Markets Muted Ahead of Fed Announcement

STOCK INDEX FUTURES

Stock index futures are little changed ahead of today’s long-anticipated Fed meeting where it is all but certain that the Fed will cut rates. Markets will analyze Powell’s comments and the Fed’s dot plot to gain an idea on how many more cuts could be on the way. Markets are pricing a 78% chance of a rate cut in October and nearly a 75% chance of an additional cut in December. Stocks could catch a tailwind on dovish speak from Fed Chair Powell and an updated dot plot that shows projections of rate cuts again in October and December. However, stocks could face some headwinds if Powell signals a more cautious stance or if policymakers seem hesitant to expect rate cuts at the following meetings.

On the corporate front, China told large tech companies to not buy tailor-made Nvidia chips, effectively banning tens of thousands of orders, causing Nvidia shares to slide in premarket trading. President Trump and President Xi Jinping are expected to speak on Friday regarding trade and TikTok.

Housing starts fell 8.5% in August, below expectations with 1.307 million new starts vs. an expected 1.37 million. Building permits also fell, shrinking 3.7% in August compared to July. Industrial production figures posted better-than-expected results yesterday, with production growing 0.1% in August against expectations of a 0.1% drop while July’s figures were revised lower to a 0.4% slump. Manufacturing production also rebounded, growing 0.2% in August, beating out expectations of a 0.2% slump and higher than July’s also downwardly revised fall of 0.1%. Retail sales grew 0.6% in August, well above expectations of 0.2% growth while July’s figure was revised from 0.5% growth to 0.6%. Weekly jobless claims figures on Thursday will round out the week.

CURRENCY FUTURES

The USD index edged higher as markets wait for the Fed policy decision after the dollar fell broadly against most major currencies on Tuesday, including hitting a four year low against the euro. Markets will also scrutinize the decision today on whether policymakers voted or considered voting for a bigger 50 bps cut, especially with the new addition of Stephen Miran on the Fed board. Markets will also parse Powell’s comments to better understand whether or not the economy can expect a series of interest rate cuts before the year end, as labor market weakness had increased expectations that the Fed will be more accommodative. The Fed will also update its quarterly economic projections, which will be telling in whether or not members at the Fed pencil in a total of three rate cuts this year or stick with the two cuts that a majority anticipated when labor market conditions felt sturdier back in June.

Euro futures fell lower after hitting a four year high against the dollar on Tuesday. Euro area inflation was revised down to 2.0% from 2.1%. Investors await the Fed’s decision later today and monitor Fed Chair Powell’s comments for signals on the pace and scale of potential interest rate cuts from the Fed. The euro could stand to gain against the dollar if Powell sounds more dovish than expected while markets will also analyze the Fed’s updated “dot plot” for further clues on the interest rate environment. Germany publishes producer price inflation data for August on Friday, while Spain releases industrial orders figures for July. Also on Friday, France’s monthly business survey for September is due, a key insight into businesses’ well-being in light of the recent change in government.

British pound futures fell lower following the release of UK inflation data for August that reinforced expectations that the Bank of England will keep rates unchanged at its policy meeting this week. Official figures showed that inflation held steady at 3.8% on an annualized basis. High inflation remains a challenge for the BoE, with the recent figure adding to the uncertainty on whether or not the UK will see an interest rate cut this year. The BoE last month forecast that CPI inflation would peak at 4% in September. On a positive note, inflation for consumer services slowed more than forecast to 4.7% from 5.0% on a yearly basis in July. Money markets only pricing in around a 36% chance of another rate cut in 2025. Markets expect that until inflation cools convincingly, the bank will be stuck holding rates high to keep pressure on price growth. The BoE is also expected to make a decision on quantitative tightening and to announce a reduction in the pace of sovereign-bond sales. UK retail sales and public finances data for August are due Friday, alongside the GfK consumer confidence indicator for September.

Japanese yen futures edged higher ahead of the Bank of Japan policy meeting where it is expected that the central bank will hold rates steady on Friday. Investor spotlight will center around an October 4 vote where the ruling Liberal Democratic Party will elect a new leader to replace the outgoing Prime Minister Shigeru Ishiba. Japan’s farm minister and the chief government spokesperson joined the race on Tuesday to lead the ruling party and replace outgoing Prime Minister Shigeru Ishiba. Economists expect that the central bank will resume rate hikes again soon as inflation remains sticky and headwinds from trade uncertainty with the US ease. CPI figures due ahead of the BoJ’s policy announcement are expected to show prices having risen by 2.7% in August on an annualized basis, down from July’s 3.1%.

Australian dollar futures slipped in overnight trade after touching a yearly high earlier in the session ahead of the Fed’s interest rate decision later today. The Aussie could catch tailwinds depending on how dovish Fed Chair Powell sounds in his post-meeting press conference. Market focus will shift to the release of August employment data due Thursday amid concerns that the labor market may be slowing despite holding strong over recent months. Government hiring has been weakening, putting more pressure on the private sector to sustain job growth. Swaps imply little chance the RBA will cut rates at its meeting this month, while a cut in November, which was priced at 100%, is now priced at just 70%.

INTEREST RATE MARKET FUTURES

Futures are little changed at the front end of the curve and higher at the long end ahead of the widely anticipated Fed meeting later today, where markets are all but certain of a 25 bps rate cut. Attention will be paid to how policymakers vote, with special attention paid to how many policymakers favor a larger 50 bps reduction. The Fed will also update its “dot plot” that shows projections of how policymakers see monetary policy heading. Any speak from Powell that is more dovish than expected, along with projections that favor additional rate cuts in October and December will likely send yields lower, while more cautious signals could offer temporary relief. The Fed will need to balance out the risks of higher inflation against a labor market that has slowed considerably over the summer. Markets will look to understand signals from the Fed on how concerning was this summer’s slowdown in job growth, how fast should officials lower rates towards a neutral policy stance, and where exactly is neutral policy.

Import prices were 0.3% higher on month in August after a downwardly revised 0.2% rise in July, according to the data. Import prices exclude duties, such as tariffs imposed on imports by the Trump administration, as well as transportation costs. The increase in August import prices defied expectations for a decline, suggesting stronger-than-anticipated cost pressures from abroad.

The Senate confirmed President Trump’s pick, Stephen Miran, as a Federal Reserve board governor late Monday night, giving him the opportunity to offer a crucial vote at this week’s meeting. Markets will look to see if Miran votes for a regular 25 bp rate cut or a jumbo 50 bp cut for future signals on a dovish tilt from the Fed. Miran has said that he expects to return to his position as Chair of the White House Council of Economic Advisers after his term in over on January 31, 2026, prompting markets to be skeptical of the Fed’s independence. If Miran votes against President Trump’s wishes, it is likely he will put his job at the White House at risk. A federal appeals court on Monday night rejected an emergency Trump administration request to remove Federal Reserve Governor Lisa Cook ahead of the central bank’s next meeting. A divided three-judge panel in left in place a lower court injunction that blocked Cook’s termination while she challenges the legality of Trump’s move.

The spread between the two- and 10-year yields fell to 50.4 bps from 51.2 bps on Tuesday.

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