In the UK, inflation data came in yesterday with a positive surprise. Prices unexpectedly fell in August, while most analysts were anticipating a rise due to higher energy prices. This fueled hopes that the Bank of England would soon end its rate hike cycle. And investors were right to hope.

While today, most investors still expected the BoE to raise rates by a quarter point to 5.5% from 5.25% - thinking that it could be the last one in this cycle – the BoE surprised them by keeping its rates unchanged. This was a close decision, with a 4-5 split. It was the first pause after 14 consecutive rate rises since the start of the tightening cycle in December 2021. It’s likely that the tightening cycle is now over. Although the Bank was very clear is that the Bank is leaving all options on the table for November. In a statement, Governor Andrew Bailey said: “Inflation has fallen a lot in recent months, and we think it will continue to do so. That’s welcome news. But there is no room for complacency. We need to be sure inflation returns to normal and we will continue to take the decisions necessary to do just that.”

On Wednesday, the US Federal Reserve also voted also voted to keep its rates unchanged. However, it confirmed yesterday that it will have to leave rates higher for longer, which didn't go down too well with investors. The tone was indeed a little firmer than expected. Wall Street fell in the wake of the announcements on Wednesday, dragging down other world markets this morning. At the same time, Powell reassured on the solidity of the US economy, which at this stage is not very sensitive to counter-inflationary measures.

To gauge investors’ reaction after the Fed decision, you just have to look at the color of the US indices, the state of US bond yields and the state of the USD/EUR pair. Sometimes the relationship between the three indicators is difficult to understand. Sometimes it's clearer, as seemed to be the case right now. So, in order, futures on all three Wall Street indices were lower in premarket trading, especially the Nasdaq 100, down 1.2% after closing 1.5% lower yesterday. The yield on 10-year US debt rose from 4.31% yesterday to 4.48% right now. And the dollar strengthened against the euro. That’s what happens when Jerome Powell was a bit more hawkish than dove.

Investors expected the Fed to leave rates unchanged, and so it did. They also expected the Fed to deliver a downbeat message about the future of rates, which it also did. But the message was a bit disappointing. The central bank has raised its growth forecasts for 2023 and 2024 quite considerably, and lowered its unemployment rate projection. This means that the US economy is much more resistant to rate hikes than expected. At the same time, the Fed slightly lowered its core inflation expectations for 2023 and 2024. The other big change can be seen in the dot plot I mentioned yesterday. Twelve of the 18 members of the Monetary Policy Committee anticipate the need for an additional rate hike by the end of the year. This compares with 9 in June. For next year, estimates are still very disparate, but they are less inclined towards major rate cuts. Fourteen of the 18 FOMC members believe that rates will be 50 points lower at best. The June consensus was for 100 basis points lower. If we follow the Powell team's average expectations, rates should be in the "5.50 to 5.75%" range by the end of the year (compared with the current "5.25 to 5.50%"), and 50 points lower next year.

In short, the Fed's message is "Rates are going to stay high but the economy is holding up, so don't be afraid, we're going to gradually bring inflation back down to the 2% level, it's going to take a long time but it's going to happen". But the market, with its usual spirit of contradiction, doesn't want to believe it. For one thing, it still doesn't believe that the Fed will raise rates this year. The probability has increased, of course, as the futures market, rising yields and a strong dollar tell us. But this is far from a capitulation. A pause remains the preferred hypothesis for the November 1 meeting. And the forecast is fifty-fifty between a pause and a rate hike for the December 13 meeting. At the same time, the market still believes that maintaining high rates will eventually wreak havoc on the economy. Economists point out that, with the cost of credit rising, pandemic savings drying up, energy prices rising and student loan repayments resuming, the American consumer is going to suffer from the end of this year onwards. These are the same people who have been shifting the date of arrival of the recession every two months for the past two years, and even the Fed no longer seems to believe in it. But still. Nobody seems to agree on anything, and the US central bank itself has conceded that it's not sure when it will be in a position to change policy.

Economic highlights of the day:

The UK’s consumer confidence index, non-farm payrolls and the University of Michigan's consumer confidence index are the main indicators today. The full agenda is here. 

The dollar is up at EUR0.9394 and GBP 0.8146. The ounce of gold is down to USD 1917. Oil lost ground, with North Sea Brent at USD 93.93 a barrel and US light crude WTI at USD 90.06. The yield on 10-year US debt climbed to 4.43%. Bitcoin trades at USD 26,550.

In corporate news:

  • Fedex climbs 5.37% in pre-market trading after reporting a 32% jump in adjusted earnings for its fiscal first quarter, to $4.55 per share, 82 cents above consensus.
  • Alphabet plans to stop sourcing artificial intelligence chips from BROADCOM as early as 2027, and may turn to MARVELL TECHNOLOGY, reports The Information on Thursday. Broadcom shares are down 5.5%, while Marvel shares are up 3.4% in pre-market trading.
  • Amazon and Italian eyewear group Safilo announced the launch of new Carrera-branded smart glasses using Alexa technology in the United States.
  • Chevron - On Thursday, the Australian Conciliation Authority proposed measures to the oil group and unions to resolve a strike-sparking dispute over wages and working conditions at two liquefied natural gas projects.
  • Warner Bros Discovery was up 2.8% and PARAMOUNT up 3% before the opening on reports of an imminent agreement between writers and producers to end the Hollywood strike.
  • Nasdaq- The Swedish Financial Supervisory Authority will investigate whether the Stockholm Stock Exchange, which belongs to the US group, breached market rules by failing to report possible insider trading, the regulator said in a statement on Thursday.
  • Vinfast - The Vietnamese electric car manufacturer plans to ship its first vehicles to Europe this year after receiving regulatory approval, its CEO told Reuters on Thursday.
  • Keurig Dr Pepper - The soda maker was reported up 1.1% after the close on Wednesday after announcing the appointment of Tim Cofer as CEO in Q2 2024.

Analyst recommendations:

  • Anglo american plc: Morningstar upgrades to buy from hold with a target price of USD 16.20.
  • DFS: Jefferies remains Buy with a price target reduced from GBX 185 to GBX 175.
  • Edison international: Morgan Stanley maintains its underweight/in-line rating with a target price of USD 53.
  • EPR Properties: Wells Fargo Securities initiated coverage with a recommendation of underweight. PT set to $40.
  • New Jersey Resources: J.P. Morgan upgrades to neutral from underweight. PT up 9.1% to $46.
  • Nextera energy: Morgan Stanley maintains its overweight/attractive rating with a target price of USD 91.
  • Ocado: BNP Paribas Exane upgrades from neutral to underperform, targeting GBX 390.
  • Oracle corp: Berenberg maintains its hold recommendation with a price target raised from USD 82.50 to USD 110.
  • Snowflake: President Capital Management Corp maintains its neutral rating with a target price of USD 160.
  • Truist Financial: Keefe, Bruyette & Woods upgrades to outperform from market perform. PT up 27% to $36.
  • Vici properties: Wells Fargo maintains its overweight rating with a target price of USD 36.
  • W. P. Carey: Wells Fargo maintains its equalweight rating with a target price of USD 66.