16th September - Fed Day Is Here
The big day is here, as later on we hear from the Fed with regards to this month's interest rate figures. Crucially, we will also see the updated dot-plot for future rate expectations. Considering we are at a 93% chance of a rate hike, the dot-plot and future guidance are likely to be the main market movers for the day. Whether we get a hawkish rate hike, with expectations of future hikes, or a dovish hike where this is a one-and-done move for now, will significantly affect market movement over the next few weeks. This will be the key thing to look out for, assuming we do not get a major surprise and see rates held.
The other news of note in the US is the continued rise of bond yields. Yesterday saw a US 20y Treasury auction take place and saw a significant drop-off in foreign demand, while the yield rate was set at 5.420%, a significant increase from 5.204% in the previous month's auction and the highest level for this tenor since May 2020. This is further proof that yields are not high because of inflation expectations alone, but instead are rising due to a lack of confidence in the US economy. This will continue to have an impact on the US Dollar and potentially the stock market as well if foreign investors remove their capital from the US economy.
Oil prices stabilized a little over the past few days around $109 per barrel, but we may shortly see some further pressure on this due to the closure of the Saudi East-West pipeline thanks to Houthi aggression recently. The Saudis yesterday were informing some European oil refiners that their September crude cargoes would be canceled, as they are not able to get sufficient oil through the pipeline and shipped out of Red Sea ports. This further reduction in supply is likely, unless we see a change in the situation, to raise costs further as we move through the month.
Forex
The USD gained a little more ground on the last day before the Fed meeting, with the DXY closing yesterday at 99.600. The USD has found a 4-day winning streak off the back of last week's inflation prints, but whether this continues will only be resolved by the Fed meeting later today. It is difficult to overemphasize the short to medium-term effect today's meeting will have. There had been so much uncertainty leading up to the meeting with regards to the decision that was to be made, which was only resolved thanks to the warm inflation prints last week. This, however, means the uncertainty remains strong for future rate decisions. As a result, the dot-plot that is due to be released today, along with Warsh's forward guidance, will give the market some clarity as to the Fed's expectations for future months and will materially change how the USD behaves moving forward. Hawkish guidance and the USD will continue its winning streak; dovish guidance and it could collapse back lower.
All focus is on the USD today, so most other currencies are relatively flat. The GBP could see some movement if we see an unexpected print for the UK CPI data this morning, but apart from that, all eyes are on the Fed meeting later on.
Indices
Another negative day for stocks, with all three majors down on the day. The Dow fell 0.60% to 52,100, the S&P 500 dropped 0.45% to 7,585, and the Nasdaq 100 fell 0.70% to 29,000. The selloff was also not isolated to one industry, with close to 350 of the 500 in the S&P returning negative days.
An interesting thing to note with regards to the moves yesterday was that some of the AI names actually recovered from Monday's drop, implying the fall on Monday was a little exaggerated. Bank of America's Benjamin Bowler made the contrarian case to concerns about the threat of rogue AI: "If the frontier labs truly believe AI is powerful enough to pose an existential threat, then AI must also be powerful enough to solve some of humanity's largest problems. AI's potential is rising as fast as its risks." This is a very interesting point to make and a valid one. If the AI industry is able to thread the needle of mitigating the risks whilst exploiting the potential benefits, then AI could be more transformative than any of us expected. The next few years will therefore be crucial and absolutely fascinating to watch.
Outside of a pure AI focus, the stock market as a whole seems to be in a holding pattern before the Fed meeting today, with investors hesitant to invest capital until they know the full picture. A hawkish Fed could be bad for stocks and see their recent drift downward accelerate, whilst a dovish Fed could push us back up to test all-time highs. Only time will tell which way the Fed will take us.
Precious Metals
Gold fell slightly yesterday to $4,295, while Silver actually rose a little to end the day at $63.73. Both were down at the start of the day, before recovering later on as they have done for 3 days straight now. As I have said before, with the increase in rate hike expectations over the past week or so, the metals should have fared far worse, which is giving backing to the idea that metals seem to have a lot of fundamental support that is willing to look past short-term factors. Both are rallying this morning to reinforce that point.
For me, this means that even with a rate hike today, if the guidance is dovish, we could see a lot of strength in the metals markets over the next few weeks. Hawkish guidance, and that could change, but for me, there is more room higher than there is lower. Another interesting one to track for the rest of the week.
Today's Market Drivers
GBP CPI, 7 am UK time - The final data before the BoE tomorrow
FOMC decision and Warsh press conference, 7 pm UK time - A hike is over 90% priced in, so the guidance is the entire story. Watch specifically whether Warsh addresses the bond market, as he will be asked.
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