Equities struggle as oil surge sets stage for hawkish Fed

Most Asian shares fell on Wednesday with markets remaining broadly risk-off before a closely-watched interest rate decision from the Federal Reserve later in the day. Meanwhile, China left is one-year and five-year loan prime rates unchanged at 3.45% and 4.2%, respectively. Elsewhere, data showed that Japan’s trade deficit narrowed sharply in August, while South Korea’s producer inflation jumped to a fourth-month high. Shares in Australia, Japan, South Korea, Hong Kong and mainland China all declined. European and US equity futures were little changed ahead of the Fed’s rate decision. Oil prices sank in Asian trade this morning, falling for the second straight session as caution dominated sentiment ahead of the US Federal Reserve’s interest rate decision. Still, prices remained close to over ten-month highs as industry data showed that US crude inventories fell by 5.25 million barrels last week, marking the fifth consecutive decline and exceeding forecasts for a 2.667 million barrel draw. The yield on the US 10-year Treasury note rose further to 4.35% on Tuesday, hovering at levels last seen in September 2007 as evidence of economic resilience supported bets of a hawkish Federal Reserve ahead of today’s policy decision. A hot inflation report in Canada compounded concerns that higher fuel costs will pin inflationary pressure for months to come in North America while surging rent costs coincided with the unsustainable increase in core rates that are closely watched by central bankers. UK inflation came in at 6.7% in August, below expectations and down slightly from the previous month. On a monthly basis, the headline consumer price index rose by 0.3%. Expectations were for the headline figure to come in a 7% annually and up 0.7% month-on-month, compared to July’s 6.8% and 0.4% month-on-month decline, amid a slight uptick in prices at the pump. Global economic growth is expected to moderate as the impact of tighter monetary policy is becoming increasingly visible, business and consumer confidence have turned down, and the rebound in China has faded, according to the OECD Economic Outlook for September 2023. The organisation sees global GDP growth to grow 2.2% this year and 1.3% in 2024, the Eurozone is seen rising 0.6% in 2023 and 1.1% in 2024 and China is seen expanding 5.1% in 2023 and 4.6% in 2024. Meanwhile, inflation is projected to moderate gradually over 2023 and 2024, but to remain above central bank objectives in most economies. Housing starts in the US sank 11.3% month-over-month to a seasonally adjusted annualised rate of 1.283 million in August, the lowest level since June 2020, and well below forecasts of 1.44 million. Tighter financial conditions, a surge in mortgage rates and high home prices continue to weigh on buyers’ affordability. The annual inflation rate in the Euro Area was revised lower to 5.2% in August from an initial estimate of 5.3%, marking the lowest reading since January 2022. On a monthly basis, the CPI went up 0.5%, slightly below 0.6% in the first estimate. The ECB recently revised its inflation forecasts upward for both 2023 (to 5.6%) and 2024 (to 3.2%), primarily driven by an increased trajectory in energy prices. Malta’s annual inflation rate eased to a seventeen-month low of 5% in August from 5.6% in the previous month. On a monthly basis, consumer prices advanced 0.4%, slightly accelerating from a 0.3% increase in July. Royal Caribbean shares rose 2.5% in Tuesday’s session after Truist upgraded its shares to “buy” from “hold,” citing optimism over the outlook for booking and pricing in 2024 and 2025. Starbucks fell 1.5% yesterday after TD Cowen downgraded its shares to “market perform” from “outperform,” citing “worrisome” macro and competitive pressures in China.