Analyst
In Europe, stock performance improved slightly due to positive economic data coming from the UK. The UK saw its inflation rate decrease to 6.7% in August, contrary to the expected 7% rise - a surprise but the September number will likely show a different picture given the sharp increase in energy prices. Still, the August inflation figure is the most modest since February 2022, suggesting potential cooling in the global inflationary environment. Germany also released it's PPI data where, German producer prices increased month-on-month to 0.3% beating market expectations, however it dipped to -12.6% year-on-year.
US stocks declined yesterday with the US 500 and US100 closing -0.22% and -0.23% respectively. Traders are anticipating that rates will remain high for a more extended period due to potential inflation flare-ups. Currently, US equity futures remain unchanged ahead of the Federal Reserve's rate decision later today (18:00 UTC+0). We will see muted trading activity before the rate decision.
The Federal Reserve is predicted to maintain current interest rates (5.5%), emphasizing the need for additional economic data in the upcoming weeks before the rate decision in November. However, more important this time, will be the language that the Fed (and Fed Char Powell) is using when giving an inflation forecast and policy outlook.
US five-year and 10-year yields hit the highest levels since 2007, ahead of the FED rate decision. Analyst believe that the bond market might have priced in rate cuts for next summer, but for the Federal Reserve to take that step, economic conditions might need to deteriorate to the point of a recession. Investors remain too optimistic about rate cuts within the next 12 month.
Surging energy costs present a dilemma for the Federal Reserve, echoing historical moments when the US faced recessions in the mid-1970s, early 1980s, and 1990s. Market experts highlight the increasing risk of soaring headline inflation, which may complicate the Federal Reserve's approach.
As for the central bank's stance, a sharp focus is also on the upcoming "dot plot" projections. Major points of interest include whether they maintain forecasts of another 25 basis-point rate hike this year and the anticipation around the predicted rate reductions for 2024. Any indication of lesser rate cuts could bolster the USD and would weigh heavily on rate sensitive stocks - such as growth/tech.
Oil prices saw some profit-taking after WTI rose to around $92/barrel and Brent to over $95/barrel. Oil price indicate expectation of higher rates for longer. Fundamentals for a further tightening oil market = rising prices remain fully intact. Gold prices remain relatively unchanged.
Key events today:
GBP Inflation Rate / CPI, PPI, Retail Price Index - 06:00 UTC+0 (released)
EUR PPI - 06:00 UTC+0 (released)
US EIA Crude Oil Stock Change - 14:30 UTC+0
US FED Interest Rate Decision, FOMC Economic Projections - 18:00 UTC+0
US FED Press Conference - 18:30 UTC+0
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