Fed Raises 25bps – Muted Market Reaction
As was widely expected the Federal Reserve Bank raised interest rates by 25 basis points overnight and indicated that more hikes could come if data warrants them. The event turned out to be a bit of a damp squib for most of the markets as comments came in mainly on expectation. US indices all finished the day close to flat, the Dow up 0.23%, the S&P flat and the Nasdaq down 0.12%. US treasury yields came off after the announcement in choppy trading with the benchmark 10-year dropping 4bps to 3.87% and the 2-year dropping to 4.85%. Oil dropped over 1% on the day after US crude supplies dropped less than expected.
Looking Ahead to a ‘Live’ Fed in September
Balanced remarks and statements from Fed Chair Jerome Powell have left the market looking at the possibility of a live rate decision next time we hear from the FOMC in September. We have two sets of monthly data to look at before that day and inflation and jobs data prints will take on an even greater importance than normal with the Fed indicating that they will react strongly to those prints. The market is now betting on a 21% chance of another hike in September and is therefore still leaning on the dovish side of things, but any changes in the key data could see those expectations alter quickly. Traders are preparing for some whippy moves ahead of – and after -key data events for the next couple of months. So even though it has been a very quiet market since this morning’s announcements, many are expecting volatility to pick up moving forward.
Investor Focus Swings to Europe and the ECB.
The first major central bank announcement for the week has come and gone and there has been a muted response as the Fed came in on most investors’ expectations. There is little on the calendar in the Asian session and traders are expecting more range-bound conditions, but once Europe opens it is all about the ECB. Traders are expecting and hoping for more volatility around the rate announcement and they are likely to get it with the Eurozone in a different position to the Fed. So, although 25bps is the likely outcome, the statement and comments should see some volatility in the market. Later in the day, the US session sees the latest GDP data out of the states as well as the weekly unemployment claims numbers.
