In this weekly market commentary, the presenter walks through the key macro events slated for the week of September 19‑23, 2022. He starts with a quick recap of recent US equity and Treasury market moves, noting a modest rebound in the S&P 500 and a brief rise in 10‑year yields above 3.5% ahead of the Federal Reserve’s FOMC meeting. He outlines the market’s pricing of a 75‑basis‑point Fed rate hike (about 82% probability) versus a smaller 18% chance of a 100‑bp hike, and discusses expected Fed dot‑plot projections and a terminal policy rate around 4.0‑4.25%. The commentary then reviews ING’s “policy bingo” framework that maps inflation, growth, interest‑rate policy and quantitative tightening to potential market reactions. Turning to the UK, he examines the upcoming Bank of England decision, where most Bloomberg‑surveyed economists anticipate a 0.5% (50‑bp) hike—the seventh consecutive move—though a 75‑bp hike would be the biggest since 1989. He links this to political developments such as Liz Truss’s energy‑price‑cap announcement, the Chancellor’s forthcoming fiscal statement, and the recent replacement of a hawkish MPC member with Swati Dhingra. He also highlights the large gap between UK policy rates and inflation (9.9%). The presenter briefly covers the Bank of Japan’s expected hold on its ultra‑easy policy, keeping 10‑year yields near zero to spur inflation. Finally, he flags the flash PMI releases for the US, UK and Eurozone due on Friday, emphasizing that Eurozone manufacturing PMIs have been below 50 for two months, suggesting continued contraction. The video concludes with a reminder to monitor the Fed and BoE meetings as pivotal market drivers.
Chapters
Hello and welcome to the rundown for this week ahead. And as per usual, I'm going to summarize some of the key things you need to be aware of. Namely, we're going to talk about the upcoming FOMC meeting we're going to get on Wednesday, and then the delayed Bank of England interest rate meeting as well coming this week. We'll also touch on the BOJ. They've also got a policy meeting, and we've also got eurozone flash PMIs coming out on Friday. But let's just talk about what's happened today. For a lot of people in the UK, I'm sure you've been watching the Queen's funeral, kind of bittersweet, but what an amazing woman. And yeah, now on to the, to the King. Long may he reign. But let's talk about what's happened in markets this week so far, because the US have been in as per normal. And as you can see here, I've got a chart of the S&P 500, which has really picked up in the second half of the trading day. No real one single catalyst, but you can see here the NASDAQ 100 also trading up around a good part of 1%. And it does come in the context of US indices posting their worst week since mid-June. So a little bit of a natural bounce, albeit some people still much more of a bearish disposition going forward. Uh, the 10-year Treasury yield briefly rose above 3.5%. You can see on this chart here, for the first time since 2021, ahead of what is of course the expected FOMC interest rate hike we're likely to get of 75 basis points, which we'll talk about in a moment. The 2-year Treasury note rose to a 15-year high, just short of 4%. As I just mentioned, the probability at the moment is around 82% for a 75 basis point rate hike from the Fed, and we still have a marginal outside bet of 100 basis points priced in at around 18% for the time being. Now, the reason why some of that has moved more recently on the potential for a 100 basis point rate hike, of course, comes on the back of that hot inflation print that we saw more recently. Hence the reason why there are some of those more minority bets looking for that much larger movement. While geopolitical backdrop, the Chinese slowdown kind of story, the potential for energy rationing in Europe, strong dollar, fragile-looking domestic equity and housing markets. They all argue for a more moderate rate of policy tightening in the coming months. If inflation momentum continues like what we saw with the surprise print last time out, it's probably going to be the case that the Fed will continue to press on at around these 75 basis point clips. And expectations from some analysts are that we'd like to see another 75 in November, possibly another 50 then in December. And of course the bank will be releasing their latest dot plot projections. And one of those, of course, that we'll look out for is the end of year terminal rate for Fed funds. And we are expecting that to go up to around the 4 to 4.25% range. That's what Goldman's analysts are looking for. They're backing a 75 call for, for the Fed for this week. And if that was to materialize, of course, it's continuing to tighten conditions, and that being quite a key crucial factor which could potentially weigh further on equity prices going further forward. Here is that kind of bingo type card that our friends at ING put together, and it outlines the 4 main kind of policy areas split in 2, really. One side on the inflation growth outlook, and then the second side on the actual policy tools in use, that being interest rates and of course quantitative tightening. And then here you've got the current existing phrases used for each one of those sections. and then a scale from top being most dovish to down being very hawkish, and the various different outcomes. And then on the right-hand side, subsequent reactions we could see in the rates markets and also in the EURUSD currency pair. So just taking a quick look at their base case, as this, as I'd say, is probably one shared on the street, and that is for interest rates of a 75 basis point hike. The dot plot and comments point to rates heading towards that 4.25% end of 2022 year range. More hawkish reaction, so something that could fire up the dollar yields and certainly weigh on equities, could be the idea of then hiking 100. Again, only around one-fifth of the market expecting that from a market pricing