“All roads lead to where we stand” Don Mclean

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After what was described as a “dovish” ECB rate hike last week all eyes turn to the Fed this week. Could we in contrast get a “hawkish” no change from the chair Jerome Powell? Post the ECB’s announcement last week, expectations for when the European Central Bank will begin to reverse the monetary brake were brought forward, if only modestly. It’s quite possible Jerome Powell’s comments may have the effect of pushing out further the timing of the first cut. Jerome Powell is also unlikely to rule out the possibility the Fed could go again at some point this year.

Whilst the US economy remains as resilient as it does, the fear from the Fed is that inflation rates, which may be much closer to their 2% target than they were, but as last week’s CPI and PPI reports indicated, getting it back down to the 2% target is proving a tougher nut to crack. To illustrate this point the Federal Reserve of St Louis five year expected inflation (on average) over the five-year period that begins five years from today has been creeping higher in the second half of the year, and now stands closer to 2.5% than the Fed’s desired 2%. Possibly on a slightly brighter note on Friday the latest Michigan Consumer sentiment survey reported a continued generally resilient consumer as well as one whose inflation expectations are continuing to fall.

US equity indexes remain stuck where they are and seem unable to push ahead further, as money continues to flow away from equities and bonds and into money market funds, which is entirely understandable. The FTSE 100, in contrast, had one of its better weeks boosted by energy and mining shares post the Chinese authorities added more stimulus measures to help support their economy.

The price of oil continues to creep higher, demand remains strong and supply is short. Capex and production data would indicate that the risk oil prices could go higher still will not be music to the Fed’s ears.

The Fed is not the only central Bank meeting this week which includes the Bank of England rate-setting committee meeting on Thursday. Despite the weaker-than-expected GDP report last week are still expected to increase interest rates by 25 basis points on Thursday. The decision on the possible 15th consecutive rise is unlikely to be a unanimous one. The flash Purchasing Manager surveys for September will also be released later in the week, and are likely to provide further evidence of a slowing global economy.

According to the S&P Global Fund Manager index risk aversion has improved in September relative to August but remains cautious. The consensus view for the expectation of a recession softens. Fund managers are most bullish on oil and least optimistic about consumer discretionary. Despite a weaker Asia stocks in Europe appear to want to start the week on a slightly positive note.