After the U.S. CPI report was released earlier this week, the market almost believed that the Federal Reserve would slightly cut interest rates by 25 basis points this month, but the situation reversed sharply from Thursday. At that time, former New York Fed President Dudley said that the Fed was justified in cutting interest rates by 50 basis points next week. A reporter from the Wall Street Journal known as the "Fed News Agency" and the Financial Times also reported that the Fed was faced with whether to cut interest rates by 50 basis points or 25 basis points. After making a difficult decision, the market's bets on the Federal Reserve's sharp interest rate cut next week significantly increased to "50-50".

The bull market in U.S. Treasuries intensified as traders increased bets on a 50 basis point rate cut at the Federal Reserve meeting next week, with the 10-year Treasury yield hitting a 15-month low. The dollar was nearly flat this week, falling below 101 on Friday, hitting a weekly low. Gold continued to soar to a record high, rising more than 3.2% this week, the biggest weekly gain in five months. The three major U.S. stock indexes rebounded strongly to near two-week highs, with the S&P 500 and Nasdaq rising for five consecutive days, both recording their best weekly performance of the year. Crude oil lost momentum to continue its rebound after Hurricane Francine, but still closed higher on a weekly basis, ending a four-week losing streak.

There will be many key risk events next week, the first of which is the Federal Reserve's interest rate decision and updated economic forecast summary. The Bank of England and the Bank of Japan will also hold policy meetings. In terms of data, retail sales in the United States and the United Kingdom, and inflation reports in Canada, the United Kingdom, the eurozone and Japan are all worth paying attention to.

The following are the key points that the market will focus on in the new week (all in Beijing time):

Central Bank Dynamics: The prospect of the Fed's interest rate cut is shrouded in fog, and gold faces the risk of two-way fluctuations

At 2:00 on Thursday, the Federal Reserve will announce its interest rate decision and a summary of its economic forecasts.

At 2:30 on Thursday, Federal Reserve Chairman Powell held a monetary policy press conference

Investors have been trying to figure out the size of a potential rate cut at the Federal Reserve's September meeting since the July U.S. jobs report sparked recession fears, and now the moment of truth has finally arrived.

After wild swings throughout the week, federal funds futures on Friday showed traders pricing in an almost equal chance of a 25 basis point and 50 basis point rate cut from the Federal Reserve next week, according to CME Fedwatch data. The shifting bets reflect one of the key questions facing markets today: Will the Fed halt labor market weakness with aggressive rate cuts or take a slower pace of cuts to stay on the sidelines.

Analysts are also divided on how far the Fed will cut rates next week. Walter Todd, chief investment officer at Greenwood Capital, said the Fed should choose to cut rates by 50 basis points on Wednesday, noting that the gap between the 2-year Treasury yield (which has been around 3.6%) and the federal funds rate (5.25%-5.5%) is "a signal that the Fed started its rate-cutting cycle late and needs to catch up." JPMorgan Chase also reiterated its call for the Fed to cut rates by 50 basis points next week "to accommodate the change in the balance of risks."

However, Goldman Sachs still believes that the Fed will ease by 25 basis points next week and at each of its remaining meetings this year. In the camp that supports the Fed's moderate rate cuts, they generally worry that a 50 basis point rate cut may risk rekindling inflation and may send a signal of poor economic conditions, thereby causing panic on Wall Street.

In fact, given that inflation remains somewhat sticky and the Atlanta Fed GDPNow model predicts economic growth of 2.5% in the third quarter, policymakers seem to have no specific reason to start the easing cycle with an aggressive move, and a 25 basis point rate cut seems to be a more sensible move. If this is the case, the dollar may rise, but whether it can hold on to gains may depend on the updated dot plot and Powell's comments on the committee's future interest rate path.

