Rise and shine everyone.

The big day is here - it’s the Fed meeting tonight. Most of the day will be spent speculating about the rate decision at 2 pm ET - whether it will be a 25-bps or a 50-bp cut. Even though we’ve had some signaling on a jumbo cut, the decision could go either way.

One thing we know for sure, there is no way the Fed can be more dovish than the market right now. The 2Y is slightly higher today but, there’s still a massive divergence between the yield and Fed Funds Rate. This expectation for Dec 2024 is 4.125% (i.e. 100bps of cuts) and for Dec 2025 is 2.875% (which is another 125bps of cuts).

Yesterday’s stronger-than-expected US Retail Sales data certainly moved market pricing somewhat. Not a lot, but it did see rates move higher, particularly at the short end. Stronger data feeds into stronger GDP growth, supporting the 25-bp cut assumption.

Interestingly though, the markets also rallied after the data release, with the S&P 500 narrowly reaching an all-time high, before reversing gains and closing lower. The USD saw some strength.

In Asian markets today, we saw a narrow trading range, with the Nikkei closing in the red again. Hong Kong and Korea remain closed. European equities are mixed ahead of the Fed, with the UK pulling back on stronger inflation data.

US Treasury Yields continue to move higher this morning, led more by the long end. Equity futures and commodities are in the green but crude oil is pulling back.

We will be on at 2 pm ET to cover the Fed decision and as we head into Chair Powell’s press conference. Watch out for our live stream on Twitter / YouTube. (Mayhem will start off the stream and I’ll join soon after as I’ll be on a Regional TV show covering the rate decision).

As always we remain cautious on Fed Day, and more so today with such a contested decision ahead of us.

Inflation ahead of Central Bank decisions - The UK and South Africa

We got inflation data from the UK and South Africa, and both central banks have their rate decisions on Thursday.

For the UK, the market has been pricing in a hold for this meeting after they did the first cut in their last meeting. Just as well. Inflation data actually came in higher than expected.

Services Inflation, which is a key data point for the BoE, jumped back up to 5.6% YoY from 5.2% in the previous month.

ING commented that this was largely due to base effects and the overall underlying picture is improving. We still expect further cuts this year, but tomorrow is likely out of the question now.

Moving over to South Africa, inflation numbers came in lower than expected at 4.4% YoY vs. 4.5% expected. This is a welcome sign because SARB (South African Reserve Bank) is getting ready to deliver their first rate cut on Thursday, after they went on hold in May 2023. The policy rate is set to go from 8.25% to 8%. Inflation has been a major factor in determining the path of easing, and this is good news that supports the start of the easing cycle.

Chart of the Day

Here’s JPMs scenario analysis ahead of the Fed

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)