceptional role in financial markets: it traditionally performs well both when the US economy is booming and outperforming peers and when the global economy is in a downturn, prompting investors to seek out the protection of the US currency. Still, strategists said dollar pricing may soon flip.“We’re at the bottom of the smile right now. Global expected growth differentials have narrowed. The US has lost momentum, but it is still doing relatively well,” said Schamotta. “There is an overly crowded trade against the dollar.”Schamotta pointed to data, including a report on Tuesday morning that showed US retail sales unexpectedly rose in August, a sign of stable consumer spending. He also pointed to the Atlanta Fed’s GDP tracker, which monitors real-time expectations for US growth. It shows the US GDP is expected to grow 3 per cent year on year in the third quarter. “Numbers like retail sales and the Atlanta Fed’s Nowcast are telling us that the US economy is still on a strong footing despite a deceleration. The only area of weakness is a labour market that has corrected from overheated levels during the pandemic,” said Schamotta. More

(Reuters) – A look at the day ahead in Asian markets.Investors in Asia will be forgiven for any reluctance to take on much risk on Wednesday ahead of the Federal Reserve’s interest rate decision later in the day, although rising expectations of a 50 basis point cut should provide some support to markets.As Asia’s first opportunity to react to the Fed is Thursday, local events may move markets more on Wednesday. They include the Indonesian central bank’s rate decision, Japanese machinery orders and trade data, and public comments from the Philippine central bank governor and Reserve Bank of Australia assistant governor Brad Jones.The backdrop to the day’s trading, however, is the Fed. While rate futures market pricing suggests the Fed will begin its policy easing cycle with a half percentage point move, there are mounting reasons to believe a less market-friendly quarter point cut is more appropriate.Indeed, some might say the Fed doesn’t need to be loosening policy at all right now.The S&P 500 and Dow on Tuesday rose to new all-time highs, after official figures earlier in the day showed U.S. retail sales in August were a lot stronger than expected. The upside surprise lifted the Atlanta Fed’s GDPNow model estimate of real GDP growth in the third quarter to a new high of 3.0%. This suggests the U.S. economy is doing just fine. On top of that, U.S. financial conditions now are the loosest since April 2022, according to Goldman Sachs, or November 2021, according to the Chicago Fed. Fed figures published last week also showed U.S. household net worth rose to another record high in the second quarter, while household debt as a share of GDP fell to its lowest in 23 years.Again, while the labor market is clearly softening there is little sign that the U.S. consumer – and therefore, growth at large – is in immediate peril. In that context, the size and pace of rate cuts implied in the rate futures curve is extremely aggressive – nearly 120 bps over the three meetings left this year, and 245 bps in total by the end of next year.Could markets be setting themselves up for a fall? If signals from Chair Powell’s press conference or the Fed’s new economic projections suggest these lofty expectations might not be met, stocks, bonds and non-dollar currencies may retrace some of their recent gains.The yen certainly recoiled on Tuesday, slumping 1% against the dollar for its worst day in a month. If the U.S. economy appears to be humming along nicely, signals from elsewhere are less encouraging – German investor sentiment and Canadian inflation figures on Tuesday were soft, and the data from China at the weekend was alarmingly weak.Over to you, Jay Powell.Here are key developments that could provide more direction to Asian markets on Wednesday:- Indonesia central bank decision- Japan machinery orders (July)- Japan trade (August) More