It's finally Fed day, and futures are up up small with Tech in line and small-caps lagging having largely priced in a 50bps rate cut already (the risk clearly is to the downside if Powell goes 25bps). As of 8:15am, S&P futures are unchanged and less than 1% from all time highs, with the cash index rising for 7 consecutive days, while Nasdaq futures gain 0.2% with Mag7 mixed, and Semis weaker with NVDA -40bps; GOOG +70bps and MSFT +29bps.
While futures are flat now, they certainly won't be after 2pm, as the uncertain ahead of today's Fed decision is unprecedented while wages in a dovish direction are record high. As DB's Jim Reid notes, "futures are pricing in a 69% chance of a 50bp cut, and given the uncertainty that’s still looming, we can expect a decent market reaction whatever the decision is tonight. You'd have to go back over 15 years to find such an uncertain situation this close to the decision. A lot of money will be made and lost today."
Bond yields are mixed with the curve twisting steeper; the USD is lower to start the day, trading near 2024 lows. Commodities see weakness in Energy and Metals but strength in Ags. Today’s focus is on the Fed and the press conference.
In premarket trading, Alphabet gained after its Google unit won a court fight over competition with the European Union. Aperol maker Davide Campari NV’s shares fell 6.7% as its chief executive officer resigned after just five months. Here are some other premarket movers:
As everyone know, today is when the Fed will cut rates for the first time since March 2020, and all eyes are on the decision at 2pm ET with the FOMC set to deliver their first surprise since the start of the pandemic when the market was debating a 75bps or 100bps cut (in the end nobody remembers it, but what everyone does remember is that that easing cycle sparked the worst inflationary tsunami in generations). In recent cutting cycles, the Fed has surprised on the dovish side during crises (Covid & GFC) but has also under-delivered cuts on some occasions (Sep 2019).
Investors are looking for the Fed to ease policy sufficiently to respond to recent signs of weakness in the economy, achieving a soft landing without stirring concerns that conditions are worse than markets appreciate.
“If they’re doing 25 basis points this time, the likelihood that they can get to a hundred basis points by year end is pretty slim,” said Justin Onuekwusi, chief investment officer at St James Place Management. “So if you don’t get 50, then you’re going to get significant moves in market pricing.”
But while investors see greater scope for the larger adjustment, economist opinions are flipped, and largely anticipate the FOMC will reduce rates by only a quarter point to a range of 5% to 5.25%, though while 114 see a modest cut, 9 economists expect a half-point move.
Fresh quarterly projections in the form of the so-called “dot plot” released at the end of the central bank’s two-day meeting will offer further insight into the path ahead for borrowing costs and the economy. Chair Jerome Powell will also hold a press conference.
“I think they will go 25, but if they do go 50 — how they talk about this will be extremely important,” Torsten Slok, chief economist at Apollo Global Management, said on Bloomberg TV. “That is why the dot plot coming along with the statement today is critical for rates expectations.”
It's not just the Fed, of course, and we also get the BOJ Friday, although there the market expects nothing from the central bank. Even so, the Japanese yen climbed as much as 0.8%, signaling expectations of a narrowing divergence in policy between the Fed and the Bank of Japan. In the UK, money markets see the Bank of England delivering modestly less easing after services inflation rose to 5.6% in August from 5.2% in July, while the headline figure held at just above the 2% target. The pound strengthened and yields on UK government bonds rose after Wednesday’s data.
European stocks are lower, with technology and heath care stocks falling the most. Auto and banking shares were the biggest outperformers. Stoxx 600 falls 0.4% to 515.48 with 384 members down, 192 up, and 24 little changed. Here are the biggest movers Wednesday:
Earlier, Asian stocks traded in a narrow range, with the MSCI Asia Pacific Index steady. Toyota Motor was among the biggest boosts while TSMC dragged on the regional benchmark. Equities fell in India and Taiwan, while key gauges gained in Japan and mainland China. Markets in Hong Kong and South Korea were closed for holidays.
The rates market is currently pricing -40bps (60% probability of 50bps), while commentary the last few days has skewed towards 50bps too, including from former Fed official Dudley and Goldman trader Josh Shiffrin who notes broadly weaker data since Jackson Hole should lead the committee to a larger cut, even as the bank's chief economist Jan Hatzius continues to call for 25bps amid Fed commentary just ahead of the blackout period. While they think a 50bp cut would be a sensible precaution against further labor market softening, the Fed leadership has communicated a sufficiently dovish reaction function for the bond market to price rate cuts between 25bp and 50bp for several meetings, which also lowers borrowing rates today. On the dots, Goldman expects the median dot to imply three 25bp cuts in 2024 followed by quarterly cuts to just above the longer-run rate thereafter.
In FX, the dollar weakened ahead of the Fed decision where market pricing suggests a near coin flip between a 25- and 50-bp interest-rate cut. The Japanese yen and New Zealand dollar vie for top spot among G-10 peers, each rising 0.6%.
