Fed decides tomorrow with the market pricing in more than a 90% probability of a rate hike
The Federal Reserve’s two-day monetary policy meeting begins today, where the expectation is for a 25-basis-point increase in its benchmark interest rate, bringing it to the 3.75% - 4.0% range.
Key points
Strong industry, weak demand in China
Germany’s economic pulse improves
UK unemployment remains stable
10-year Treasury yield crosses 5% for the first time in 19 years
For the rest of the day, the interbank exchange rate (pesos per dollar) could trade between $17.xx - $17.xx spot
Futures are trading virtually unchanged today, in a market increasingly conditioned by doubts over advances in artificial intelligence (AI), the rise in oil prices and the sharp increase in bond yields. In addition, traders are awaiting the Fed meeting, which concludes tomorrow, Wednesday. In fixed income, the 10-year Treasury yield rises 3.5 basis points and touches 5%, its highest level since 2007. Regarding oil, Brent is down 0.10%, reaching $105.6 per barrel, while WTI is up 0.30%.
Monitor
Bolsas / Exchanges
S&P 500
7,624
0.00%
Nasdaq
29,157
0.00%
Dow Jones
52,392
-0.10%
IPyC
64,163
-0.10%
Monedas / FX (Foreign Exchange
USD/MXN
17.1160
-0.10%
EUR/MXN
19.7514
-0.20%
EUR/USD
1.1546
0.00%
Índice DXY
99.57
0.20%
Tasas / Exchange Rates
Treasury 2 años
4.65
1.6 bp
Treasury 10 años
5.00
3.5 bp
TIIE 3 meses
6.56
10.0 bp
M Bono 10 años
9.51
-0.3 bp
Commodities / Commodity Markets
Petróleo (Brent)
105.58
-0.10%
Oro
4,292
-0.10%
What you need to know about the economy and markets
The Federal Reserve will announce this Wednesday a key decision for the credibility of its Chair, Kevin Warsh. The market assigns close to a 90% probability to a 25-basis-point increase, which would bring the rate to the 3.75% to 4.00% range, amid still-high inflation and a resilient labor market. After the hawkish tone adopted at Jackson Hole, keeping the rate unchanged would require a convincing explanation and could raise doubts about the central bank’s independence.
Our Take
We expect the Fed to raise the rate by 25 basis points to align its actions with its rhetoric and preserve its credibility. More important than the increase will be the guidance on the next moves. An unexpected pause could initially reduce short-term rates, but raise long-term yields if the market interprets the decision as a response to political pressure.
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China’s economic activity showed mixed signals in August. Industrial production grew 5.2% year over year, above July’s 4.5%, driven by technology manufacturing and strong exports. In contrast, retail sales rose just 0.4%, from 0.6% previously, while fixed-asset investment fell 7.2% between January and August, affected by the 19.9% plunge in real estate investment.
Our Take
The data confirm an unbalanced recovery, supported by industry and external demand, but limited by weak consumption and the prolonged real estate crisis. The divergence between supply and domestic demand reduces the sustainability of the rebound and increases pressure on Beijing to strengthen stimulus aimed at households and stabilize the housing market.
Germany’s ZEW economic sentiment indicator rose slightly in September to 34.7 points, from 34.2 in August. The assessment of the current situation registered a more marked improvement, rising 14 points to −47.1, although it remains deeply negative. Analysts maintain cautious optimism, supported by fiscal stimulus and exports.
Our Take
The improvement in current conditions and the stability of expectations point to a gradual recovery of the German economy. However, the gap between both components reveals that the rebound is still more an expectation than a consolidated reality, while high energy prices and weakness in the automotive and metals industries keep risks tilted to the downside.
The UK unemployment rate remained at 4.9% during the May-to-July quarter, unchanged from the previous period, although it increased 0.2 percentage points year over year. The employment rate remained at 75.1%, while economic inactivity declined slightly to 20.9%.
Our Take
The stability of unemployment suggests that the UK labor market is gradually losing momentum, without experiencing a sharp deterioration. This moderation partially reduces wage pressures, but still does not provide the Bank of England with sufficient arguments to accelerate rate cuts.
The 10-year Treasury yield exceeded 5% and traded at times around 5.04%, its highest level since July 2007. The move reflects the rise in oil prices and inflation expectations, the possibility of further rate hikes by the Fed and the growing premium demanded by investors amid high deficits and heavy U.S. debt issuance.
Our Take
Crossing 5% represents an additional tightening of financial conditions, even before the Fed’s decision. Remaining above this threshold would increase the cost of mortgages, corporate credit and government financing, in addition to raising the discount rate for equities. The move also shows that long-term rates no longer depend solely on monetary policy, but on a more persistent combination of inflation, fiscal risk and greater debt supply.
Corporate news
Borr Drilling announced that it will divest its 51% stake in the Perfomex joint ventures in Mexico. This divestment is relevant to Mexico’s oil drilling sector, as it reflects the broader portfolio restructuring process underway among global deepwater drilling companies.
Shares of Dave & Buster's fell as much as 14% after the restaurant and entertainment chain reported second-quarter results below analysts’ expectations.
Shares of Enova International fell 18% after the online lender canceled its acquisition of Grasshopper Bancorp and withdrew its related banking regulatory applications.
The “to-do list”
Prepare the analysis ahead of tomorrow’s Fed decision, with the market pricing in more than a 90% probability of a rate hike.
Monitor Brent oil prices due to the warning that they could rise to $150 if Saudi oil infrastructure suffers more permanent damage.
Take 10 minutes today for a quick at-home routine: 20 squats, 15 push-ups, a 30-second plank, and 20 jumping jacks, with no equipment and no need to change clothes, ideal to do between meetings.
Remember that tonight, September 15, the Grito de Independencia is commemorated in public squares across Mexico.
Quote of the day…
“Inflation is like toothpaste. Once it’s out, it’s hard to get it back in.”
- Paul Volcker
Alejandra Marcos amarcos@kapital.com
James Salazar jsalazars@kapital.com
Guillermo Quechol gquechol@kapital.com
Nahely Suasnavar nsuasnavara@kapital.com
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