Stocks in the US (pre-market) and Europe are trading higher amid overall subdued trading activity ahead of the Fed rate decision – though more attention is being paid to the language used and the policy outlook than to the widely expected pause in interest rates.
The Fed is expected to NOT raise rates for the second time this year, following signs of slowing inflation and early signs of a cooling (but still very tight) labor market. A pause is widely expected and I too believe that the Fed has not gotten much smarter from the recent economic data and instead prefers to wait for ~two more months of data before deciding to raise rates (or not) for another time this year. The focus will be on Fed Chairman Jerome Powell's remarks as he describes the risk of inflation flaring up again, as well as the Fed's policy outlook and the so-called “dot plot,” which gives a better idea of whether another rate hike is likely and how far away rate cuts are. Investors and analysts still expect the first rate cut in June/July 2024 – and may soon have to push that date back further. Concerns that interest rates could rise for longer will make the USD stronger again and put pressure on interest rate-sensitive equities.
However, the general expectation is that the U.S. economy can withstand higher rates – even another 25 basis point hike (which would make little difference) – there is downside potential here as well, especially if inflation remains stubborn and the Fed can only manage it by slowing the U.S. economy significantly.
Also contributing to a slight improvement in sentiment today was the fact that oil prices fell after hitting a new 10-month high yesterday, and that inflation in the UK unexpectedly slowed. The GBP fell as much as 0.5% against the USD to its lowest level since May as traders bet that the Bank of England now has more reason to hold off on rate hikes and wait for more data. The likelihood of the BOE raising rates by 25 basis points at its meeting on Thursday, which was almost guaranteed earlier this week, has now fallen to less than 50%. The Bank of England is in a similar situation to the ECB last week – I would suggest that the Bank of England pauses but does not provide a dovish outlook and thus NOT follows the ECB with a dovish rate hike – an extremely confusing move.
Oil prices have fallen after hitting a 2023 high yesterday, but the outlook remains positive. A growing number of analysts expect oil prices (Brent) to reach $100 before the end of the year. Global oil demand remains at record levels and OPEC+ supply constraints continue to tighten the market.
We expect a “hawkish pause” from the Fed and a dot plot pointing to another rate hike and no rate cut before the end of Q3/2024. In our expectations, the USD will regain value and the rotation from tech/growth to more defensive stocks will intensify.
👁 ROB'S MARKET OVERVIEW:
September 20, 2023
⚠️ We expect a “hawkish rate pause” from the Fed. This would short-term make the USD more appealing again while weighing on rate-sensitive stocks.
🇺🇸 US Markets ↗️/↕️/↘️ (If Fed & Fed dot plot is on the hawkish side)
Cyclical Stocks ↗️/↕️
Tech/Growth Stocks ↗️/↕️/↘️
Financial Stocks ➡️
Defensive Stocks ➡️/↗️
Energy Stocks ↘️/➡️ (remains bullish for September)
Materials Stocks ↕️/↗️
USD ➡️/↗️ (USD to benefit from “hawkish” Fed)
EUR, CHF ➡️
GBP ↘️ (after cooler than expected UK inflation and ahead of BoE rate decision)
⚒ Commodity Markets ↕️/↗️
Oil prices ↘️/➡️/↘️ (oil would see additional headwinds on hawkish Fed; oil remains bullish for September)
Natural Gas prices ↕️
Metal prices ↕️
Precious Metal prices ↘️/↕️/↗️ (gold would benefit from a hawkish Fed)
(*↗️ bullish, ↘️ bearish, ➡️ sideways / stable, ↕️ mixed / volatile)