In rates, treasury futures are under pressure in the early US session, following wider losses across core European rates in what’s been a fairly muted session ahead of the fraught Fed announcement at 2pm New York time. Treasury yields are cheaper by 1.5bp-2bp across a marginally steeper curve — spreads remain within 1bp of Tuesday’s close. The 10-year at 3.66% is near session high, higher by around 1.5bp on the day with bunds and gilts in the sector cheaper by an additional 1.2bp and 3bp. Ahead of the Fed decision, swaps market prices in around 39bp of rate-cut premium and a combined 115bp over this year’s three remaining meetings. Further out, a combined 250bp of cuts are priced in by the end of next year. There’s been a surge in open interest in October fed funds futures over the past three sessions, skewed toward long positions targeting a 50-basis-pointc cut this week. In Europe, gilts fell, lagging German counterparts, as traders pare Bank of England rate cut bets after UK CPI rose in line with expectations.
In commodities, oil turned lower after a two-day gain as signs of higher US stockpiles countered concerns that Middle East tensions may escalate further. WTI drops more than 1.5% to $70.10 a barrel, unwinding Tuesday’s gain.
Spot gold is steady near $2,570/oz. We urge readers to use our partners JMBullion for all their gold-buying needs.
Looking the day ahead now, the main highlight will be the Federal Reserve’s policy decision and Chair Powell’s subsequent press conference. The US economic data calendar also includes August housing starts/building permits (8:30am) and July TIC flows (4pm). We’ll also hear from the ECB’s Holzmann, Vujcic and Nagel.
Market Snapshot
Top Overnight News
A more detailed look at global markets courtesy of Newsquawk
APAC stocks were mostly rangebound with participants lacking conviction heading into the crucial Fed policy decision. ASX 200 was contained amid light macro newsflow and a quiet overnight calendar heading into this week's central bank updates. Nikkei 225 initially rallied on currency weakness but then reversed course and briefly wiped out its gains after mixed data and as the JPY nursed some of its losses. Some BoJ policymakers are reportedly worried that they may not be able to increase interest rates much further as a stronger JPY would result in cheaper imports, slow inflation and impact corporate earnings, via WSJ citing sources. Shanghai Comp initially struggled for direction on return from the holiday closures before retreating below the 2,700 level. Hong Kong participants were absent from the market, while the weak activity data from over the weekend had little impact and the PBoC delayed its MLF operations once again.
Top Asian news
European bourses, Stoxx 600 (-0.3%) began the session mixed/modestly lower, and slowly dipped lower as the morning progressed. European sectors hold a strong negative tilt; Optimised Personal Care tops the pile, propped up by gains in Reckitt, amid asset-sale related reports. Healthcare is found at the foot of the pile, hampered by losses in Novo Nordisk (-2.1%) after it was reported that Ozempic is “very likely” to be part of the next US price cut negotiations. US Equity Futures (ES +0.1%, NQ +0.1%, RTY +0.1%) are indicative of a very modestly firmer open, with traders mindful of today’s FOMC Policy Announcement, where the Fed is expected to deliver its first rate cut in 4 years. Alphabet's Google (GOOGL) wins court challenge against EUR 1.49bln EU antitrust fine
Top European news
FX
Fixed Income
Commodities
Geopolitics: Middle East
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US Event Calendar
DB's Jim Reid concludes the overnight wrap
Do you think the Fed will cut 25bps or 50bps today? If you feel like taking part in our flash poll click on the hyperlink underneath these two numbers above to provide a one click response. It'll be great if you can take a second to take part. It'll be interesting to see how far this is away from current market pricing. I'll publish the answers in a CoTD today later.
As it stands right now, futures are pricing in a 69% chance of a 50bp cut, and given the uncertainty that’s still looming, we can expect a decent market reaction whatever the decision is tonight. You'd have to go back over 15 years to find such an uncertain situation this close to the decision. A lot of money will be made and lost today.
I've waivered both ways over the last few days and I'm surprised the Fed has left pricing so uncertain at this stage. However in an era of heavy forward guidance it's refreshing to see a little less certainty. If that was more widespread I think it would be more rather than less helpful. If you think you know exactly what the central bank will do it is likely to promote more over exuberance in markets which in turn requires a bigger opposite reaction later. I'm sure they'll be those taking the opposite view though.
In terms of what our US economists expect, their view is the Fed will go for a 25bp cut today but Matt Luzzetti agrees its an incredibly balanced call. He decided against changing his view to 50bps as he believes that even though there’s a compelling risk management case for a larger cut, Fed communications before the blackout period and the balance of data don’t clearly argue for a larger cut. If the Fed do cut by 25bps, then they expect the median dot to show two further 25bps cuts this year, and then a string of reductions in 2025 that take the fed funds rate much closer to neutral by end-2025. Either way, they think Fed Chair Powell will face a communications challenge, as a 25bp cut would raise questions about the Fed falling behind the curve, whereas a 50bp cut would mean Powell needs to avoid sending negative signals about the economy. Click here for their full preview.
