Following Wednesday’s surprise drop in British inflation, markets are now split on whether the Bank of England will pull the trigger one last time later today or signal the end of the whole campaign here at a peak rate of 5.25%. Central banks in South Africa and Turkey are also meeting.
But, as so often, it’s the Fed that casts the biggest shadow.
In what many dubbed a ‘hawkish pause’ in its tightening campaign that drummed home the ‘higher for longer’ message, the U.S. central bank upgraded its view of growth, jobs and policy rates through 2024 – and a majority of policymakers indicated they still favour one last rate hike this year to 5.5-5.75%.
Wall St took it badly and stock futures remain in the red on Thursday. The S&P500 fell almost 1% to its lowest level of a rough September so far, with tech stocks taking the brunt of the selling and the NYFANG index of 10 megacap digital and tech giants off more than 2% – its biggest daily swoon in almost a month.
The VIX volatility gauge closed above 15 for the first time this month and climbed further pre-market on Thursday. Asian and European bourses all fell sharply too.
The sour mood in equities emanated from a further repricing rates and bond market.
Futures now show the implied Fed policy rate for the end of next year at a new cycle high of 4.85% – up a whopping 35 basis points in just over a week. And that’s still a quarter point below where Fed policymakers indicated they would be by then – and just 50bp below the ‘peak rates’ later this year.
The reason? Fed officials still don’t see inflation back to their 2.0% target until 2026. As the economy dodges recession and unemployment stays low, Chair Jerome Powell said the Fed needs ‘convincing evidence’ its policy stance is bringing inflation back to target.
Goldman Sachs said it now expects Fed easing to start as late as the fourth quarter of next year, six months later than an earlier forecast for a first cut in Q2.
“(Fed) participants appeared to move away from the view that monetary policy tightening could weigh on growth with a long lag next year, which weakens one argument for cutting,” wrote Goldman economist Jan Hatzius.
Others, such as Institute for International Finance chief economist Robin Brooks, think the Fed is simply trying to prevent bond markets loosening prematurely and running away with the prospect of rate cuts ahead once a peak rate is assumed. “It’s just expectations management,” Brooks said.
If so, it appears to be working.
The Treasury market – bracing for another heavy diary of new debt sales next week – seemed in no mood to fight the Fed.
Two-year Treasury yields topped 5.2% on Thursday for the first time since 2006 – up 32bp this month alone. Ten-year Treasury yields hit 4.5% for the first time in almost 16 years.
The only solace was that it knocked back restive crude oil prices even further. US crude futures dropped back below $90 per barrel for the first time in more than a week – down almost 6% from Tuesday’s highs.
With many of the other central banks hesitating even as the Fed hangs tough over the horizon, the dollar zoomed to six month highs. The SNB’s pause and the prospect of the BoE stalling later too meant the Swiss franc and sterling led the way lower against the pumped up buck.
