All eyes on the Fed

OVERNIGHT

Asia-Pacific equity markets are mostly down this morning. In Australia, Q2 annual CPI inflation was lower than expected and at 6.0% down from Q1’s 7.0% rate. The outturn for June was in line with expectations at 5.4%, down from 5.5% in May. The IMF has raised its 2023 world growth forecast to 3.0% from 2.8% but it left its 2024 projection unchanged at 3.0% and continued to warn about multiple downside risks. 

THE DAY AHEAD

Today brings the first of three important international monetary policy updates. The US Federal Reserve will make its latest announcement early evening UK time to be followed by the European Central Bank tomorrow and the Bank of Japan on Friday. The Fed left rates unchanged at its last update in June for that first time since it started hiking them last March. But that now looks like a brief pause as rates seem set to rise again today by 25 basis points. In the light of recent comments from Fed policymakers, markets are giving more than a 95% probability to a hike. So unless Fed policymakers uncharacteristically intend to surprise, the significant news may be any guidance that they give on their likely future actions.   

So far the majority of Fed policymakers have been indicating probable support for at least one further hike in the autumn.  However, markets have been sceptical for some time whether that will happen. Market scepticism has risen further since US June inflation surprised on the downside, so markets will be looking for indications today whether today’s expected hike will be the last one. 

However, Fed policymakers may be more inclined to keep their options open for now. They will be mindful that the June CPI data may have exaggerated the improvement in inflation and possibly loath to provide further fuel to rising financial markets. Fed policymakers know that there is an unusually long gap until the next policy update in late September, which will give them plenty of new data and ample time to signal their policy intentions. In the meantime, they may content themselves with a statement that the decision on further rate moves will be data dependent. 

Ahead of the Fed’s announcement, the economics calendar is light. Eurozone money supply may provide further indications of the impact of the ECB’s previous interest rate rises but it is unlikely to have much impact on tomorrow’s policy decision. In the US, June new home sales data will be interesting given signs that the market is levelling off after an initial marked negative impact from interest rate rises. Finally, the Bank of Canada will publish the minutes of its last policy meeting when it raised rates again. 

MARKETS

Bond yields were up in the US and the UK yesterday but slightly lower in the Eurozone as markets awaited this week’s monetary policy updates. In currency markets, sterling is a touch higher against both the euro and the US dollar.