24 to 30 September: The Federal Reserve remains cautious, as external risks mount

The FOMC delivered a 25bp hike lifting the range of the Fed funds rate to 2.00-2.25%. The decision itself was broadly expected and caused no surprise. Indeed, markets were unfazed by the updated macroeconomic projection, ‘dot plot’ and press conference. Tweaks in the Fed’s communication and changes in macroeconomic projections were not meaningful, in our opinion; members still see robust growth in 2018 and some deceleration in 2019. According to the updated ‘dot plot,’ the median expectation of FOMC members implies one additional 25bp rate hike in 2018 Q4 and three further 25bp hikes throughout 2019. As a result, the range of the Fed funds rate might rise to 3.00-3.25% by the end of next year, if everything goes according to the FOMC’s view. Markets, however, see the Fed funds rate below 3% at the end of 2019.

In our view, the FOMC’s approach to the conduct of monetary policy and the tone of the post-decision statement were rather cautious. The Fed’s prudence and vigilance are understandable in the context of mounting external risks – such as ongoing trade tensions, a potentially disorderly Brexit, a fiscally irresponsible Italian government, elevated oil prices, etc. – since the Fed does not want to reinforce risk-averse global market sentiment. We remain of the view that the terminal Fed funds rate at the end of the tightening cycle is not the most relevant factor in determining the future direction of markets, but the speed of balance sheet reduction. For the time being, quantitative tightening is progressing gradually and according to schedule.

Looking ahead

Although neither the Federal Reserve nor other major central banks are scheduled to have a monetary policy meeting in the next couple of weeks, financial markets will not be left with nothing to ponder, as tier-one data releases from the US are scheduled this week. Most importantly, the US releases labour market statistics for August, i.e. ADP figures on Wednesday and the usual jobs report on Friday – including the NFP, unemployment rate, nominal wage growth, etc. Meanwhile, on the other side of the Atlantic, Brexit negotiations and Italian news flow are will be in the limelight, as fiscal plans proposed by the Italy’s populist government could further upset financial markets.

In Asia, the week kicks off with the release of PMI figures that will clarify whether business and manufacturing sentiment has been affected by the on-going trade war. On Friday, the monetary policy meeting of India’s central bank (RBI) bears the potential to improve market sentiment, as the RBI is expected to hike the policy rate in response to the recent rupee weakness.

Market sentiment in Latin America will be primarily driven by Brazilian election polls (first round of elections is held on 7th October 2018) and the negotiations between the IMF and Argentina for the extraordinarily large bailout package. During the week, due to noise coming from Brazil and Argentina, monthly macroeconomic data releases might not have too much of an impact on markets – including the monetary policy meeting of the Mexican central bank.

The economic diary in Africa does not contain any data release that bear the potential to drive local markets. Consequently, global sentiment and idiosyncratic political issues will set the tone in Africa.

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