In what Goldman Sachs had said was shaping up to be the most uncertain policy meeting in almost 30 years, the Fed on Wednesday decided to keep rates on hold. Three of the 12-strong voting committee dissented for a hike. Does this suggest a September hike is now a given? Not really.
Fed Chair Kevin Warsh said the discussion with colleagues was the "good family fight" he had been hoping for. This suggests more than three officials might vote to hike in September. But rate futures are only indicating a 55% chance of that, down from 75% immediately after today's decision, and long bond prices plunged after Warsh's press conference. A lack of faith in the Fed's commitment to 2%?
The collapse in South Korean stocks, especially the chip sector, has fueled concern over leverage. Authorities there are scrambling to mop up and minimize volatility, rolling out new rules and regulations surrounding single-stock ETFs and retail investors in particular.
The rout has spread to U.S. chips, with the Philadelphia SE semiconductor index down nearly 30% from its June 22 peak. The index is on for its worst month since the early 2000s. What about leverage in the U.S.? Strategists at JPMorgan estimate that deleveraging in the tech and semiconductor space has advanced faster than they had anticipated. "As a result, we now see more limited room for any further deleveraging."
After the Fed, it's over to the Bank of England and its latest policy decision on Thursday. The MPC is expected to keep the base rate on hold at 3.75% in another 7-2 vote. Rates futures are putting an outside 10% chance on a hike.
UK inflation surprised to the downside in June, but markets still expect the BoE to raise rates in the coming months — 25 bps by the end of the year, and another 25 bps by March. Long-dated gilt yields are near their highest levels since the 1990s. With a new PM in place and fiscal worries running strong, failure from the BoE to meet the market's hiking expectations could soon push these long yields through 6%.
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