Market Thoughts – Tuesday 17th September – Choppy Trade As FOMC Looms

Where We Stand – A choppy day across the board, yesterday, as participants continued to fine-tune their expectations ahead of tomorrow’s eagerly-anticipated FOMC decision. My base case remains for a 25bp move, however market pricing remains finely balanced, with the OIS curve at one point yesterday actually implying a greater likelihood of a larger 50bp cut.

This is important as, since the start of 2009, the FOMC have almost never gone against what the market was pricing at the start of ‘Fed week’. Just once over that period has the actual rate move differed by more than 10bp from that which markets priced on the Monday before a Fed decision, and that was in the midst of the pandemic, when the FOMC surprised participants with an ‘emergency’ 50bp cut in early-March 2020.

I’m sticking to my 25bp guns, for now, however, and must admit that I find the whole debate over a 50bp cut a little ridiculous. Macro conditions don’t exactly scream for a jumbo move – inflation is still above the 2% target (per both CPI and PCE); the unemployment rate still signals, pretty much, full employment; while the economy has grown at a rate north of 2% in seven of the last eight quarters.

Still, I don’t sit on the FOMC, so what I think the Fed should do tomorrow doesn’t really matter. We must, as always, focus on what policymakers will do. On this latter point, I’d argue that guidance on the future policy path, namely how quickly rates return to a neutral setting, is of much more importance than the size of tomorrow’s rate cut, though that shan’t prevent a significant bout of intraday volatility over the decision itself.

Anyway, back to yesterday.

Stocks were, as noted, choppy for most of the day, with notable weakness coming through in the tech sector. Pressure was seen in Apple (AAPL) after reports that early iPhone 16 demand was softer than expected, while some of the classic AI plays such as Nvidia (NVDA), Broadcom (AVGO), Arm Holdings (ARM), and Micron (MU) also encountered significant selling pressure. As noted recently, risks around the AI theme have become more two-sided over the summer, so it’s perhaps unsurprising to see investors further take risk off the table as the FOMC looms.

Elsewhere, in FX, the day was dominated by broad-based USD weakness, as the greenback lost ground against most major peers, with the DXY touching a 10-day low. 100.50 remains the pivotal near-term support in the DXY, representing the YTD lows printed in August, with a test of this level possible before the FOMC, particularly if market pricing continues to drift in a dovish direction.

The JPY was, initially, the biggest beneficiary of this USD weakness, as USD/JPY dipped south of the 140 figure for the first time since mid-2023, though the yen pared much of this initial advance as trade went on, probably as profits were taken. Instead, it was the higher-beta areas of the G10 FX market that outperformed on the day, with the GBP, AUD and NZD all adding around 0.6% apiece, as all three traded to one-week highs. Perhaps, this is a promising sign for equity bulls, with sentiment remaining firm in the FX space for now.

Treasuries, meanwhile, rallied through the day, with the belly of the curve marginally underperforming, seeing the 2s10s spread bull steepen once more, with the spread reaching new wides since the summer of 2022, kissing the 10bp mark. A steeper curve is to be expected as central banks increasingly move to target an inflation range, say 2-3%, as opposed to an explicit return to the 2% target outright, so long as inflation expectations remain well-anchored, as they appear to be doing so at present.

Once more, lower yields acted as a healthy tailwind for gold, with the yellow metal notching new record highs for the third session in a row, albeit failing to move north of $2,600/oz in the spot market. Crude, sticking with the commodities space, also traded firmer, with front WTI settling just north of $70bbl, cracking what had been stiff resistance. Despite that, both WTI and Brent require a sustained pick-up in demand to build a durable rally, which remains elusive at present.

Look Ahead – A busy day awaits, as the FOMC kick-off their 2-day policy meeting.

August’s US retail sales report is, arguably, the most important of today’s releases, given that a soft print would likely see participants go ‘all-in’ on the idea of a jumbo 50bp Fed cut tomorrow, though it’s tough to imagine an equally aggressive paring of dovish bets were the data to beat expectations. Headline sales are seen falling 0.2% MoM, though the all-important control group metric, the basket of goods which feeds into the GDP release, is seen rising 0.3% MoM for the third straight month. The US also releases industrial production, for the same month, today.

Elsewhere, a handful of other notable datapoints are due. The latest German ZEW survey is likely to add to the body of evidence pointing to a rather grim outlook in Europe’s largest economy, as the engine room of the eurozone continues to stall. The expectations component of the September survey is set to fall to 17.0, from a prior 19.2, which would represent both the third straight MoM decline, but also the lowest such reading since back in January.

Canadian CPI is also due today, and has taken on greater importance since BoC Governor Macklem touted the prospect of larger rate cuts in a weekend FT article. Headline inflation is seen falling to 2.1% YoY in August, down 0.4pp from the July print, and would leave the annual CPI rate, as near as makes no difference, in the middle of the BoC’s target band. The loonie comes into the print delicately poised, with spot trading bang in line with the 200-day MA at 1.3590, and with the OIS curve pricing a 50/50 chance of a 50bp BoC cut at the next meeting on 23^rd October – a cooler-than-expected print, when coupled with unemployment having risen to a near 3-year high 6.6% last month, would cement expectations for a larger cut next month.