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Fed rate hike looms as markets weigh 'one-and-done' vs. new tightening cycle
Global investors are anticipating a US Federal Reserve rate hike this week, with focus shifting to whether it signals a new tightening cycle or a singular adjustment. The market reaction hinges on the Fed's guidance, as a one-off increase could…
With a US interest rate increase considered highly probable this week, investors are evaluating whether this move will be an isolated event or the beginning of a broader tightening phase. Market participants are also preparing for a likely borrowing-cost increase in Japan, which could trigger significant capital flow adjustments.
As probabilities for a 25 basis-point rate hike at the US Federal Reserve’s Thursday policy meeting reached 92 percent, equity traders have directed attention toward the world's largest central banks' future rate trajectories. A singular rate increase might be perceived as dovish, potentially benefiting equities by reinforcing the Fed's inflation-fighting credibility and Chair Kevin Warsh's commitment. Conversely, if the Fed signals further rate increases, stocks could face considerable pressure, particularly given current valuation levels and persistent oil market volatility.
Stephen Innes, a managing partner at SPI Asset Management, noted, “A one-and-done outcome would allow the Fed to show that it is responding to inflation, respecting the message from markets and acting independently despite political pressure.” He added, “It would also take some of the guesswork out of the remaining meetings this year.” Innes also highlighted that “The surprise risk may no longer be the increase itself. It may be anything in the guidance suggesting that one move will not be enough.”
Hong Kong and mainland China equities have shown minimal movement this week, as investors hold back from major positions ahead of key rate decisions from the US, UK, and Japan. US benchmarks have experienced a slight weekly dip, though they remain near record highs, reflecting some optimism that the US economy will avoid a prolonged monetary tightening cycle.
The Fed’s September meeting is drawing close scrutiny from investors, who have been contending with rising US Treasury yields, crude oil prices above USD 100 per barrel, and White House pressure to reduce borrowing costs. This decision will also test whether Chair Warsh upholds the Fed's independence, particularly after his Jackson Hole symposium comments last month prioritizing inflation-fighting policy.
While Macro Risk Advisors projected a 10 percent decline for the S&P 500 following a Fed rate increase, Citigroup maintained that the equity bull trend would persist, citing the resilience of the US economy. Historical data, according to Citigroup, indicates that global equities typically show initial volatility at the start of a Fed rate-hike cycle, followed by gains in the subsequent six to 12 months, with the US market and value stocks outperforming growth names. David Groman, a strategist at Citigroup, commented that “It is not the first Fed increase that ends equity bull markets, although it does inject near-term volatility.”
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