Daily Market Outlook, September 21, 2022

Overnight Headlines

Putin Mobilises More Troops, Says West Wants To Destroy Russia
Putin Warns Nuclear Response In Threat To Russian Territorial Integrity
Fed Set To Hike By 75 Basis Points, With More To Come
US Dollar Ascendant As Investors Gear Up For Fed
Currency Volatility Surges In Options Market Before Fed, BoJ Decisions
Bitcoin Hovers In Sight Of Lowest Level Since 2020 As Fed Looms
Biden To Skip UN Meeting As Climate Change Moves To Back Burner
White House: Biden Policies Will Boost Investment, Slow Inflation
BoC’s Beaudry: Inflation Still Too High, But Moving In Right Direction
ECB's Lagarde Raises Prospect Of Rate Hikes Beyond Neutral Level
UK PM Truss To Cut Stamp Duty In A Push For Prosperity: The Times
Russia Moves To Cement Grip On Occupied Ukraine, Ups The Stakes
Iran, West At Odds, US Sees No Breakthrough On Nuclear Deal At UN
BoJ Announces Unscheduled Bond Buying As Yields Stay At Ceiling
RBA Deputy Governor: RBA Looking For Opportunities To Slow Hikes
Europe Energy Crisis May Deepen With Looming Liquidity Crunch
US Two-Year Yield At Almost 15-Year High Before Fed Meeting

The Day Ahead

Tonight’s monetary policy announcement from the US Federal Reserve may be the key event of the week for global financial markets. So far this year the Fed has raised interest rates by 225 basis points and a further hike is expected today. Market speculation for most of the period since the last update in August centred on whether the Fed would opt for a third successive 75bp hike or a smaller 50bp increase. However, hawkish comments from Fed Chair Powell just before the central bank went into its blackout period and last week’s higher than expected inflation outturn have convinced markets that at least 75bp is a near certainty. Indeed, market pricing suggests there is some risk of 100bps. Equally important will be what the Fed signals about its future intentions. Overall, the message is likely to remain that getting inflation under control is the number one priority and so further rate hikes are likely. This is one of the meetings where policymakers update their forecasts, including the ‘dot plot’ of interest rate projections. The last set in June showed a median expectation of them being close to 3.5% by end 2023 and peaking just below 4% in 2024. As a 75bp hike would take the upper bound of the Fed Funds range to 3.5% on Wednesday it seems likely that these projections will be revised up in line with market expectations of close to 4% by the end of 2022 and a peak near 4.5% by the middle of next year. A particularly hawkish move would be if the Fed raises its estimate of the ‘neutral’ interest rate and so markets will be watching closely for that.

The September UK CBI industrial survey will provide a timely update on developments in manufacturing. For the last three months it has shown orders slipping sharply, fuelling concerns that demand is faltering, while cost pressures although still elevate are off their peaks.

Early Thursday’s Bank of Japan monetary policy update is not expected to see any changes. Of most interest may be whether anything new is said about the faltering yen. However, while the BoJ is likely to repeat that it is monitoring the situation it is unlikely to point to any new policy response.