perspective. The dot plot and comments could indicate more like a 4.5% terminal rate at the end of the year or even higher. Very hawkish 125 basis point hike and the Fed signals clear intent to crush inflation. I would say that is highly improbable, and if such would cause a very distinct and sharp market reaction, but I wouldn't be expecting that. Of instead of those ultra hawkish type expectations, I'd probably prefer to pivot more towards the 75 and 100 as potential outcomes here. Then, of course, the next meeting we've got this week is the Bank of England. This is going to be particularly interesting as well. The majority of the 47 economists most recently surveyed by Bloomberg are expecting the BoE to hike interest rates for the 7th consecutive meeting, and they are expected to do so by 0.5 percentage points, so 0.5%. Investors on Friday were pricing in just over a 50% chance of a 3/4 point increase. Reining in those bets from a peak of 80% several times in the last few weeks. And of course, we've had Liz Truss come out with energy price cap, and that has had a bit of an impact on what we are expecting with that energy intervention on behalf of the government to prevent then that winter spike in prices. So inflation is, according to analysts, expected to peak at 10.5% in October. Remember, it has come back a little bit under that 10 marker, surprisingly, in the recent weeks, but is expected to move north again, but not as to where the bank had previously forecast, which was 13.3% in October. So that in itself, some expect then to rein in the need for such aggressiveness, certainly if you're of a bearish disposition on the monetary policy committee. Um, if though that the bank does decide to go 75 basis points A move of that margin would be the biggest rate hike from the Bank of England since 1989. As you can see here, that would have been going through this period here when we saw a distinct pickup in interest rates at that point in time, or inflation, I should say. Now, a couple of other things to be aware of. Um, here you can see the big divergence between that of where UK rates reside at the moment and to where inflation is at at this present time at 9.9%. So this is one of the biggest gaps between those two metrics of all of the Western developed central banks out there, and hence the rationale why the Bank of England might need to put their foot to the floor and really go for a more aggressive hike here. As I've said, although they've hiked multiple times, they've always done so by much smaller increments than what we've seen from the likes of the Fed or the Bank of Canada and the like. And then Just taking a quick look at the Monetary Policy Committee. One thing to be aware of here is that Michael Saunders, who was one of the most hawkish members of the panel, he has now left. He stepped down last month and he's been replaced here by Swati Dhingra. And for a bit of background, we don't know too much about her at the moment, but she comes from as an associate professor at the London School of Economics, LSE. So looking out, be interested to see what her voting pattern is, but we are expecting, according to most analysts, to sit rather center ground at this point in time. But as you can see here, all of them leaning on the side of ultimately hiking rates. The question being, how aggressive do they go? Um, the other things to be aware of, a day after the Bank of England rate decision, so at the end of the week on Friday, the Chancellor of the Exchequer, Kwasi Kwarteng, is due to give a statement to Parliament setting out more detail on the energy proposals. From the government and also confirming plans to reverse a recent rise in payroll taxes. The cost to the taxpayer in terms of extra government borrowing is expected to top £100 billion. As such, the bank could choose to delay the commencement of selling of gilts, recognizing the additional gilt supply coming down the tracks. And what that means is, away from the blunt instrument of just moving interest rates, could they hold back at this point in time of the active selling of gilts, which would be akin to quantitative tightening. So what you could do is hike rates, but if you don't do quantitative tightening, you're only kind of giving one tightening signal rather than twofold, which could be too much for the market to handle at this point in time, and a step too far perhaps if they decide to go big and 75 hike, uh, if indeed inflation is now not going to peak as high as we previously thought. And with the looming recession, then demand expected to decline as we go further forward in time. The other things that are happening is that of the Bank of Japan, uh, much less exciting. They're expected to make its policy decision on Thursday, and most economists expect the BOJ to basically stick to the plan, which is holding 10-year bond yields near zero as it attempts to stoke more durable inflation, what otherwise, um, has been particularly tepid for the last few decades. So not too exciting for that one. But one thing we will be looking out for on Friday is, as you can see here, we get a whole batch of the various different UK, European, and US flash manufacturing PMI and service PMI data points. These would be quite important in the eurozone. It will get the first look at economic activity then in September with PMIs. And after 2 months below 50, Expectations are there's going to be another one to follow in contractionary territory as manufacturing production cuts due to high energy prices and the end of the tourist season are set to impact business activity. That is pretty much it. Obviously, lots of other things going on, but really they're the main events to look out for. So the Fed on Wednesday, the Bank of England on Thursday are going to be crucial market events to monitor. All right. Take care. Don't forget to like and subscribe to the channel if you haven't already done so. And I'll see you for the next video. All right, take care.
