All eyes are on The Federal Reserve. The TPP midweek commentary by Ed Davies.

All Eyes Are Now On The Federal Reserve.

Traders have been frantically wagering on the size of the US Federal Reserve’s first interest rate cut in four years. We will find out the answer on Wednesday evening at 7pm GMT.

US equities opened fairly mute as expected ahead of the meeting and the markets are unlikely to find any real direction until the announcement later today.

Traders seem split over whether the US central bank will announce a cut of 25 or 50 basis points with market-implied odds currently signalling a 55% chance of the bigger move.

Contracts on the S&P 500 are still slightly below their July record but that could change if the cut is 0.5%. However, the move to the downside could be even greater if the Open Market Committee disappoint.

Europe’s Stoxx 600 index retreated earlier today as have most major European benchmarks. The FTSE was down -0.75 at lunchtime. The dollar slipped close to its weakest levels since January, while Treasury yields ticked higher.

Investors are looking for the Fed to ease policy sufficiently to respond to recent signs of weakness in the economy, achieving a soft landing without stirring concerns that conditions are worse than markets appreciate.

“If they’re doing 25 basis points this time, the likelihood that they can get to a hundred basis points by year end is pretty slim,” said Justin Onuekwusi, chief investment officer at St James Place Management. “So if you don’t get 50, then you’re going to get significant moves in market pricing.”

The yen climbed as much as 0.8%, signalling expectations of a narrowing divergence in policy between the Fed and the Bank of Japan, which decides on rates on Friday.

Economists surveyed largely anticipate the Federal Open Market Committee will reduce rates by a quarter point to a range of 5% to 5.25%, though a number expect a half-point move. Investors see greater scope for the larger adjustment.

Fresh quarterly projections in the form of the so-called “dot plot” released at the end of the central bank’s two-day meeting will offer further insight into the path ahead for borrowing costs and the economy. Chair Jerome Powell will also hold a press conference.

“I think they will go 25, but if they do go 50, how they talk about this will be extremely important,” Torsten Slok, chief economist at Apollo, said on Bloomberg TV. “That is why the dot plot coming along with the statement today is critical for rates expectations.”

“If the dot plots suddenly tell you maybe we are not getting 10 cuts, maybe we are getting only six or seven cuts, then of course that also means that markets will look at that and say: ‘maybe we are overpricing this,’” Slok said.

Aside from the wait for the rate cut, data out Wednesday showed US housing starts bounced back in August after tumbling a month earlier. Beginning home construction increased 9.6% to a 1.36 million annualized rate last month, the fastest since April. The median estimate of economists called for a 1.32 million rate.

In the UK year over year inflation was unchanged in August, according to figures released on Wednesday by the Office for National Statistics, remaining above the Bank of England’s target.

Consumer price inflation was 2.2% in the year to August, in line with expectations and above the BoE’s 2% target.

Services inflation rose to 5.6% in August from 5.2% in July, also as expected.

Core CPI - which excludes energy, food, alcohol and tobacco, rose to 3.6% from 3.3% in July. This was a touch above expectations of 3.5%.

ONS chief economist Grant Fitzner said: "Inflation held steady in August as various price fluctuations offset each other. "The main movements came from air fares, in particular to European destinations, which showed a large monthly rise, following a fall this time last year.

"This was offset by lower prices at the pump as well as falling costs at restaurants and hotels. Also, the prices of shop-bought alcohol fell slightly this month, but rose at the same time last year."

Ruth Gregory, deputy chief UK economist at Capital Economics, said: "Overall, a pause on interest rate cuts was already expected tomorrow and today’s release cements that view. "We continue to assume the next 25 basis point rate interest rate cut will take place in November and that rates will be cut at alternative BoE meetings until June."

In the Eurozone inflation fell to 2.2% in August from 2.6% a month earlier, confirming a flash estimate two weeks ago, according to official data published by the European Union on Wednesday.

The figure also compared with a 5.2% last August. European Union's annual inflation was 2.4% in August 2024, down from 2.8% in July. A year earlier, the rate was 5.9%.

In a separate announcement, July seasonally adjusted production in construction remained stable in the euro area and increased by 0.2% in the EU compared with June, according to flash estimates.

On an annual basis, production fell by 2.2% in the euro area and 2.4% in the EU.

In equities, Goldman Sachs upgraded InterContinental Hotels to ‘buy’ from ‘neutral’ and cut Premier Inn owner Whitbread to ‘neutral’ from ‘buy’ as it reshuffled its European-listed hotel ratings.

The bank said IHG’s enhanced long-term earnings per share growth algorithm, improved enterprise platform and optionality on ancillary revenue streams merits a narrower valuation discount to key US peers.

Goldman also upgraded Lancashire Holdings to ‘buy’ and downgraded Hiscox to ‘neutral’ while Hammerson was lifted to ‘buy’ at Citi and Kainos gained after an upgrade to ‘buy’ at Deutsche Bank.

Legal & General fell after saying it had sold UK house builder CALA Group for £1.35bn to Ferguson Bidco, an entity owned by funds managed by Sixth Street Partners and Patron Capital. The insurer said it would receive cash proceeds of £1.16bn, of which £500m will be paid at closing with the remaining consideration being paid over the next five years.

PZ Cussons tumbled as the Imperial Leather maker said it swung to a full-year pre-tax loss due to the devaluation of the Nigerian naira.

Consumer goods giant Reckitt Benckiser rallied following a Bloomberg report it has launched early discussions with potential suitors for a sale of its homecare assets, which could be worth more than £6bn.

Oil traded flat Wednesday following a two-day gain as signs of higher US stockpiles offset concern that Middle East tensions may escalate further.

Benchmark Brent traded near $73 a barrel, while West Texas Intermediate was below $71, both paring earlier losses. An American Petroleum Institute report showed crude inventories rose by almost 2 million barrels last week, with gasoline and distillate holdings also expanding, according to people familiar with the data.

Crude remains markedly lower year-to-date, reflecting China’s dour demand outlook and OPEC+’s plans to eventually restore shuttered output. That’s been partially countered by supply disruptions in Libya and the US and prospects for monetary easing, with investors expecting the Federal Reserve to start lowering interest rates.

In the Middle East, Iran-backed Hezbollah accused Israel of orchestrating an attack in Lebanon involving the explosion of pagers, which left a number of people dead and wounded thousands. The incident raised fears of an all-out war in the region, and buoyed prices on Tuesday.

Yet on the demand side, lacklustre consumption has seen some refineries in Europe reduce processing rates. Meanwhile, in China, the world’s largest oil-importing nation, poor margins have led to the bankruptcy of two small plants.

That’s all from us. The Federal Reserve will lower US interest rates for the first time in four years this evening, the question still remains though, will it be 0.25% or 0.5%?

One thing we are sure of is that there will be volatility! Have a great Evening.

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