Investors wait for The Fed. The TPP midweek update

Stocks muted before U.S. Central Bank rate announcement.

The FTSE 100 and European stocks opened mostly lower on Wednesday as a warning from the Bank of Japan that Trump's tariffs were creating "high uncertainty".

BoJ governor Kazuo Ueda said: “In the past month or so, there have been rapid changes in the scope and speed of US tariffs. However, there are aspects we may not know even beyond April, so uncertainty remains high. We will scrutinise how the US trade policy unfolds, how it affects the US and other global economies, and how that all impacts Japan’s economic and price outlook.”

It came as the central bank left interest rates on hold at 0.5%, even though the country's annual wholesale inflation rate hit 4.0% in February. The decision was reached unanimously at a two-day policy meeting.

Meanwhile, eurozone inflation came in cooler than expected with prices rising 2.3% in the year to February, less than the 2.4% initially estimated, according to updated figures from Eurostat which looked at inflation across the 20 nations that use the euro. Inflation was down from the 2.5% reported in January.

The month-over-month figure for February was 0.4% after -0.3% in January. Over the last 6 months, inflation has risen only 0.4% implying an annualised rate of 0.8% if things continue as they are. There will be inflationary pressures from tariffs, but prices seem fairly stable at the moment so not too much cause for concern for the European Central Bank.

In the U.S., stocks saw mild gains Wednesday having fallen hard on Tuesday. Bonds fell and the dollar outperformed major currencies as traders braced for the Federal Reserve’s rate decision and outlook, following a selloff that shed trillions of dollars from American equities amid economic jitters.

Federal Reserve officials will likely hold interest rates steady when they meet later today, buying time to assess how President Donald Trump’s policies impact an economy facing both lingering inflationary pressures and mounting growth concerns.

Earlier this week a White House official indicated that Donald Trump’s intention is still to enact tariffs on 2 April.

Fresh tariffs from the Trump administration, paired with retaliatory action from US trade partners, have dented consumer sentiment and fanned Americans’ expectations for future inflation. And with some levies getting postponed shortly after being announced, it’s unclear how the trade war will ultimately shape the economy.

The uncertainty will likely keep policymakers in a wait-and-see mode, reluctant to wed themselves to a particular path of policy.

“I think there’s going to be a fairly wide dispersion on the trajectory for rate cuts because of the uncertainty,” said Diane Swonk, chief economist at KPMG.

The Fed’s rate decision, along with officials’ updated quarterly economic forecasts, will be released at 6 p.m. UK time. Chair Jerome Powell will hold a post-meeting press conference 30 minutes later.

Officials are widely expected to hold their benchmark interest rate in a range of 4.25%-4.5%, but Fed watchers say the post-meeting statement could change slightly amid recent data pointing to slower activity.

Mentions of an uncertain outlook and balanced risks to their employment and inflation mandates are likely to remain unchanged, economists say, but policymakers may scrap their description of a “solid pace” of economic growth.

The economic picture has evolved since officials last submitted their projections for interest rates in December. Tariff threats have escalated, fresh data, including a souring in consumer sentiment, has sparked concerns about the growth outlook, and stock prices have slid sharply in recent weeks.

More policymakers could signal a preference to hold rates steady, a “natural outcome” given the uncertainty of many of Trump’s policies, especially around trade, Swonk said. “Do we have a trade war that’s so bad that it causes a much deeper recession? We don’t know.”

In the December Summary of Economic Projections, Fed officials had pencilled in two rate cuts for this year, according to the median estimate. Economists generally expect the central bank will continue to signal two reductions for 2025 in the so-called “dot plot” this week.

Oil pared earlier losses as traders assessed signs that US crude stockpiles expanded against the backdrop of a weaker economic outlook and rising geopolitical tension.

West Texas Intermediate crude traded near $67 a barrel. The American Petroleum Institute said nationwide inventories rose by 4.6 million barrels last week, although a draw was seen at the key hub in Cushing, Oklahoma, and fuel stockpiles shrank. Official data are due later on Wednesday.

Crude remains markedly lower from a peak in January, as several bearish drivers combine to pressure prices. On the supply side, OPEC and its allies are preparing to increase production, while the escalating trade frictions are threatening a hit to demand just as consumption in China remains weak.

Economic data “will remain the salient driving force of sentiment and consequently prices,” said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd. “The large build in US crude oil stocks, as seen by the API, is another hindrance to an upside reversal, albeit product inventories declined,” he added.

That has overshadowed geopolitical concerns that lifted prices on Monday. Trump has pressed Iran to rein in the Houthis, treating attacks from the Yemeni militant group as Tehran’s direct responsibility. Russian President Vladimir Putin, meanwhile, declined the US president’s bid for a ceasefire in Ukraine, agreeing instead to limit attacks on the country’s energy infrastructure.

Gold’s rise has been impressive. Its rally has continued despite higher interest rates, a rising dollar and higher real yields. Gold is one of the best-performing major commodities this year, up more than 14% year-to-date, extending its momentum from 2024. It has hit a series of consecutive record highs along the way, driven by trade frictions, economic uncertainty, central bank buying, and inflows into ETF holdings.

The pace of annual purchases by central banks has doubled since the outbreak of the Russia-Ukraine war in 2022, from about 500 metric tonnes a year to more than 1,000. Central banks’ appetite for gold is also driven by concerns from countries about Russian-style sanctions on their foreign assets in the wake of decisions made by the US and Europe to freeze Russian assets, as well as shifting strategies on currency reserves.

Last year, central banks bought a combined 1,045 tonnes, accounting for about a fifth of overall demand (according to the World Gold Council). Poland, India and Turkey were the largest buyers in 2024.

All eyes are now on the FED today and then the Bank of England tomorrow. All 61 economists polled by Reuters last week expected the BoE to leave its benchmark interest rate on hold at 4.5%, with the next cut likely in May, followed by further reductions in August and November.

Unlike the European Central Bank which cut borrowing costs for the sixth time since June earlier this month, the BoE has moved only carefully on rates since a first cut last August.

Data published last week showed Britain's economy contracted unexpectedly in January but there was also a noticeable jump in public expectations for near, and long-term inflation.

Enjoy the rest of your week and good luck in the markets.

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Disclaimer: The views expressed in this article are the author’s own and should not be considered in rendering any legal, business or financial advice.

Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to the corresponding past performance

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