Investors will be watching the Fed's new economic projections and interest rate outlook closely. Markets expect the Fed to cut rates by 115 basis points by the end of 2024, according to LSEG data late Friday. By comparison, the Fed's June forecasts showed only 25 basis points of rate cuts this year. If the dot plot and Powell indicate fewer rate cuts this year than the market is expecting, the dollar could get fuel for a rally. As for Wall Street, confidence that the world's largest economy is not heading for a recession could keep risk appetite high, even if that means a smaller rate cut than expected.

Gold continues to hit record highs amid rising market expectations for a sharp rate cut by the Federal Reserve. However, according to the relative strength index (RSI), gold is already overbought, which is usually a sign that advises bulls not to increase holdings because the risk of a pullback increases. Fxstreet analysts pointed out that if gold prices correct, it may find firmer support at the previous high of $2,550 or lower at $2,531. But any correction will eventually lose momentum and the broader uptrend will resume, pushing gold to new highs. The first resistance level on the upside will be the peak of $2,586 hit on Friday, and the next stop will be the psychological level of $2,600.

In any case, the trend of gold is still bullish from any time frame. Marc Chandler, managing director of Bannockburn Global Forex, said: "Gold hit a record high, seemingly helped by the decline in US interest rates and the dollar. After the market increased its bets on a 50 basis point rate cut next week, even if the Fed cuts interest rates by 25 basis points next week, as long as Powell does not oppose the expectation of a 50 basis point cut once or even twice in the last two meetings of the year, then this meeting may also be regarded as a dovish rate cut. In terms of gold, psychologically speaking, $2,600 is very attractive."

Adam Button, head of currency strategy at Forexlive.com, said a Fed rate cut of just 25 basis points could lead to some knee-jerk selling in gold, but buyers would take over until it falls to $2,500.

Other central banks: Bank of England and Bank of Japan are expected to remain on hold, with policy guidance attracting more attention

At 1:30 on Thursday, the Bank of Canada will release the minutes of its monetary policy meeting.

At 19:00 on Thursday, the Bank of England will announce its interest rate decision and meeting minutes.

The Bank of Japan will announce its interest rate decision at 11:00 on Friday.

At 14:30 on Friday, Bank of Japan Governor Kazuo Ueda held a monetary policy press conference

The Bank of Canada will release the minutes of its monetary policy meeting early Thursday. At last week's meeting, the Bank of Canada cut interest rates for the third time in a row, which would open the door to larger rate cuts if the economy slows sharply further. Its minutes may provide more clarity in this regard.

The Bank of England will follow the Federal Reserve in announcing its interest rate decision later on Thursday. The central bank voted by a narrow 5-4 majority to cut interest rates by 25 basis points at its last meeting in July, and officials have said they will be cautious about future rate cuts.

Since then, more data has confirmed officials’ stance. Both July and August PMIs exceeded expectations, while the labor market continued to improve. Although average weekly earnings continued to slow, they proved to be stickier than expected, with year-over-year growth in July remaining high at 5.1%. More importantly, the headline CPI rebounded in July, and service sector inflation remained elevated.

Even BoE Governor Bailey himself said at the Jackson Hole annual meeting that they are not in a hurry to cut interest rates again, prompting market participants to price in an 80% chance that the BoE will not take action at this meeting. If the BoE does not press the rate cut button, investors will turn their attention to officials' communication on future rate cut plans.

The Overnight Index Swap (OIS) curve shows investors expect another 25 basis points of cuts at the November and December meetings. This would have to be verified by lower inflation data or significant weakness in the labor market going forward. If policymakers stick to previous guidance on keeping interest rates restrictive for longer, that could lead to a pullback in some dovish bets and the pound could extend its recent rally.

On Friday, it will be the Bank of Japan’s turn to take center stage. The central bank unexpectedly raised interest rates by 15 basis points in July and has since signaled that more hikes are imminent, leading investors to bet on an 85% chance of another 10 basis point increase by the end of the year. The divergence in monetary policy strategy between the central bank and the rest of the world sent the yen soaring and triggered a wave of carry trade unwindings, before the hawkish Bank of Japan was blamed for exacerbating global market turmoil in early August.

