U.S. Equity Markets closed more-or-less flat on Tuesday with the small-cap Russell 2000 (+0.7%) outperforming, while the Dollar saw gains, to the detriment of G10 peers, after US Retail Sales headline M/M surpassed expectations. Treasuries are lower across the curve, with the greatest weakness seen in the short as T-Notes come well off earlier highs induced by a piece from Wall Street Journal’s Timiraos implying that 50bps is still on the table. However, it was later tempered by US data and Fed pricing coming slightly back, with now a circa 60% chance of a larger 25bps cut this evening, as opposed to 67% chance post-Timiraos article. In terms of US data, US Retail Sales were mixed, but as mentioned headline M/M surpassed expectations, while Industrial Production and Manufacturing Output both surpassed Wall St. consensus with the latest Atlanta Fed GDPnow Q3 model revised up to 3.0% from 2.5%. US sectors were mixed with Health and Consumer Staples lagging while Energy sits atop of the pile. The latter was buoyed by strength in the crude complex amid escalating geopolitical updates after thousands of Hezbollah pager devices exploded. Looking ahead, all attention is on the FOMC on Wednesday (preview below), whereby desks are split between a 25bps or 50bps cut, with attention thereafter on the SEPs, accompanying statement, and then Chair Powell’s press conference. The Federal Reserve will release its latest rate decision on this evening at 7.00 pm, alongside the updated Summary of Economic Projections (SEPs). The focus will lie on the rate decision with market pricing leaning towards 50bps, but the analyst consensus is for 25bps, with recent articles from the Wall Street Journal and Financial Times, as well as commentary from former New York Fed President Dudley shifting market pricing since the analyst surveys were released. However, not many analyst desks appear to have revised their calls since these updates, with both JPMorgan and Goldman Sachs retaining their calls (JPM sees a 50bp cut, GS sees a 25bp cut). There will also be attention on the Summary of Economic projections and the statement to gather expectations for the pace of the Fed’s easing process, particularly through the year-end. The Bloomberg survey expects the Fed to pencil in the median 2024-end dot at 4.9% (prev. 5.1% in June SEP), while 44% of economists surveyed expect the Fed will tweak the statement to acknowledge the possibility of further adjustments, and 31% expect the Fed would signal the intention to pursue a string of rate cuts and provide guidance on their pace. Attention will then turn to Fed Chair Powell at 7.30 pm to explain the Fed’s decisions with participants cognisant of any guidance updates from the Chair, and the discussion around 25 or 50bps for September. Overall, the Retail Sales report was mixed. The headline beat expectations, rising 0.1% vs exp. -0.2% with the prior revised up to 1.1% from 1.0% initially. The core, ex-autos, rose by 0.1%, missing the 0.2% forecast and down from the prior 0.4%. The super core, ex gas and autos rose 0.2%, down from the prior 0.4%. The control metric, a good gauge of consumer spending in GDP, rose by 0.3%, in line with expectations while the prior (July) was revised up by 0.1% to 0.4%, which bodes well for Q3 Consumer Spending. In relation to tomorrow’s Fed decision, ING writes “We fully buy into the argument for the Fed moving policy back to neutral swiftly and expect Fed Chair Jerome Powell to push the case for a 50bp cut tomorrow. However, the issue is whether the other FOMC members are as certain. An economy growing at 2.5-3% with low unemployment, inflation above target and equities at all-time highs suggests there will be large pockets of resistance, which makes the outcome tomorrow a coin toss”. Elsewhere, Oil closed Tuesday with a 1.57% gain while a stronger Dollar saw Gold end yesterday’s session with a 0.6% loss.
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