Market Update

This week brimmed with central bank announcements, yet the spotlight remained on the Federal Reserve and the Bank of England.
The Federal Reserve, after its two-day open market committee gathering on Wednesday (September 20), chose to hold its interest rates steady, within the 5.25-5.5% range. But this decision carried subtle implications hinting at a changing market mood. While there wasn't an immediate rate hike, the Fed projected further policy tightening by year's end. Chair Jay Powell emphasized the bank's dedication to handling inflation and upholding its data-driven approach. Notably, the Federal Reserve hinted at a decreased likelihood of rate reductions in the upcoming year, implying increased optimism about the economy's resilience against potential hurdles.
Although a rate hold was anticipated, the Federal Open Market Committee's prospective path generated considerable speculation. Signals pointing to a tighter monetary direction and an intention to persist with higher interest rates for a more extended period influenced market dynamics.
Driven by the Federal Reserve's decision to sustain short-term rates for a prolonged period and combined with signs of robust economic growth, long-term treasury yields, like the 10-year US Treasury yield, climbed to a peak not seen in 16 years.
A potential government shutdown is on the horizon, as the defence spending bill couldn't secure passage in the Republican-led House of Representatives. In past instances, such shutdowns have had limited adverse effects on the US stock market. There's optimism that a resolution will be finalized before month-end, as neither political side wishes to shoulder the blame for a shutdown.
Across the Atlantic in the UK, recent official stats showed an unanticipated dip in inflation, settling at 6.7% year-on-year for August 2023.
Echoing the Federal Reserve, the Bank of England, on Thursday (21 September), halted its rate-increasing trajectory for the first time in almost two years. With a marginal majority, the Monetary Policy Committee (MPC) opted to retain the 5.25% interest rate, suggesting that we might have seen the peak of borrowing expenses. However, Governor Andrew Bailey cautioned against anticipating rate reductions, underscoring emerging signs of a calming labour market, consistent wage increments, and a potentially softer economic projection for the year's latter half. The Bank also highlighted the probable significant decrease in "CPI inflation in the imminent future, despite renewed pushes from rising oil costs."
The Bank of England's decision was accompanied by a hawkish tone, emphasizing the willingness to employ stringent policies when deemed necessary. This narrative underscores their careful balancing act of curbing inflation without inadvertently sparking a recession. While policy pauses don't definitively rule out future rate hikes, they manifest a dedication to astutely managing economic dynamics.
Lastly, Japan’s Central Bank has kept its primary interest rate targets stable. Expressing concerns over premature policy tightening leading to deflation, Governor Kazuo Ueda confirmed Friday's decision to sustain the current negative benchmark short-term interest rate, consistent since 2016.