Nonetheless, higher-than-expected inflation and wage growth in Japan over the past month appear to have given the Bank of Japan more confidence that a benign wage-price cycle will keep inflation above 2%, which should pave the way for further policy normalization going forward.

However, no policy action is expected at this meeting of the Bank of Japan, so the focus will be on whether Kazuo Ueda and his colleagues continue to hint at more rate hikes to come. Any view that confirms market expectations that the Bank of Japan may raise interest rates again before the end of the year could keep the yen rising.

Important data: The last important data will be released before the Fed meeting

At 20:30 on Monday, the US New York Fed Manufacturing Index for September

At 17:00 on Tuesday, the Eurozone ZEW economic sentiment index for September

Tuesday 20:30, Canada August CPI monthly rate

Tuesday 20:30, U.S. August retail sales monthly rate

Tuesday 21:15, U.S. August industrial output monthly rate

Tuesday 22:00, US September NAHB Housing Market Index, US July Commercial Inventory Monthly Rate

At 14:00 on Wednesday, the UK August CPI monthly rate and the UK August Retail Price Index monthly rate

At 17:00 on Wednesday, the final value of the euro area's August CPI annual rate and the euro area's August CPI monthly rate

At 20:30 on Wednesday, the total number of new housing starts in the United States in August was annualized, and the total number of building permits in the United States in August

At 22:30 on Wednesday, the EIA crude oil inventory and strategic petroleum inventory reserves in the United States for the week ending September 13

At 20:30 on Thursday, the number of initial jobless claims in the United States for the week ending September 14 and the Philadelphia Fed Manufacturing Index for September

At 22:00 on Thursday, the annualized total number of existing home sales in August in the United States and the monthly rate of the Conference Board's leading indicator in August in the United States

At 7:30 on Friday, Japan's August core CPI annual rate

At 22:00 on Thursday, the monthly rate of the U.S. existing home sales index in July

7:30 on Friday, Japan's July unemployment rate, Japan's August Tokyo CPI

At 14:00 on Friday, the UK's August seasonally adjusted retail sales monthly rate

Friday 20:30, Canada's July retail sales monthly rate

U.S. retail sales data for August will be released on Tuesday. It is estimated that the year-on-year growth rate of U.S. retail sales in August will slow to 0.1% from 1% in the previous month. If the data is lower than expected, there is a risk that recession concerns may return. On the other hand, if the economy continues to remain resilient, it will weaken the need for the Federal Reserve to cut interest rates sharply. CNBC host and former hedge fund manager Jim Cramer called it the last important data before the Fed makes a decision. He said the report is a good measure of consumer spending and he predicts that the data will be weak. Consumer spending is the main pillar of the U.S. economy and one of the reasons why the Federal Reserve’s most aggressive interest rate hike cycle in decades has not yet brought an economic recession.

Outside the U.S., several countries and regions will release inflation data. If Canada's August CPI data released on Tuesday cools further, it will likely encourage market participants to increase their bets on rate cuts from the Bank of Canada, which currently expects another 60 basis points of rate cuts by the end of the year.

For the UK, the August CPI data may show a sharp rise in services inflation, but this is mainly due to base effects in this category. The Bank of England will tend to ignore these changes, as it already expects services inflation to rise temporarily this autumn but to fall again by the end of the year.

On Friday, inflation data released shortly before the Bank of Japan's policy meeting will be in focus to validate the market's pricing of a further 10 basis point rate hike by the central bank this December. Japan's core inflation is expected to rise to 2.8% in August from 2.7% previously, which would mark the 29th consecutive month of above-target inflation, while an upward surprise in inflation could spark more hawkish bets to price in an earlier rate hike timeline.

Key events: Oversupply concerns intensify, hedge funds are net short on Brent crude for the first time in history

The oil market is rife with concerns about oversupply, with international crude oil closing higher this week mainly due to shorts covering their positions as prices fell to their lowest level in more than three years and as a result of hurricanes.

