Fed leaves rates unchanged at September meeting

The Federal Reserve left the upper bound of the Federal Funds target rate unchanged at 5.5% at yesterday’s FOMC meeting. The statement accompanying the decision upgraded the Fed’s language on the US economy, saying it was expanding at a “solid pace” compared with “moderate pace” in the July statement. The September decision was also accompanied by new economic projections where the Fed upgraded its GDP forecast for 2023 to 2.1% from 1% previously and its outlook for 2024 to 1.5% from 1.1% in June. The latest projections also continue to suggest that the majority of FOMC members expect one additional rate hike by end-2023, taking the rate up to 5.75% on its upper bound. The dot plot also highlighted that FOMC members expect rates to stay elevated for longer, with the median rate projection for 2024 at 5.1%, up from 4.6% previously. That would suggest just 50bps of rate cuts next year.

Inflation in Dubai rose 2.3% y/y in August, after rising by a more muted 1% y/y/ in July. The August print is the first acceleration in annual inflation in the Emirate since February 2023. The two components with the largest weights in the CPI basket - housing and food - recorded annual price growth of 6% and 3.3%, respectively. These increases were in part offset by an 11.2% y/y decline in the transport component. The August decline in annual transport prices was however smaller that that seen in July (-19.7%), reflecting the recent uptick in fuel prices. On a monthly basis, Dubai CPI rose 0.5%. 

The UK inflation rate rose at a slower pace than had been anticipated, to reach its lowest level in 18 months, in August. On an annual basis headline CPI rose 6.7%, lower than the 6.8% recorded in July and well below the 7% consensus expectation.  There were notable declines in the restaurant and hotels, and food and beverages components. Most encouragingly for the Bank of England will be the decline in core CPI from 6.9% y/y in July to 6.2% in August. Despite the better-than-expected inflation print, policy makers will still be concerned about robust wage growth and rising oil prices and are therefore expected to raise rates by 25bps to 5.5% at today’s monetary policy committee meeting.

Today’s Economic Data and Events

• 15:00 UK Bank rate decision: Forecast 5.5%
• 15:00 TU One-week repo rate decision: Forecast 30%
• 16:30 US initial jobless claims w/e Sept 16: Forecast 225k
• 18:00 US conference board leading index Aug: Forecast -0.5%
• 18:00 EC consumer confidence Sept: Forecast -16.5

Fixed Income

• US Treasury yields reached a 17 year high on Wednesday, after the Fed announced that it would keep rates unchanged in September but flagged the risk of a further hike before year-end. The 2yr yield rose 9bps to reach 5.176% and the 10yr UST yield rose 5bps to 4.407%.
• Yields were lower across European markets. Gilt yields, in particular, saw sharp moves on the day after better-than-expected inflation data. The 2yr Gilt yields fell 16bps to 4.819% and the 10yr Gilt yield declined 13bps to reach 4.209%. The 2yr Bund was 3bps points lower at 3.248% and the 10yr Bund yield was down 4bps to reach 2.697%.

FX

• The dollar strengthened against a basket of major currencies on Wednesday. EURUSD declined 0.17% to reach 1.0661, while GBPUSD fell 0.38% to 1.2344.
• Commodity currencies were also weaker against the dollar on the day. USDCAD rose 0.1% to 1.3462, while AUDUSD and NZDUSD fell 0.09% and 0.12%, respectively, to reach 0.6448 and 0.5929.

Equities

• Asian equity indices lost ground yesterday ahead of the Fed rate decision, with the Hang Seng dropping 0.6% and the Shanghai Composite closing 0.5% lower. Japan’s Nikkei ended down 0.7%.
• European markets had a positive day as the STOXX 600 added 0.9% with the DAX up 0.7% and the CAC 0.8%.
• The mood changed in the US following the higher for longer messaging from the FOMC however, and all three major indices closed lower. The interest rate sensitive NASDAQ was the biggest loser, dropping 1.5%, while the Dow Jones fell 0.2% and the S&P 500 0.9%.
• Locally, the DFM closed up 1.6%, the biggest one-day gain since early July. The ADX closed flat.

Commodities

• Brent futures closed down for the second day running yesterday as the risk-on sentiment was dampened by the FOMC commentary and dot plot. They dropped 0.9% to USD 93.5/b while WTI closed down 1.0% to USD 90.3/b. Both are losing further ground in trading this morning.
• The fall in oil prices came despite further evidence of a tightening market as US inventories at the Cushing storage hub fell for the sixth week in a row to 22.9mn bbl, near minimum levels for the unit and at the lowest level since last July.