What did the Fed tell us?

Thoughts of the Day

As expected, the US Federal Reserve kept rates unchanged while projecting 1 more hike this year. They revised economic projections upwards. Fed Chair Powell reiterated readiness to act but noted uncertainty and data-dependent. The hurdle to hike likely increases as inflation drops toward the 2% target.

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Day Ahead

The Bank of England is expected to hike interest rates by +0.25% to 5.50% in its policy meeting.

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What Happened Yesterday

Market Movements as of New York Close 20 Sep 23
  • The UK Inflation rate showed that prices rose +6.7% Year-on-Year (vs +7.0% expected and 6.8% previous). The core index moderated significantly to +6.2% YoY from +6.9% (much lower than the 6.8% expected). The GBP fell more than -0.3% against the USD in immediate reaction as this surprise drop in inflation could mean that the Bank of England is likely to speak dovishly even if they hike 0.25% as expected in the policy meeting later today.
  • The US Federal Reserve kept policy interest rates unchanged as widely expected by the market. They did surprise the market with the Economic Projections with an upward revision of GDP growth (2.1% vs 1.0% previously for 2023 and 1.5% vs 1.1% previously for 2024) and a downward revision of Unemployment Rate (3.8% vs 4.1% previously for 2023, and 4.1% vs 4.5% previously for 2024 and 2025). This means they expect the economy and the jobs market to be stronger than previously thought. 
  • The Dot Plots showed that most of the committee members still expect one more interest rate hike in the next 2 meetings of the year, but two less rate cuts than previously projected for 2024 and 2025. The message was a clear higher interest rate for a longer period of time although the longer run neutral rate remains at 2.5%. 
  • The US Treasury Yield curve inverted further to 0.77% as the US 2 year bond yield rose +0.04% to 5.12% while the 10 year bond yield dropped 0.03% to 4.35%.
  • The softer than expected UK inflation data boosted risk sentiment and helped the S&P 500 futures rise roughly 0.2% before the New York session started.
  • The US stock market opened on a positive note but the “higher interest rates for longer” message by the US Fed sapped investor risk sentiment.. Consequently, the S&P 500 closed the day -0.94% lower, the Dow Jones slipped -0.22% while the Nasdaq fell -1.46%.
  • The crypto market weakened in tandem with the general market sentiment. Bitcoin fell a mere -0.36% and Ether dropped -1.3% on the day.
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Headlines & Market Impact

Fed declines to hike, but points to rates staying higher for longer

Notable Snippet: The Federal Reserve held interest rates steady, while also indicating it still expects one more hike before the end of the year and fewer cuts than previously indicated next year.

If the Fed goes ahead with the move, it would make a full dozen hikes since the policy tightening began in March 2022.

Markets had fully priced in no move at this meeting, which kept the fed funds rate in a targeted range between 5.25%-5.5%, the highest in some 22 years. The rate fixes what banks charge each other for overnight lending but also spills over into many forms of consumer debt.

Along with the rate projections, the Fed also sharply revised up its economic growth expectations for this year, with gross domestic product now expected to rise 2.1% this year.
In addition to holding rates at relatively high levels, the Fed is continuing to reduce its bond holdings, a process that has cut the central bank balance sheet by some $815 billion since June 2022.

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Is Japan’s deflation era ending?

Notable Snippet: Recent comments by Bank of Japan and government officials are stirring expectations the Japanese economy is finally nearing a turning point where it can declare victory over deflation and the central bank can shift away from a decade of massive stimulus.

Prime Minister Fumio Kishida promised to bring about a virtuous cycle of rising wages and consumption. To this end, Kumano said a full exit from deflation and positive economic momentum are two sides of the same coin.

A Cabinet white paper on the economy released on Aug. 29 pointed to signs of inflation for the first time in decades, and this was followed by some BOJ board members suggesting conditions for phasing out stimulus were falling into place.

The focus now will be on Friday morning’s release of inflation data and the BOJ’s monetary policy decision around noon, when the bank is widely expected to keep policy on hold.

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Grayscale files for ether futures ETF

Notable Snippet: Grayscale is throwing its hat in the ring for an ether futures exchange-traded fund (ETF). The ETF, which tracks ether futures, would be another way for Grayscale to get exposure to ether as it awaits a decision on its bitcoin ETF.

Since the ETF will only focus on ether futures, the filing clarifies that it will not “transact in ether and will not be required to retain an ether custodian.” The filing comes after Grayscale announced that it was abandoning the rights to Ethereum proof-of-work tokens. 

The decision, according to a press release, came after Grayscale and the relevant service providers determined that both the custodian of the products, as well as the service providers, do not “support the ETHPoW tokens, nor have trading venues with meaningful liquidity developed for the ETHPoW tokens.

Grayscale notched a partial victory against the SEC last month after a panel of judges ruled that the SEC must re-examine Grayscale’s application for a spot bitcoin ETF.The win comes after Grayscale filed a lawsuit against the SEC over the application rejection back in 2022. While the win does not mean that Grayscale was immediately able to convert its Bitcoin Trust (GBTC) to an ETF, it raised hope among those who are awaiting an SEC decision on spot bitcoin ETF.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord