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All eyes on the FOMC meeting

Daniel Richards - MENA Economist
Published Date: 21 September 2022

 

All eyes are on the FOMC meeting, from which we are due to hear the latest rates decision at 10pm tonight Dubai time. We expect a further 75bps hike to 3.25% at the upper bound, but what will be key to watch out for will be the new projections and the commentary from Chair Jerome Powell, with it looking increasingly likely that a signal of higher for longer will be given. After inflation came in hotter than anticipated at the latest print, the likelihood that the bank will slow down now is unlikely, and the tone from Fed officials prior to the blackout period was especially hawkish – as such there is even a fair chance of a further 75bps hike at the November meeting, although we will have a number of relevant data points to see before then. With this in mind, the projections for economic growth will likely be significantly weaker than they were in June.

US housing starts picked up in August, rising to 1.58mn, from 1.40mn the previous month. The 12.2% rise confounded expectations of an ongoing decline, but the applications to build measure dropped to an over two-year low of 1.52mn, likely reflecting the rise in mortgage costs as the Federal Reserve hikes interest rates. A further 75bps hike from the Fed tonight would likely further dampen the US housing market.

Canadian CPI inflation continued to decelerate in August as it dipped to 7.0% y/y, down from 7.6% in July and lower than the consensus projection of 7.3%. The slowdown, which was largely driven by lower petrol prices, will likely see the Bank of Canada ease off the pace of its rate hikes in subsequent meetings, although given inflation remains high, and core inflation remains well above the 2% target at 5.2% y/y, a further 50bps hike at the October meeting remains in play.

German PPI inflation came in hotter than expected in August, with the y/y measure at 45.8%, up from the 37.2% recorded in July and exceeding projections of a modest slowdown to 36.8%. Prices were up 7.9% m/m, compared to expectations of a far more modest 2.4% rise. Energy was a key driver (electricity prices were up 174.9% and natural gas 209.4%) but the rises were broad based, with fertilisers and nitrogen compounds up 108.8% and metallic steel up 20.9%. The upwards surprise in producers’ inflation will likely keep pressure on the CPI measure in the coming months also.

Key economic data and events

12:00 South Africa CPI inflation, August, % y/y. Forecast: 7.6%

22:00 US FOMC rate decision, upper bound. Forecast: 3.25%

Fixed Income

  • US Treasuries moved weaker in anticipation of the outcome of today’s FOMC. A 75bps hike is expected by the markets as well as a more hawkish outlook on where the Fed will take policy rates going forward. Yields on the 2yr UST added 3bps overnight to settle at 3.9665%, just shy of the 4% level, while the 10yr UST yield closed at 3.563%.
  • Eurozone bonds moved higher as ECB president said that the bank would “expect to raise interest rates further” in coming meetings. Yields on the 10yr bund added 12bps to 1.92%, its highest level since 2013. French bonds also saw some heavy selling with yields up 13bps to 2.472% while the resumption of trading in the UK saw another sharp move lower in gilts with yields up 15bps to 3.285%.
  • Risk assets also sold off in anticipation of today’s FOMC with an EM index of USD-denominated bonds dropping by 0.35% overnight and a high-yield bond index dropping by about the same amount.

FX

  • The dollar rose against all peers overnight with the broad DXY index up 0.44% to 110.215. Expectations of an even more hawkish Fed will support the dollar against risk assets generally even as other central banks are catching up in terms of policy direction. EURUSD dropped by 0.5% to 0.9971 while GBPUSD fell by 0.44% to 1.1381. USDJPY added another almost 0.4% to settle at 143.75 even as there is a chance the Bank of Japan could start to walk back some of its accommodative stance at this week’s policy meeting.
  • Commodity currencies were also routed against the dollar with USDCAD up by nearly 0.9% to 1.3365 while AUDUSD fell by 0.56% to 0.6689. NZDUSD was the principal loser, however, down by 1.1% to 0.5893.

Equities

  • Asian markets followed the previous day’s US moves into the green yesterday, with the major indices all closing higher on the day. The Shanghai Composite gained 0.2% while both the Hang Seng and the Nikkei added 0.4%.
  • Local markets took their cue from Asia as both the ADX (0.4%) and the DFM (0.7%) closed higher. The Tadawul added 0.5%.
  • European markets were not so sanguine, with the FTSE 100 dropping -0.6% and the DAX -1.0%. In the US, all three major indices closed down, between 1.0% and 1.%.

Commodities

  • Oil prices were lower overnight although the moves were relatively contained by the scale of some recent movements. Brent futures settled lower by 1.5% to USD 90.62/b while WTI dropped the same amount to USD 84.45/b.
  • The API reported a build in US crude inventories of 1m bbl last week along with larger increases in both gasoline and diesel stocks.

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