17th September - The Fed Hikes Rates
Yesterday saw the main event, where the Fed raised interest rates by 0.25% as expected. The real market-moving news, however, was the forward guidance and the dot-plot that went with the decision. The decision to raise rates was unanimous, with 16 of the 18 participants also expecting at least one more rate hike this year. Four expected two rate hikes, whilst the majority expected only one. An interesting thing to note, however, and a point that has affected the precious metals and growth stocks, is the extent of the expected rate hikes. No one has predicted more than two hikes in the next two years, and all have predicted rates will either maintain or fall by 2028. The Fed has effectively put a ceiling on where it expects rates to go for the medium and longer term.
Warsh's speech was characteristically short, and his press conference was also. The text in the Fed statement was short and reinforced their focus on inflation, stating, "Inflation remains elevated. Today's policy action will support a timelier return to the Committee's 2 percent goal. The Committee will deliver price stability." The message overall was essentially hawkish now but finished later, which caused mixed reactions in markets.
Bond markets did not show a huge reaction to the news but did seem to give credence to the hawkish now and finished later story that the Fed was trying to tell. The 2y yields moved comfortably higher on the day, following the short-term hawkish narrative. The 10y yields also rose but not by as much (and are down this morning), whilst the 30y yield actually fell on the news to back up the 'finished later' part of the story. The entire yield curve, however, is still significantly elevated, and this has not changed after the Fed meeting. With governments all around the world in more debt than ever, bond yields are taking on more and more importance, so these heightened yields could potentially be a focus for further intervention moving forward and will be a key market to stay on top of.
Outside of the Fed meeting, oil was lower yesterday as we did not see any fresh escalation in the Middle East. We also saw that the Saudis are rerouting oil that could not flow through the East-West pipeline, instead moving it through Oman and then using ship-to-ship transfers to avoid the Strait of Hormuz entirely. Not a permanent solution, but it helped to show the market that there are still ways of getting oil to the open market. A stronger USD on the back of the Fed meeting also helped in lowering oil prices by comparison.
Forex
The USD exploded higher after the Fed meeting yesterday, with the DXY closing past the key 100.000 level for the first time since the start of August. After two weeks of subdued reactions to positive news for the USD, the dollar finally reacted with consistent strength yesterday. This was a textbook reaction to a hawkish hike, and it means the dollar is now on a five-day winning streak. The key now is to follow whether the USD follows through with this strength. Bond yields are still elevated, and I still have concerns about the US economy, so the next few weeks will be very instructive to see whether this USD strength holds.
The USD/JPY pair has well and truly bounced off the 153.00 level we were watching earlier in the week, as the rate hike has served to mitigate the expected hike from the BoJ later in the week. The pair is currently sitting above 155.00 and has made close to a 50% retracement of the move lower we saw at the start of the month. As with the USD in general, I am now curious to see whether this move up can hold or whether the concerns surrounding the US economy mean the pair will drift back down to test 153.00 again in the near future.
We are due to receive the BoE's interest rate decision today that will affect the GBP, with the broad expectation that it will hold rates. The market mover will likely be the vote split on the decision, how many will vote for a hike and how many will vote to maintain. Last month we saw a 3/0/6 split with 3 voting to raise, 0 voting to cut, and 6 voting to maintain. The current prediction is for the same today, but we will only need two votes to move to raise to see this decision change. This will have an effect on GBP, but it will be an interesting guide into how Central Banks are thinking outside of this as we come off the Fed's decision to raise rates.
Indices
Another negative session for indices, as all three of the majors fell for the third straight day on the Fed meeting news. A hawkish hike would normally be a worst-case scenario for growth stocks in the tech and AI sector, as investors will move capital away from assets promising returns later and into assets offering better rates now. However, we saw yesterday the most underperforming indices were those with less exposure to tech. The Dow was down 1.29%, but the S&P was only down 0.55%, and the NAS100 was more or less level on the day. To me, this signals that the 'hawkish hike' was actually not that hawkish outside of the medium term, as we have not seen moves away from assets that would be truly affected by a longer-term shift in the Fed's mindset. The market seems to be taking the rate hike as a bump in the road instead of a change of direction.
All three major indices are down between 4-6% from their August highs. While I do not think they will fall significantly due to the Fed meeting, I still think there could be more room for them to fall a little more. I have been expecting a 10-20% correction at some point after the record-breaking rises in the first half of the year. Whether we are seeing the start of it now or whether we see the fall as we head into 2027 is anyone's guess, but I still feel it is something to look out for in the medium to longer term.
Precious Metals
Gold fell 0.73% yesterday to close at $4,261, while silver dropped 1.11% to $62.98. Both have already recovered the entirety of those losses this morning.
The initial reaction to the hike was as expected. A 25 basis point increase, a unanimous vote, and a dot plot showing 16 of the 18 participants expecting at least one more move this year is about as hawkish a short-term hike as the metals could have been handed, and they duly sold off. What is more interesting is how quickly that has been reversed.
This comes back to the point made in the indices section, that in the short term this may be hawkish but in the medium to long term it is absolutely not. Metals tend to trade on the medium to long term instead of the short term, so the rally today in metals is actually not unexpected. With a ceiling placed on rate hikes by the Fed, markets can look to longer-term concerns with the US economy and the uncertainty in the Middle East. Metals still offer a safe haven away from this uncertainty and so have not lost their appeal.
I have been struck over the past week by the resilience of the metals markets. We have seen oil rise and stay above $100 per barrel, we have seen NFP triple expectations, we have seen inflation come in hot for both PPI and CPI, yet gold is currently sitting only 4% below its level just before the NFP print. Everything that could have happened to damage metals has happened, yet they are still holding strong.
To me, this screams that there is strong underlying support for metals. Now we have more clarity on the rate hike expectations, I would not be in the least bit surprised to see metals rally over the next few weeks. If we also see positive news in the Middle East that reduces oil prices, that will only increase the metals' strength.
Today's Market Drivers
GBP BoE rate decision, 12pm UK time - Expected to hold rates, the market mover is likely to be the vote split between the BoE members.
JPY BoJ rate decision, overnight tonight UK time - With a rate hike expected, again the forward guidance will be key.
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