Market snapshot: stocks break records ahead of rate decision day

US markets ended the day hugging the flatline, erasing gains from earlier in the session which saw both the S&P500 and Dow Jones touching new record highs.

The late departure from that buying interest reflected investors’ ongoing speculation of the size of the Federal Reserve interest rate cut when it is announced later day. The irony is that whatever happens, some will be disappointed.

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A reduction of 0.25% will cause concerns to resurface that the Fed has slipped behind the curve, while a more aggressive 0.5% cut could equate to an economic outlook which is weaker than currently expected. At the same time, the balance has swung towards the higher number in terms of consensus, with an estimated 65% expecting the Fed to front load its monetary easing policy and kick off with a 0.5% reduction.

Those hoping for a lastminute clue to the decision after the release of retail sales figures yesterday were left empty-handed, as the data revealed an increase of 0.1% in August, as opposed to an expected 0.2% decline.

Beneath the bonnet, the number excluding autos rose at 0.1%, shy of the estimated 0.2% increase. In addition, the July number was revised higher, while a separate report on industrial production growth also beat expectations.

Taken together, these numbers did little to presage any recessionary fears, casting extra doubt on the scale of the Fed’s decision and adding extra weight to the importance of the accompanying comments which will be scrutinised for clues on the central bank’s current thinking.

In the meantime, the main indices have continued not only to hold their nerve but to continue with some solid progress over the course of this year. The Dow Jones has now added 10.4%, the Nasdaq 17.4% and the S&P500 18.1% and, once the Fed decision is known, attention will begin to switch slowly to the upcoming third quarter reporting season which will begin next month.

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Asian markets were also undecided, helped not only by the late slowdown from Wall Street but also still considering the state of the nation in China. The weekend’s numbers, which pointed to further weakening in new home prices, retail sales and industrial production added to the erosion of confidence in the region from investors, who have of late become notable by their absence.

In Japan, the Nikkei lost most of its early gains, as the yen recovered after an initial bout of weakness against the dollar. The currency volatility has had differing impacts on the economy, with exports rising by 5.6% compared to the previous year and imports up by 2.3%. Both numbers were expected to have comfortably increased by more than 10%, raising some questions around the strength of the economy.

Meanwhile, the Bank of Japan decision on interest rates this Friday is not expected to involve a change, although the meeting could provide some clues for the following months. 

The Bank of England finds itself in a similar boat after the release of inflation figures for August which showed an increase of 2.2%, unchanged from the previous month and bang in line with estimates. Lower fuel costs and restaurant prices were offset by higher air fares, while services inflation rose by 5.6% from 5.2% the previous month, indicating that despite a slowdown in price pressures, the battle with inflation is not quite over.

As such, sterling initially strengthened against the dollar, while the release further confirmed expectations that the central bank will leave its own interest rates unchanged at tomorrow’s meeting. 

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The premier index mirrored the reluctance of traders to get involved as had been the case with most other global markets. The FTSE100 slipped at the open, but nonetheless remains ahead by 7.3% in the year to date.

Early trading activity suggested some switching to more defensive stocks such as Reckitt Benckiser Group (LSE:RKT), BAE Systems (LSE:BA.) and Centrica (LSE:CNA), although the overhang of weak China sentiment dragged on the likes of the mining stocks, Prudential (LSE:PRU) and Burberry Group (LSE:BRBY) bringing the net result to an opening decline. The rest of the session could see muted trading volumes, with the Fed decision being announced after the close of UK play today.