Written Commentary
The Ghost in the Machine Q3 2023
September 19, 2023
STOCK INDEX FUTURES
Stock index futures are higher.
Today is the first day of the two-day Federal Open Market Committee meeting. Investors are awaiting the Federal Reserve’s policy meeting on Wednesday for more signals on the pace of monetary tightening with markets anticipating another rate hike to counter the highest inflation in decades.
The 9:00 central time March factory orders report is expected to show a 1.1% increase and the 9:00 March Job Openings and Labor Turnover Survey (JOLTS) is anticipated to show 11.270 million.
The dominant influences remain geopolitical tensions and the hawkish Federal Reserve.
CURRENCY FUTURES
The U.S. dollar index is lower but remains near 20-year highs.
Interest rate differential expectations suggest higher prices are likely for the greenback.
The euro currency is higher on news that the number of people classified as unemployed in the euro zone decreased by 76,000 in March compared with the previous month to 11.27 million.
The euro zone jobless rate fell to 6.8% in March from a revised 6.9% in February, which was in line with the forecast by economists.
The seasonally adjusted number of unemployed people in Germany fell by 13,000 to 2.287 million in April of 2022, compared to market forecasts of a 15,000 drop and following a decline of 18,000 in the previous month. This marks the 14th straight month of declines in the number of jobless people.
Lower prices are likely for the euro currency.
Bank of England will likely hike interest rates for a fourth straight meeting on Thursday, bringing borrowing costs to 1.0%, which would be the highest level in 13 years.
The Japanese yen is higher but remains near its lowest level in 20 years. Recent pressure on the yen is linked to the Bank of Japan’s firm commitment to maintain ultra-easy monetary policies, which contrast sharply with other major central banks that are hiking interest rates.
Interest rate differential expectations remain bearish for the Japanese yen and lower prices are likely.
The Reserve Bank of Australia raised the cash rate by 25 basis points to 30 basis points at its policy meeting today, which is more than market consensus of a 15 basis point hike. This was the first rate increase since November 2010. The board indicated further tightening is likely.
INTEREST RATE MARKET FUTURES
The Federal Reserve will release its latest policy statement and hold a press conference with Fed Chair Jerome Powell Wednesday afternoon.
Currently there is a 98.7% probability of a 50 basis point increase and a 1.3% probability of a 25 basis point hike in the fed funds rate.
Economists see two half-point hikes followed by a series of quarter-point increases.
The Fed is also expected to formally announce that it will begin quantitative tightening, or rolling assets off of its $9.0 trillion balance sheet.
Lower prices are likely across the board for the interest rate market futures as most major central banks are anticipated to tighten credit policies this year.
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