A look at the day ahead in European and global markets by Vidya Ranganathan
Just hours before the Fed hikes to 75 or even 100 basis points and the Bank of Japan declares its commitment to zero, one might have expected markets to be balanced, even calm. The decisions are largely priced in.
However, that is not the nature of these things. Asia woke up on Wednesday determined to test the BOJ’s resolve by pushing bond yields higher and beyond political boundaries.
World equities are falling, the benchmark US 2-year Treasury hits 4% and the dollar is relentlessly moving back towards 20-year highs.
This number – four – is in every conversation. Swap markets are pricing Fed rates above 4 through 2023, but Fed’s own forecast lags behind.
Investors see at least four risks tomorrow. Will the Fed’s dot plot be revised to show a 4% top rate in 2022, unanimously? Will Powell hint at being “higher for longer”? Will markets be forced to reverse their expectations and prices for a Fed pivot, ie rate cuts, in the second half of next year? Will the Fed also revise economic forecasts and admit that it will take longer for prices to stabilize than they now expect?
Commodity markets and stocks are tiring of the ongoing debate over whether the Fed and other central banks are going too far.
Oil prices are on track for their worst quarterly declines since the start of the COVID-19 pandemic, and dire warnings of a looming economic slowdown have been issued by Ford and FedEx, among others.
It didn’t help that European Central Bank President Christine Lagarde also joined in the chorus of hawks about the need for restrictive policies.
Meanwhile, Liz Truss addresses the United Nations later in the day as part of her first international trip as Britain’s Prime Minister and pledges billions of pounds more in support for Ukraine over the next year.
Key developments that could impact markets on Wednesday:
WASHINGTON, DC — The Federal Open Market Committee (FOMC) announces its decision on interest rates, followed by a statement — 1800 GMT.
FRANKFURT – The Governing Council is holding a non-monetary policy meeting in Frankfurt.
BERLIN – German Finance Minister Christian Lindner talks about energy crisis, inflation, recession fears – 0800 GMT.
TOKYO – Bank of Japan to hold monetary policy meeting (until September 22)
Interest rate decision by the Central Bank of BRAZIL
(Reporting by Vidya Ranganathan; Editing by Kim Coghill)