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Early Morning Call: dollar shows strength ahead of Fed rate decision

Yields are rising on expectations that Fed action will crush appetite for risk assets. Two-year UST yield now at 15-year highs.

Macro overview

Indices in the Asia-Pacific region traded lower overnight, following the negative lead of the US, as markets expect another oversized rate hike by the Federal Reserve (Fed).

Indeed, a 75-basis point (bps) hike is fully priced in, but some wonder whether the Fed could go even higher this time. The latest data shows a 17% probability of a full percentage point increase. This probability went as high as 35% on September 13 on the back of the latest US consumer price index (CPI).

Last August, headline CPI came in at 8.3% year-on-year (YoY), lower than the 8.5% recorded in July, but beating expectations of an 8.1% rise. Core CPI unexpectedly rose by 6.3%, from 5.9% in July.

Since the Jackson Hole symposium, Fed members have been very vocal, from Atlanta's Fed president Raphael Bostic saying the Fed still has 'some work to do', to Fed vice chair Lael Brainard saying 'we are in this for as long as it takes to get inflation down', to Jerome Powell's statement last week: "we need to act now, forthrightly, strongly as we have been doing." And charts reflect that. US treasury yields are at their highest since 2011, the dollar index trades near two-decade highs and gold is at a 2 ½-year low.

Elsewhere the Bank of Japan (BoJ) announced an unscheduled bond buying operation overnight as the authorities there continue to try to support the market. Also, a survey by Reuters indicated that economists are split on whether there will be intervention on the yen.

The Bank of England (BoE) is expected to raise its interest rates by 50-basis points tomorrow. Today in the UK we have some stats that are perhaps more important to the UK chancellor Kwasi Kwarteng, ahead of his first budget that is to be delivered on Friday.

Public sector net borrowing for reached £11.06 billion in August, after £2.1bn in July.

In the US we see that start of building permits and housing. August data will be published at 1.30pm, followed at 3.30pm by EIA crude oil inventories.

Commodities

Yesterday API reported an increase in inventories across the board. Crude oil stocks rose by one million barrels, lower than the 2.3-million barrel increase anticipated by analysts. Note that the Department of Energy released another 6.9 million barrels from SPR.

Gasoline stocks rose by 3.2 million barrels, distillates by 1.5 million barrels.

Equities

Elsewhere, Galliford Try PLC posted a 68% pre-tax profit increase to £19.1 million, and announced a total dividend of 8 pence, up 70% on last year.

French industrial conglomerate Schneider Electric SA has agreed a deal to buy out minority shareholders in British software company Aveva Group PLC at a cost of £31 per share.

In the US, General Mills Inc is due to report its first quarter (Q1) earnings before the US market opens. Analysts expect earnings of 99 cents per share on revenue of $4.72bn.


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