Markets look ahead to Fed rate decision

Following on from the ECB’s 25bps cut last week, the US Federal Reserve is widely expected to make its first cut of this cycle at its upcoming FOMC meeting which concludes on Wednesday. Somewhat sticky core inflation figures last week have made a 25bps cut the more likely outcome according to money markets, with bets on a 50bps cut having dissipated. This would take the upper bound of the Fed funds rate down to 5.25%, having been steady at 5.50% since July 2023. The quarter-point cut has long been our expectation for this meeting. The Bank of England is also setting policy this week, on Thursday, with a hold at 5.0% expected there.

The US University of Michigan sentiment index came in above expectations at 69.0 for August, up from 67.9 the previous month and beating the predicted 68.5. The improvement was driven by both components of the survey as the expectations component of the survey which to 73.0, from 72.1, while the current conditions index picked up to 62.9, from 61.3 previously. Crucially for the Fed ahead of this week’s meeting, inflation expectations for the year ahead dropped to 2.7%, from 2.8% previously, while for five to 10 years ahead it ticked up modestly, from 3.0% to 3.1%.

Today’s Economic Data and Events

There are no major data releases scheduled today

Fixed Income

• US treasuries rallied last week, ahead of an expected interest rate cut from the Fed on Wednesday. Yields on the 2yr closed 6bps lower over the week to 3.5824%, while the 10yr also ended the week 6bps lower at 3.6513%.
• Aside from the US Fed and the Bank of England, Turkey’s central bank is also setting policy this week, as is Brazil and South Africa’s.
• S&P upgraded its outlook on Saudi Arabia’s long-term foreign currency debt from stable to positive, with the rating unchanged at A-.

FX

• The dollar lost ground against its peers last week ahead of the expected Fed rate cut. The dollar index ended the week down 0.6%.
• The gains against the dollar came largely from the commodity currencies and the yen. JPY closed at 140.85, its lowest level since early January. EUR on the other hand ended the week down 0.8% against the dollar following the ECB rate cut, ending Friday at 1.1075, while GBP dropped 0.4% to 1.3124.

Equities

• Aside from some losses locally and in East Asia, equity markets were largely positive last week. In the US, the Dow Jones, the S&P 500, and the NASDAQ added 2.6%, 4.0%, and 6.0% on the week respectively, while in Europe the DAX gained 2.2% and the FTSE 100 closed up 1.1% w/w.
• Locally, the DFM ended the week 0.1% lower, while the ADX dropped 1.8%. In Saudi Arabia, Thursday’s close saw the Tadawul down 2.1% w/w, while Egypt’s EGX 30 dropped 1.7% compared to the previous Thursday.

Commodities

• Oil prices lost ground again on Friday after two days of gains, and Brent futures ended the week at USD 71.6/b, still up 0.8% w/w but nevertheless near lows not seen for several years. WTI gained 1.5% w/w to close at USD 68.7/b.