LONDON, 6:00 AM — The Federal Reserve has spent much of the past few years worrying about inflation without wanting to tighten too much. It now arrives at Wednesday’s meeting with Brent crude close to $108 a barrel, the US 10-year Treasury yield flirting with 5% and markets almost entirely convinced that another rate rise is coming.
There are easier days to be a central banker.
A quarter-point increase is more than 90% priced in ahead of the decision, according to rates markets. The potentially more interesting bit comes afterwards: whether Chair Kevin Warsh gives investors much reason to expect another move before the end of the year.
Asian markets have mostly decided to wait and see. MSCI’s broad Asia-Pacific index outside Japan was up around 0.3% in Wednesday trading, while Japan’s Nikkei slipped 0.1%. S&P 500 futures were up 0.15%, while Nasdaq futures were down 0.20% after a weaker session on Wall Street on Tuesday.
Five per cent is doing quite a lot of work
The US 10-year yield was sitting at 4.996%, having briefly moved above 5%.
That number has become something of a psychological line for markets. It also comes at an awkward time for expensive US equities, which have so far been surprisingly tolerant of the renewed bond sell-off.
Tuesday was less comfortable. The S&P 500 fell 1.14% and the Nasdaq lost 1.66%, although both remain well above levels that would suggest investors have abandoned the equity story altogether.
The latest jump in yields is partly about the Fed. Oil is helping.
Brent was trading at roughly $107.91 a barrel, up 3.15% from its previous close, leaving crude at levels which looked fairly remote only a few weeks ago.
An unexpected 7.1mn-barrel increase in US crude inventories gave prices an excuse to come down earlier in the session. Supply concerns have hardly disappeared: Saudi Arabia suspended loadings at Yanbu following an attack on the East-West pipeline, an important route for moving Saudi crude away from the Gulf.
Markets would probably prefer to know whether $108 oil is temporary before deciding how many rate rises are needed to deal with it.
They are unlikely to get that answer today.
The dollar has found something it likes
Higher US yields have given the dollar another leg higher.
The dollar index was close to a two-week high overnight, while sterling was trading at around $1.3488, down 0.47% against the dollar.
That leaves GBP/USD in an interesting position ahead of two UK events.
The first arrives this morning. The ONS publishes August UK inflation figures at 7:00 AM. July CPI was already running at 2.9%, up from 2.6% in June.
The second arrives tomorrow, when the Bank of England announces its September rate decision.
Oil above $100 makes that meeting rather more interesting than it looked earlier in the summer. Markets have moved towards expecting further UK tightening before year-end, even as Tuesday’s labour-market figures showed falling vacancies and weaker private-sector wage growth.
The MPC therefore gets to choose which problem it dislikes more.
Japan has its own rate decision coming
The Fed will not have the tightening conversation to itself for long.
The Bank of Japan begins its two-day meeting on Thursday, with a policy statement due on Friday. Markets have been assigning a high probability to another increase in Japanese rates, helping the yen recover even as the dollar strengthens elsewhere.
A Fed hike followed by further tightening from Japan and potentially the UK would mark quite a change in the global rates conversation.
Only a few months ago, investors were spending rather more time wondering how quickly central banks could cut.
Oil has made that discussion feel slightly dated.
What to watch today
7:00 AM London — UK CPI: August inflation data from the ONS. July CPI was 2.9%; the release lands one day before the Bank of England decision.
US session — Treasury yields: The 10-year was sitting just below 5%. A sustained move above it would be considerably harder for equities to ignore.
7:00 PM London — Federal Reserve decision: The FOMC announcement is scheduled for 2:00 PM Washington time, followed by Chair Kevin Warsh’s press conference at 2:30 PM.
Oil: Brent was trading at around $107.91, up 3.15% from its previous close, with Saudi infrastructure still the more consequential part of the story.
