Fundamental Analysis

Equities Falter Ahead of Fed’s Decision

  • Investors expect that the Fed will maintain current interest rates.
  • There was a surge in Canada’s annual inflation rate due to rising gasoline prices.
  • Eurozone consumer inflation in August was slightly lower than initially estimated.

Equities lost ground on Tuesday as the US Federal Reserve convened its highly-anticipated two-day monetary policy meeting. This meeting caused a shift toward risk-averse sentiment.

All three US indices ended lower in a widespread sell-off before the Fed’s impending interest rate announcement on Wednesday. 

The Fed will also unveil its Summary Economic Projections, including its dot plot, offering insight into the Federal Open Markets Committee’s expectations for interest rates, inflation, and economic growth. 

Financial markets have already factored in a near-certain 99% probability of the central bank leaving its key Fed funds target rate at 5.25%-5.00%. Moreover, there’s a growing 70.9% chance of maintaining the status quo at its next meeting in November, according to CME’s FedWatch tool.

On the economic front, investor uncertainty came amid a surge in Canada’s annual inflation rate due to rising gasoline prices and a larger-than-expected drop in US housing starts.

European equities had a subdued performance on Tuesday, with gains in energy stocks offset by losses in industrials. Investors exercised caution as they anticipated a series of central bank decisions worldwide this week.

This week, major central banks’ interest rate decisions include the US Federal Reserve on Wednesday and the Bank of England, Swiss National Bank, Riksbank, and Norges Bank on Thursday.

Official data revealed that Eurozone consumer inflation in August was slightly lower than initially estimated but remained more than double the European Central Bank’s target. Meanwhile, the euro area’s benchmark 10-year Bund yield neared its highest levels in over 12 years after ECB officials reiterated their commitment to keeping rates at current levels for a long period. This rise added to investor concerns.

ECB policymaker Francois Villeroy de Galhau stated that the ECB would maintain rates at 4% for as long as necessary. This statement countered recent calls from policy hawks for sustained high rates without ruling out further hikes.

Canada inflation (Source: Statistics Canada, BEA)

Canada inflation (Source: Statistics Canada, BEA)

On Tuesday, Canada’s primary stock index experienced its most significant decline since mid-August. The prospect of higher borrowing costs to combat inflation scared investors. 

Canada’s annual inflation rate in August surged to 4.0% from July’s 3.3%, indicating that the Bank of Canada might have to raise interest rates further, following ten hikes since March of the previous year.