Its a new dawn a new day and I’m feeling good

We will get the Fed’s decision later today. Will it be 50bp or 25bp? The danger is that whatever the Fed does or doesn’t do, they could be dammed. It will somewhat depend on whether investors are looking at the glass half full or half empty. Half full, the market cheers 25 basis points as a demonstration of the Fed’s confidence in the economic outlook and 50 basis points as trying to get ahead of the curve. Half empty, 25 basis points are not enough to support the soft landing expectation, and 50 basis points show signs of panic.

 Ahead of the announcement, some economic data may have pushed the Fed toward 25 basis points, which probably accounts for the fact that the US dollar rallied, the equity market ran out of a bit of steam, and yields edged up. It may also be a bit of profit taking in all asset classes ahead of tonight’s decision. US retail sales in August were stronger than anticipated, rising by 0.1% month-on-month versus the -0.2% consensus, while July’s growth rate was revised up to 1.1% from the initial 1% reported. Another sign of caution is that the Vix index also climbed at the start of the week. In one way, it is remarkable that we have not seen the Fed cut interest rates for four years.

The troubles in Europe continue. The latest ZEW economic sentiment survey, an indicator of economic sentiment for the Euro Area, continued to plummet in September 2024, dropping 8.6 points to an eleven-month low of 9.3, well below forecasts of 16.3. It marks the third consecutive month of deterioration in the morale gauge amid ongoing uncertainty about the economic outlook and the direction of monetary policies.

This morning, we get a raft of UK inflation data, which could influence Thursday’s Bank of England decision. It would have to be different from what the market expects to change the current narrative that the policy committee will not lower rates this month. As it was, the headline rate remained steady at 2.2%; wage inflation remained high. Producer Prices also popped a little higher.

Markets in Europe are opening essentially unchanged despite the possible increase in Middle Eastern political tensions from the pager attack on Hezbollah.