Daily Market Outlook, Wednesday, Sept. 20

By Patrick Munnelly of Tickmill

Wednesday, September 20, 2023 6:03 AM EDT

Munnelly’s Market Commentary…

Asian equity markets generally faced a downward trend as investors adopted a cautious stance ahead of forthcoming central bank policy announcements, including the Federal Open Market Committee (FOMC) rate decision and dot plot projections.

Freepik

Nikkei 225 weakened as the latest trade data indicated that Japanese exports and imports remained in contraction territory, though not as severe as anticipated. Hang Seng and Shanghai Composite followed the subdued market sentiment. The People's Bank of China (PBoC) maintained its benchmark one-year and five-year Loan Prime Rates at 3.45% and 4.20%, respectively. Country Garden, a property developer, missed a coupon payment on its dollar bonds, causing concern among bondholders. The developer still has a 30-day grace period for payment.

The UK's Consumer Price Index (CPI) data for August revealed an unexpected drop in annual inflation to 6.7% from 6.8% in July. This defied economist expectations of rising inflation due to increased petrol prices, but other factors offset the increase. The "core" rate of inflation (excluding food and energy) also fell significantly to 6.2% from 6.9% in July. This data fuels speculation that UK interest rates may be nearing a peak, making the Bank of England's upcoming interest rate decision a closer call.

Stateside focus is firmly on The US Federal Reserve who are expected to keep interest rates unchanged, marking the second "pause" this year. While markets do not anticipate a rate hike, attention will be on the guidance regarding future actions, including whether rates have peaked and when they may be cut. The Fed's updated projections, including the "dot plot" of interest rate projections, will provide insights into these questions. Federal Reserve Chair Jerome Powell is likely to emphasize that they are managing inflation successfully but still face risks, as evidenced by the recent rise in headline inflation. Powell may not indicate that US interest rates have peaked or are expected to fall soon. The dot plot may retain one more rate increase for this year and a projected rate cut of around 100 basis points in 2024, supporting market hopes for significant reductions. However, Powell may caution against placing too much emphasis on these projections due to the high level of uncertainty.

FX Positioning & Sentiment

The majority of economists anticipate that the United States Federal Reserve will maintain its interest rates within the range of 5.25% to 5.50%. Only a very small minority of economists expect the Fed to implement a rate hike this evening. During this decision, the Fed will release new economic projections and assess whether additional rate increases are necessary. Traders currently believe that the tightening cycle has concluded, with the next expected move being a rate cut in July 2024. The highest probability for another rate hike is in December, standing at 40%. Traders have covered all short positions in the US dollar ahead of the rate decision, suggesting caution and uncertainty in the market. Despite this, emerging market currencies have displayed notable resilience. The US dollar index has risen by 6%, achieving its target to correct its previous steep decline. The Fed's decision may result in increased volatility in foreign exchange trading markets.