Six weeks ago, a September hike was far from certain. Now markets are pricing roughly a 92% chance of a quarter-point move, taking the Fed funds target range to 3.75%-4.00%. Inflation is running too hot to ignore, the jobs picture has been firmer than expected and oil has kept finding new ways to get worse. My own read is simple: they hike.
Chair Warsh held in July and was criticised for it. Holding again today, with inflation this hot and an energy supply shock reverberating through the global economy, looks increasingly difficult to justify. Several major banks now expect a September hike, and the market pricing is about as one-sided as these things get.
But the hike itself probably isn't the story. It's already priced in. What will actually move markets today is the tone: the dot plot, the statement and, most importantly, what Warsh says in the press conference about what comes next. The real question is whether this is a one-off adjustment or the start of a longer tightening cycle.
A hawkish hike, with signals of more to come, keeps extending what's already underway. AI and chip stocks could give back this week's bounce, Treasuries could sell off further, the dollar could strengthen and gold could come under more pressure as higher real yields raise the opportunity cost of holding it. Banks are the obvious relative winner, as higher rates can support net interest margins. Property, REITs and assets that are interest rate sensitive or priced on distant cash flows are the obvious losers.
A dovish hike, signalling “we're done for a while”, does the opposite. What follows could be a relief rally in the names hit hardest, bonds finding support, the dollar easing and gold stabilising.
Two days ago I flagged two things that could blow this consensus apart. Neither one did what I expected.
The first was the AI rout turning into a real correction. Instead, it started reversing. Nvidia bounced yesterday, while Amazon and Nvidia announced plans to deploy another two million Nvidia GPUs across AWS infrastructure, with the partnership also extending into physical AI and robotics. Nvidia's own outlook remains remarkably strong. Whatever the slowdown talk was about, the demand for AI infrastructure hasn't got the memo.
That removes one potential prop from the case for Fed restraint: the market isn't doing the tightening job for it any more. If anything, the AI trade has decided, for now, that the sell-off was enough.
The second wildcard was the war de-escalating.
Instead, it has arguably got worse.
A drone attack disrupted Saudi Arabia's East-West Pipeline, forcing the suspension of crude loadings at Yanbu, the Red Sea export hub that has become increasingly important since the closure of the Strait of Hormuz. Saudi Arabia has reportedly also cancelled some September-loading cargoes to European customers. Libya has separately suspended operations at three oil fields after protests, adding another disruption to an already strained market.
There are now so many moving parts in the global oil market that keeping track of the disruptions is becoming a job in itself. Physical European crude cargoes have even traded at substantial premiums to the futures market, underlining how tight near-term supply has become.
And that matters for the Fed.
Both wildcards resolved in the same direction: towards more inflation pressure, not less, and less cover for the Fed to hold.
The decision has become easier to call… but harder to like.
So yes, the Fed hikes today. That was always the easy bit.
The harder question is what it's hiking into: an oil market getting worse by the day, propped up by an AI trade that has decided, for now, not to blink.
There are a lot of plates spinning. It feels like it will only take one to fall to send markets on a collision course with volatility. Time will tell.
GLA & DYOR.
Also interesting…
⛏️ $10BN FUNDING MACHINE - Rio Tinto keeps the tap open
Buried beneath the bigger headlines, Rio Tinto has refreshed its $10bn Euro Medium Term Note programme. Not headline news, but that's precisely why it's interesting. This is the plumbing behind a major miner's access to debt capital: boring, routine and very important when the cost of money is suddenly one of the biggest stories in markets.
🔥 ENERGY TRANSITION - Pennpetro finds a new target
Pennpetro Energy has confirmed its new reverse-takeover target: Indigenous Canadian Energy Holdings. The proposed transaction remains subject to various approvals, so there is plenty of road left to travel. But in a market now obsessed with energy security, it's an interesting little M&A story to keep on the radar.
Two very different kinds of energy story today: one barrel at a time in the Red Sea, one basis point at a time in a bond prospectus.
Disclaimer
This newsletter is published by Jimmy Lea / CorpCast for general information and journalistic purposes only. It does not constitute investment advice, a personal recommendation, or an offer, invitation or inducement to buy, sell or hold any security or other investment. Nothing in this newsletter should be relied upon as the basis for making an investment decision, and no account is taken of any individual's personal circumstances, objectives or financial situation.
Any views expressed are those of the author at the time of publication and may change without notice. References to securities, investments, markets or asset classes are for general information and commentary only and should not be interpreted as a recommendation that any particular investment is suitable for any reader.
Investments can fall as well as rise in value, and you may get back less than you invest. Past performance is not a reliable indicator of future results. Figures, data and third-party information are believed to be reliable but are not guaranteed to be complete or accurate and may become outdated.
Jimmy Lea / CorpCast is not authorised or regulated by the Financial Conduct Authority. Before making any investment decision, you should consider whether the investment is appropriate for you and, where appropriate, seek advice from a suitably qualified and independent financial adviser.