What will the Fed tell us?

Thoughts of the Day

The US Federal Reserve is expected to keep interest rates unchanged in their policy meeting later today, an outcome priced at 99% probability by the market.
Key factors for risk sentiment include the policy statement’s language, quarterly economic projections, dot plots (interest rate projections by committee members), and Fed Chair Powell’s press conference.

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Day Ahead

The UK Consumer Price Index is expected to show that prices rose +7.1% Year-on-Year, up from +6.8% in July. The core index is expected to moderate to +6.8% YoY from +6.9%.

The Federal Reserve is expected to maintain interest rates at the 5.25%-5.50% range in its policy meeting.The language in the policy statement as well as the quarterly projections in the dot plots will be closely watched. The Fed Chair Powell’s press conference after the meeting will be key as the market will be looking for hints on how likely they will resume hiking in the policy meetings ahead.

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What Happened Yesterday

Market Movements as of New York Close 19 Sep 23
  • The Euro Area Consumer Price Index showed that prices rose +5.2% Year-on-Year (vs +5.3% expected and prev). The core index moderated to +5.3% YoY from +5.5% as expected. There was no significant market reaction but this decreases the probability of more interest rate hikes by the ECB.
  • The Canadian Consumer Price Index showed that prices rose +4.0% Year-on-Year (vs +3.8% expected), higher than +3.3% in July. This marks the second consecutive acceleration in inflation since July’s print of +2.8%. The increase was largely due to increased energy prices. The CAD strengthened on the print with the USDCAD falling  -0.23% from 1.3410 to 1.3379 immediately after the release before recovering back to 1.3407 in mere minutes..
  • The US Treasury Yield curve narrowed slightly to 0.71% as the US 2 year bond yield rose +0.03% to 5.08% while the 10 year bond yield rose +0.05% to 4.37%.
  • The US stock futures eased slightly through the Asian trading session but started to improve in the early hours of the London trading session. However, the release of the higher than expected Canadian CPI put a dent in risk sentiment. The S&P 500 futures was down -0.16% before the New York session started.
  • The US stock market opened lower from Monday and continued trading lower in the early New York session. However, a reversal occurred in the latter half of the session, effectively erasing some of the losses incurred. Consequently, the S&P 500 closed the day -0.21% lower (intraday high: -0.08%, low: -0.83%) the Dow Jones slipped -0.31% (intraday high: -0.08%, low: -0.90%) while the Nasdaq fell -0.22% (intraday high: -0.04%, low: -1.02%).
  • The crypto market continues to creep higher with Bitcoin rising +1.7% and Ether gaining +0.4% on the day.
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Headlines & Market Impact

Bank of England deputy governor says impairments rising among UK lenders

Notable Snippet: The British banking sector is seeing a rise in impairments amid rising inflation and ensuing interest rate hikes, according to Bank of England Deputy Governor Sam Woods.

“So far things have worked out a bit better than many people expected and particularly through Covid of course, the huge fiscal and monetary support did actually shield the banking system from credit losses,” Woods told CNBC on Tuesday.

“But as we’re looking at it now, we are actually seeing a pickup in impairments across the banking sector. It’s not one that people should be alarmed about.”

The PRA estimates that just over 1% of mortgages are in arrears. Woods noted that number was equally high as recently as 2018, and during the financial crisis it was 3.6%.

Woods said that the PRA is also keeping an eye on these institutions and remains “very alert” to the risks, along with those arising from China’s economic headwinds. China’s property market has been ailed by faltering consumer confidence, with real estate giants Evergrande and Country Garden teetering on the brink because of mounting debt piles.

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Saudi energy minister says oil supply cuts are not about ‘jacking up prices,’ as Brent hovers at $95 a barrel

Notable Snippet: Saudi Arabia’s energy minister said Riyadh and Moscow’s decision to extend crude oil supply cuts is not about “jacking up prices,” as Brent futures hover near $95 a barrel and analysts predict further rises into triple digits.  

“We can reduce more, or we can increase, that has been a subject that we want to make sure that the messaging is clear, that it’s not about, again, this jacking up prices,” Saudi Energy Minister Prince Abdulaziz bin Salman said Monday at the World Petroleum Congress in Calgary, Alberta.

“It’s about … making the decision at the right time, when we have the data, and when we have the clarity that would make us in much more of a comfort zone to make that decision.”

Some members of the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, are implementing 1.66 million barrels per day of combined voluntary declines — which falls outside of unanimously agreed OPEC+ policies — until the end of 2024. Topping this, Saudi Arabia and Russia announced they will apply respective voluntary declines of 1 million barrels per day of production and 300,000 barrels per day of exports until the end of the year.

Saudi Arabia is the world’s largest seaborne oil exporter and relies on hydrocarbon revenues to support so-called giga-projects designed to diversify its economy.

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Global debt hits record $307 trillion, debt ratios climb -IIF

Notable Snippet: Global debt hit a record $307 trillion in the second quarter of the year despite rising interest rates curbing bank credit, with markets such as the United States and Japan driving the rise, the Institute of International Finance (IIF) said on Tuesday.

The financial services trade group said in a report that global debt in dollar terms had risen by $10 trillion in the first half of 2023 and by $100 trillion over the past decade.

It said the latest increase has lifted the global debt-to-GDP ratio for a second straight quarter to 336%. Prior to 2023, the debt ratio had been declining for seven quarters.

Slower growth, alongside a deceleration in price increases, were behind the debt ratio rise, the report said.

“The sudden rise in inflation was the main factor behind the sharp decline in debt ratio over the past two years,” the IIF said, adding that with wage and price pressures moderating, even if not to their targets, they expect the debt to output ratio to surpass 337% by year-end.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord