Written Commentary
STOCK INDEX FUTURES
Stock index futures are higher as investors look toward the Federal Open Market Committee statement at 1:00 central time and Federal Reserve Chair Powell’s press conference at 1:30.
Traders remain apprehensive in light of U.S. labor strike activity and debt ceiling issues.
CURRENCY FUTURES
U.S. labor strike activity and debt ceiling issues may limit the upside near term for the U.S. dollar.
However, in the longer term, interest rate differential expectations are favorable for the greenback, especially against the European currencies, since the U.S. economy appears to be holding up relatively well compared to economies in Europe.
Producer prices in Germany tumbled 12.6% year-to-year in August 2023, matching market forecasts, while accelerating from a 6.0% decline in July. This was the second consecutive month of falling prices and the steepest pace since data collection first started in 1949.
Consumer price inflation in the U.K. declined to 6.7% in August 2023 from 6.8% in July, falling under the market consensus of 7.0%. This is the lowest rate since February 2022.
This unexpected slowdown in the inflation rate caused analysts to reduce the odds of a Bank of England interest rate hike tomorrow.
Financial futures market are now pricing in less than a 50% chance for a quarter-point hike to 5.50% by the BOE on Thursday. Earlier this week there was a 70% probability of a 25 basis point hike.
The Swiss National Bank will likely hike its key interest rate by 25 basis points at its policy meeting tomorrow.
On Friday, the Bank of Japan is likely to keep its key rate unchanged at negative 0.1%. Japan has had negative interest rates since early 2016.
INTEREST RATE MARKET FUTURES
The Federal Open Market Committee concludes its two-day meeting today.
The FOMC is expected to pause its interest rate hikes today for the second time this year following a slowing in inflation, while leaving the door open for another increase as early as November.
Financial futures markets are overwhelmingly pricing in no change in the fed funds rate, which currently stands at 5.25%-5.50%.
Financial futures markets are predicting there is a 99% probability that the Federal Open Market Committee will keep its fed funds rate unchanged at its Wednesday policy meeting, and there is a 1% probability of a 25 basis point increase.
There is a 29% probability that the FOMC will hike its fed funds rate by 25 basis points to 5.50%-5.75% at its November 1 policy meeting.
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