MARKET WRAPS
Watch For:
EU Flash consumer confidence indicator; U.K. BOE interest rate decision, Public sector finances; France Business sentiment index; trading updates from JD Sports Fashion, Next, Halma
Opening Call:
Shares may open lower in Europe on Thursday, as investors digest Fed Powell's comments and brace for the Bank of England's rate decision. In Asia, stock benchmarks were lower; Treasury yields were broadly higher; the dollar gained; while oil futures and gold declined.
Equities:
European stock futures are tracking lower early Thursday ahead of the Bank of England's interest rate decision.
The Bank of England is expected to raise its key rate by 25 basis points to 5.5% on Thursday, but it could then hold it at that level until February 2025 in an effort to contain U.K. inflation and bring it back down to the 2% target, Bank of America economist Robert Wood said.
The U.K. economy has "a greater entrenched inflation problem than other developed market economies, due to unique supply shocks (Brexit, workforce sickness) and modestly deanchored inflation expectations," Wood said.
U.S. stock indexes finished lower Wednesday after the Federal Reserve left its benchmark interest rate decision unchanged, as expected while indicating that a majority of officials continue to expect one more quarter percentage point interest rate hike before the end of the year.
The U.S. central bank also sent a clear message that interest rates are expected to be "higher for longer" by cutting their forecast for rate cuts in 2024 from four to two.
The Fed's statement "maintained the tightening bias, with the language that the FOMC will look to determine 'the extent of additional policy firming,' analysts at Capital Economics said.
Alexandra Wilson-Elizondo, deputy chief investment officer of multi-asset strategies at Goldman Sachs Asset Management, said the Fed's statement was more hawkish than expected.
"There has been disagreement between what the Fed has been saying, what the bond market was doing and what the equity market was doing," said Eric Sterner, chief investment officer at Apollon Wealth Management.
"They are all starting to come together now."
Sterner said tech stocks are increasingly under pressure as higher rates buoy bond yields and entice investors to redirect more cash to the Treasury market.
"I think that the stock market is getting used to the expectations that rates are gonna be higher for longer," said Travis Anderson, co-founder at TBH Advisors.
"It doesn't seem to have changed the risk appetite in the secondary market that much," Anderson said.
"This desire and ability to operate in a little higher-rate environment is out there," he said.
Forex:
The dollar was consolidating in Asia after the Fed signals rates will stay higher for longer, boosting the appeal of U.S. fixed-income assets and demand for the greenback.
The Fed's dot plots were raised for 2024 and 2025 while continuing to indicate another rate increase this year, said Michael Wan, senior currency analyst at MUFG Bank.
Bonds:
Treasury yields were broadly higher after Federal Reserve Chairman Jerome Powell indicated that officials are not necessarily done with interest rate hikes.
Cindy Beaulieu, managing director and portfolio manager at asset management firm Conning said, "this is a Fed that is still very focused on inflation at more than two times their current 2% target, but they simply want to consume more data before moving again. Cracks are forming but none of them are big enough to end this tightening cycle."
But some analysts doubt the Fed will be able to stick to this hawkish path.
"If the Fed is right about the economic outlook then rates can stay higher for longer," Capital Economics said.
"We just don't believe those forecasts." CE foresees a recession forcing faster easing.
Strategists, traders and investors also reckon that rising oil prices likely haven't been completely factored into Wednesday's updated forecasts from the Fed.
"The Fed is not in the business of doing long-term predictions on oil. Policy makers have told us time and time again that they're more concerned about core," said Tim Magnusson, chief investment officer of the fixed income relative value strategy at Wayzata, Minn.-based hedge-fund firm Garda Capital Partners.
Still, "the more time that goes on in which energy stays elevated, the more likely that feeds into other categories of inflation."
Energy:
Oil prices retreated in Asia after prices failed to find much support from U.S. government data showing a weekly decline of more than 2 million barrels in crude stockpiles.
"The disappointing inventory drawdown gave impetus for traders to lock in profits following the 10% gain since the start of the month," ANZ analysts said.
Prices were also weighed after the Federal Reserve left its benchmark interest rate unchanged on Wednesday, as expected, but signaled another rate hike this year is possible.