It is worth noting that hedge funds have turned net short on Brent crude oil for the first time in history. As of the week of September 10, fund managers had 12,680 more short positions than long positions, the first time since ICE Futures Europe had data in January 2011. Hedge funds are still net long on WTI crude oil, but this position is the smallest since February. According to data from the U.S. Commodity Futures Trading Commission (CFTC), bullish sentiment on Brent and WTI crude oil has hit a record low.

Despite OPEC+'s delayed plans to restore supply, investors are increasingly concerned about a crude glut next year as non-OPEC countries are expected to increase production while demand in the world's largest oil consumer appears to be slowing.

Macquarie analysts including Marcus Garvey and Vikas Dwivedi said in a report that the tight market conditions are fading this quarter, and the supply and demand balance forecast shows that there will be a serious oversupply in the next five quarters. Although Saudi Arabia will not seek to launch a price war, given the prospect of a serious oversupply, oil prices may fall more than the model level and hover above $50 per barrel. However, geopolitical factors also bring some upside potential to oil prices. Macquarie expects Brent crude oil to rise to $79 per barrel this quarter and fall back to $73 in the fourth quarter.

Company financial reports: US stocks are in a fragile period, is this bull market destined to be “short-lived”?

As the second quarter earnings season draws to a close, Wall Street is turning its attention back to the macro level. The S&P 500 has risen about 18% so far this year, so next week's Federal Reserve meeting may only need to perform slightly worse than expected to disappoint investors.

Aggressive rate cut bets have helped drive a rally in U.S. Treasuries, with the 10-year yield down about 80 basis points to around 3.65% since early July, close to its lowest level since June 2023. However, Mike Mullaney, head of global market research at Boston Partners, noted that if the Fed's easing continues to fall significantly short of expectations this year, the bond market will have to reprice, pushing yields higher. Rising yields could put pressure on U.S. stock valuations, which are already at historical highs. The S&P 500's latest forward price-to-earnings ratio is 21 times, higher than its long-term average of 15.7 times, according to LSEG Datastream.

Doug Ramsey, chief investment officer of the Leuthold Group, believes that no matter how the Federal Reserve continues to make interest rate decisions, he is skeptical that the boom in U.S. stocks will last for a long time. He said that the current bull market in U.S. stocks may be doomed to a short life, including valuations that have never been reset by a full-blown economic recession. Leuthold's data shows that of the past 12 bull markets, only four started outside of a recession, and the average duration of these bull markets was only half that of other bull markets. If the current bull market can achieve the average performance of the past four most cyclically relevant bull markets, it will last until May 2025, and the S&P 500 will peak at 5,852, about 8% higher than its closing price on September 6.

Hedge funds are also cautious. Morgan Stanley's prime brokerage team said hedge funds cut their net equity exposure to the lowest level since the end of last year. Overall, market positioning is becoming more cautious, with U.S. stock funds suffering their largest weekly outflow since April, according to EPFR Global data compiled by Bank of America.

Skeptics also point out that federal funds futures are pricing in more than two percentage points of rate cuts over the next 12 months, a scenario rarely seen outside of a recession. "With the S&P 500 near all-time highs and credit spreads narrow, starting a rate-cutting cycle with a big cut seems like something that only happens if the Fed knows something that no one else does," said James St. Aubin, chief investment officer at Ocean Park Asset Management, which manages $5.3 billion in assets. "I think a 50 basis point cut is likely to do more harm than good in terms of market sentiment."

Market Holiday Arrangement:

On Monday, Japan's Tokyo Stock Exchange was closed for one day due to the Respect for the Aged Day; due to the Mid-Autumn Festival, China's Shanghai, Shenzhen and Beijing Stock Exchanges and domestic futures exchanges were closed until Tuesday, and South Korea's Seoul Stock Exchange was closed until Wednesday.

The Taiwan Stock Exchange was closed on Tuesday due to the Mid-Autumn Festival.

On Wednesday, the Hong Kong Stock Exchange was closed for one day due to the Mid-Autumn Festival.

The article is forwarded from: Jinshi Data