If the Fed do go for the larger 50bp cut today, it wouldn’t be the first time that they’ve begun a cycle of rate cuts with a larger move. In both 2001 and 2007 they opened with a 50bp cut, although in those two cases a recession followed within 3-4 months, so that’s hardly inspiring from the Fed’s perspective. The most recent example of a 50bp rate cut came in March 2020, again as the economy was deteriorating sharply given the pandemic, which was then followed up by a 100bp cut just 12 days later. So this is partly why there’s the theory that a dovish decision could panic the markets today, with the argument saying that if the Fed do go for a 50bp cut, that implies they’re pretty worried about where the economy stands right now.
The market dial between 25bp and 50bp continued to waver over the last 24 hours. It had marginally shifted it back towards 25bps earlier yesterday, as neither the retail sales nor the industrial production data suggested the economy was heading into a sharper downturn. In fact, the Atlanta Fed’s GDPNow estimate was updated on the back of those, and it now expects Q3 growth to come in at an annualised +3.0%, up from +2.5% before. So well away from recession territory as it stands. In terms of the specifics, the headline retail sales print was stronger than expected at +0.1% (vs. -0.2% expected), and the previous month was revised up a tenth to +1.1% as well. Then on industrial production, the headline figure was up +0.8% in August (vs. +0.2% expected), and that outperformance more than outweighed the three-tenths downward revision to the previous month. That led futures to initially dial back the chance of a 50bp cut, with the probability falling from 71% at Monday’s close down to as low as 62% intra-day. However, the pattern of a drift towards 50bp pricing in the absence of newsflow then re-emerged, with the probability rising to 66% by the close and further up to 69% as we type this morning.
This backdrop led to an up-and-down session for US equities. The resilient data saw the S&P 500 reach an all-time intra-day high of 5670 (+0.67% at the peak) early on but it later gave up those gains to close little changed on the day (+0.03%). This did still represent a 7th consecutive advance, and the equal-weighted version of the S&P 500 (+0.14%) advanced to a new all-time high. As we pointed out in yesterday’s Chart of the Day (link here), if you look at the Fed rate cut cycles since 1957, this one has seen the strongest advance for the S&P 500 in the year leading up to the cuts. So it’s unusual to see monetary policy eased against the backdrop of such buoyant equity gains.
There was some divergence across sectors yesterday, with cyclical stocks including energy (+1.41%) and consumer discretionary (+0.62%) leading the way within the S&P 500. By contrast, defensive sectors declined, including healthcare (-1.01%) and consumer staples (-0.93%). The outperformance of small-caps was another continued theme of recent days, as the Russell 2000 (+0.74%) outpaced the S&P 500 for a 4th consecutive session. Meanwhile in Europe, equity markets closed before the US gave up its gains, with the STOXX 600 (+0.40%), the DAX (+0.50%) and the FTSE 100 (+0.38%) all moving higher.
In the meantime, sovereign bond yields moved off their recent lows, as the strong US data saw investors slightly dial back the likelihood of rapid rate cuts. By the close, that meant the 2yr yield was up +5.4bps to 3.61%, whilst the 10yr yield was up +2.8bps to 3.65%. The uptick in rates was echoed in Europe, where yields on 10yr bunds (+2.1bps), OATs (+2.7bps) and BTPs (+2.0bps) each moved a bit higher as well.
The rise in US rates was led by breakevens, which ticked up for the 5th session in a row as oil prices continued to recover from their post-2021 low seen last week. Brent crude was up +1.31% to $73.70/bbl, in part amid renewed concerns over Middle East escalation after a wave of pager explosions in Lebanon that appeared to target Hezbollah, which in turn blamed Israel for the attack.
In Asia markets are pretty flat with most just above or below the flat line including China where markets have resumed trading after the early week holiday. Hong Kong and South Korea are still closed for holidays.
Early morning data showed that Japan’s export growth slowed sharply in August, rising +5.6% y/y (v/s +10.6% expected), up for a ninth straight month and against a downwardly revised +10.2% y/y increase the previous month. Meanwhile, the value of imports grew +2.3% y/y in August, versus a +13.4% increase expected by Bloomberg. As a result, the trade deficit stood at -695.3 billion yen (v/s -628.7 billion yen last month) compared with the forecast of a deficit of -1.43 trillion yen. A reminder that the BoJ are widely expected to keep interest rates on hold at its two-day meeting ending Friday.
Looking at yesterday’s other data, the German ZEW survey came in noticeable lower than expected, with the expectations component down to an 11-month low of 3.6 (vs. 17.0 expected). The current situation also fell back to -84.5 (vs. -80.0 expected), which is the lowest reading since May 2020. Meanwhile in Canada, inflation fell a bit more than expected in August, with CPI coming down to +2.0% (vs. +2.1% expected).
To the day ahead now, and the main highlight will be the Federal Reserve’s policy decision and Chair Powell’s subsequent press conference. Data releases include the UK CPI for August, along with US housing starts and building permits for August. We’ll also hear from the ECB’s Holzmann, Vujcic and Nagel.