The week kicked off on quite mixed sentiment. The German stocks gained, while CAC40 posted a small loss on Monday. The UK was closed due to Queen Elizabeth’s funeral and the US indices closed the session in the positive thanks to a late trading rally, that boosted appetite in Big Tech stocks. Apple jumped 2.50% to above its 100-DMA, while Tesla rallied some 1.90%. Yet, the S&P500 closed a couple of cents below the closely watched 3900 level, as Nasdaq rallied 0.77% but remained below the 13000 into the first day of the Fed meeting. The US treasuries continued their selloff. The US 2-year yield advanced to 3.97%, and the 10-year yield was above 3.50%.
So the FOMC begins its two-day policy meeting today, and is expected to deliver the third 75-bp hike tomorrow. Activity on Fed funds futures gives more than 80% chance for a 75bp hike this morning, and less than 20% chance for a 100bp hike. Although the probability of a full percentage point hike spiked up to 35% after last week’s disappointing inflation reports, we still believe that the Fed has nothing to gain by surprising the market with a bigger than expected rate hike. The strength of the US dollar is too threatening for the Fed to pull out the bazooka.
Therefore, a 75bp hike at tomorrow’s announcement has the potential to give some relief to the US dollar and the equity markets, as it would help de-pricing the scenario of 100bp hike. Yet, the size of an eventual relief, or whether we would see a relief or not will also depend on the economic projections and the dot plot. If there is any hint that the Fed members move away from the idea of ‘soft landing’, the doves would be more aggressively back, and we could see a bigger relief across risk assets, whereas if Powell insists on the fact that the US jobs market remains resilient to the policy tightening, it would be taken as a sign that the Fed will carry on with sustained rate hikes, and the relief – if any – would be much smaller. And I think that the second scenario is more likely at this stage. We will see what the dot plot says.
So remember, the so-called ‘dot plot’ plots on a chart how the FOMC members see the rates evolve. It gives very important hints about the future of the Fed policy, and I can even say that this week, the dot plot will be more carefully watched than the rate decision itself, as it will certainly show a higher terminal rate for 2023. The Fed may take its rates to around 4.0 – 4.2% from 3.8% plotted in June. That means that after this week’s 75bp hike, there would be at least another 75bp hike to reach that level, whereas the expectation so far was a 50bp hike in November, and a 25bp in December.
And the global tightening winds will continue to blow beyond the US this week. We have an army of central banks around the world which are due to announce their latest policy decisions: Bank of Japan, Sweden, Norway, Brazil, South Africa, Philippines, Indonesia, Taiwan, Turkey, the Bank of England and the Swiss National Bank will announce their latest decisions throughout this week. Most of these banks are expected to raise their interest rates, and/or sound hawkish in an effort to slow the depreciation of their currencies against the Fed-boosted US dollar.
The Swiss National Bank (SNB) is expected to hike by 75bp.
The Bank of England (BoE) could stick to a 50bp hike, given that the energy support package could ease the pressure of looser fiscal policy on consumer prices.
The Bank of Japan (BoJ) is expected to stay pat, but voice concerns regarding abnormal USD appreciation against the yen.
The Central Bank of Turkey (CBT) will continue its free-style rate policy and keep the benchmark rate at 13%.