"We do feel some consolidation is warranted until we see the next leg higher," Tariq Zahir, managing member at Tyche Capital Advisors said.
Still, "the weight of the continued supply production cut through the end of the year by Saudi Arabia and Russia...is not a matter of if, but a matter of when prices will break $100," he said.
The "one cure for oil prices going higher is higher oil prices to tamper down demand." That may not happen "until we get above $100 a barrel," Zahir said.
Metals:
Gold edged lower after the U.S. Federal Reserve left the rates unchanged on Wednesday but signaled one more rate hike by the end of the year.
"Gold prices have been, at the very least, resilient, reflecting not only growing expectations of less aggressive Fed monetary policy but also of increased expectations of a 'soft landing'," said Jeff Klearman, portfolio manager at GraniteShares.
"A resilient economy with slowing inflation has tilted market sentiment that the Fed funds target rate has a decent chance of remaining unchanged in the near term," he said.
"All of this is supportive of gold prices going forward."
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Base metals fell across the board amid a risk-off mood sparked by the FOMC signaling that rates will likely stay higher for longer.
Aluminum could also be weighed by data showing higher output, analysts said.
Total monthly aluminum production rose 1.6% on year to 6.04 million tons in August, ING commodities strategists said, citing industry data.
This leads to cumulative aluminum output of 46.5 million tons for the first eight months of this year, up 1.7% on year, the strategists added.
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Iron ore prices rose in Asian trade, extending gains in the previous session.
Molten iron production continues to rise while steel mill inventory is low, Nanhua Futures analysts said.
They expect the ferrous metal's price to be supported in the short term given that mills are likely to restore inventories before China's National Day holiday in October.
However, with steel mills' profits gradually declining over the longer term, downstream demand may weaken in the upcoming peak season, they added.
TODAY'S TOP HEADLINES
Fed Holds Rates Steady but Pencils In One More Hike This Year
WASHINGTON-Federal Reserve officials voted to hold interest rates steady at a 22-year high and revealed a divide over whether they should raise them once more this year, with most leaning toward another increase.
Fed Chair Jerome Powell said that officials didn't need to decide yet whether to lift rates again after a historically rapid series of increases over the past 18 months and as they await evidence that a recent inflation slowdown can be sustained.
Higher Interest Rates Not Just for Longer, but Maybe Forever
On Wednesday, Federal Reserve officials surprised markets by signaling interest rates won't fall as much as previously planned.
The tweak might be more important than it looks. In their projections and commentary, some officials hint that rates might be higher not just for longer, but forever. In more technical terms, the so-called neutral rate, which keeps inflation and unemployment stable over time, has risen.
Don't Buy the Fed's Rate Projections
Doth the Fed project too much?
Federal Reserve policy makers on Wednesday held to their target range on rates-no surprise there. If there was a surprise, it was how little they expect to cut rates next year.
The Stock Market's Next Big Problem: A Strong Dollar That Breaks Out
The dollar has risen lately to a key level. And If it breaks above that, the stock market could drop.
The U.S. Dollar Index (DXY), which measures the buck against a basket of currencies, is up just over 5% from a mid-July low point to 105. The main driver has been higher yields on U.S. government bonds as the rate of inflation hasn't been declining much in the past couple of months. That attracts buyers of dollars who are looking to own U.S. bonds.
Buy U.S. Stocks, BofA Says. Just Not the Market-Cap S&P 500.
Economists increasingly predict that the U.S. economy could avoid a recession. That should give U.S. stocks a boost into year-end, but Bank of America says investors should go for an equal-weighted approach to the S&P 500 to get the most benefit.
Equity and quant strategist Savita Subramanian is more bullish on the S&P 500 than the Wall Street consensus target, which she says implies a 2% decline in the broad index. When consensus among Wall Street strategists called for the market to end lower, the index actually ended higher 100% of the time, according to the strategist. Many of Subramanian's other indicators are also flashing green, a reason she raised her year-end S&P 500 target to 4600 from 4300 for year-end on Wednesday, implying about 4% more upside. The index closed Tuesday at 4,443.95.
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09-21-23 0015ET
