Fed day: Risk sentiment remains broadly positive ahead of the event

It’s Fed day: risk sentiment remains broadly positive but the big-ticket event is the Fed policy meeting. US stocks rose Tuesday as the two-day Fed policy meeting kicked off. Whilst there is relative calm in markets again after the tech-led sell-off produced a correction in the Nasdaq and a 7% decline in the S&P 500, the expectation on the Fed to be very dovish may lead to volatility should the market think the FOMC isn’t offering enough detail on the future path of monetary policy.  

The S&P 500 added 0.52% and managed to close above the psychologically significant 3,400 level after running into resistance at the 38.2% retracement of the early September pullback, with the 21-day SMA sitting around 3,426, which may offer a further test for bulls. The Nasdaq added 1.2% as Tesla shares rose a further 7%, extending the rally from Monday’s 12% gain. Overnight, Tokyo was flat as Yoshihide Suga was elected as Japan's new prime minister, replacing Shinzo Abe. European equity markets were slightly higher in early trade, though the FTSE 100 dropped. 

There are several things to look out for from the Federal Reserve today, not least some firming up of the details around the new average inflation targeting regime.  After Jackson Hole, there were some unanswered questions for the FOMC. There was not much in the way of detail of how the Fed plans to deliver the new AIT framework, for instance. And Powell’s speech lacked in any real specifics on the nature of forward guidance that the FOMC is clearly leaning towards – this will be an important lever of the AIT approach, so it needs to be clarified at this meeting. Should forward guidance be based on a time horizon or specific economic data? Yield curve control has been shelved as an idea by the FOMC but remains an option should it desire. Today’s statement and press conference with Powell will be of great importance to iron out how AIT will be delivered. Powell stressed that if ‘excessive inflationary pressures’ were to build, or inflation expectations were to rise above levels consistent with its mandate, the Fed ‘would not hesitate to act’. This gives it a degree of latitude down the line should there be a major inflation overshoot, which as noted on several occasions, is a very real possibly if expectations become unanchored. So far, after rising sharply post the March trough in financial markets, US 10-year breakevens have levelled off, whilst benchmark bond yields have barely budged.  

The Fed is also likely to lean heavily on the need for Congress to come up with fresh stimulus – it cannot do all the lifting here. Whilst a fifth package remains elusive, Nancy Pelosi has signalled that Democrats could delay the October recess in order to get a deal done, with the White House saying the $1.5tn package floated by the ‘Problem Solvers Caucus’ was worthy of discussion. The Fed has not quite exhausted all its ammunition, but it’s very much in a position where it needs to wait for the fiscal support. Several Fed officials have been talking up the need for fiscal support. There will also be updated economic projections to watch out for along with the tone the Fed strikes on the economic outlook  – we know the Fed has taken a pretty cautious view of the economy and the loss of momentum in initial jobless claims may be a concern. 

Looking ahead to today’s session, US retail sales will also be closely watched and may well show a sharp slowdown after Americans’ $600 stimulus cheques stopped. UK inflation figures earlier this morning showed a sharp drop in CPI inflation to 0.5% in August from 1.1% in July, as the Eat Out to Help Out scheme and the VAT cut on the hospitality industry bit into prices.  

Elsewhere, Hut Group shares got off to a lively start on their stock market debut, rising to 650p in what is the biggest IPO in London this year and for several years. As noted when the filing was lodged, after a considerable ramp in tech valuations this year – eg, Ocado +100% in the last 12 months - this IPO looked like a well-timed move, at least on the part of the founder who is due a bumper £700m pay-out should all go well, whilst still remaining very much in control of the business. The question is whether this 10% margin business deserves a tech rating. A standard listing makes it ineligible for inclusion on the FTSE index although its mooted market cap would be enough just to make the FTSE 100. Any standard listing raises eyebrows as it means no index inclusion and lower governance standards. Arcane incentive schemes and a founder share model are also suspect. Founder Matt Moulding is also selling £54m of stock despite previously indicating he would retain all his shares. Heavy demand indicates what a tech multiple, zero per cent interest rates and a premium on growth can do for your stock.

Indeed, the IPO market continues to show considerable strength, which does not indicate significant signs of stress in capital markets. Snowflake, a cloud software business backed by Warren Buffett, got its IPO off cleanly at a price of $120, valuing the company at $33bn. Apple unveiled new products, but investors were underwhelmed by products like the new iPad Air and new watches, with the shares flat on the day and ticking lower by 0.67% in after-hours trading. All investors really care about is the 5G iPhone launch, when it comes.  

Crude prices rose after a surprisingly large draw on inventories and have now bounced over 8% from last week’s lows. API figures showed stocks fell 9.5m barrels in the week ending September 11th, much more than the narrow 1.27m barrel draw expected. EIA figures today are expected to show a build of 2m barrels, which seems rather unlikely in light of the API report. Oil prices firmed despite OPEC and IEA reports this week indicating a slower recovery in demand in 2020 than previously forecast. Nevertheless, prices look vulnerable to a further pullback as the near-term uptrend runs out of steam and the longer-term downtrend re-asserts itself.