Markets anticipate more hawkish Fed ahead of annual central banks meeting

The main European indices are expected to stick in narrow ranges Wednesday, with global investors becoming more concerned that rising energy prices and central banks raising rates will cause the global economy to slide into a prolonged recession as European gas prices continue to trade at record highs. At the same time, oil prices soared roughly 4% Tuesday in the wake of tight US supply and speculation of further cuts from OPEC+. 

Concerns about a power shortage in China and fears of a hawkish Federal Reserve led Asian currencies to retrench on Wednesday after the yuan fell closer to a two-year low against the dollar. 

Reports of potential power cuts in Shanghai weighed on Asian markets Wednesday as investors feared that there would be further headwinds to manufacturing activity after a series of COVID lockdowns elsewhere in China this year. 

Following disappointing US data this week, investors anticipate the Federal Reserve will double down on its commitment to crushing inflation. In the upcoming annual central bank meeting, Jerome Powell is expected to deliver a strong message about tightening and dash any hopes of a rate cut next year on Friday.

Raising longer-dated yields without causing panic in the markets would be necessary for the Fed to achieve its desired outcome. One way to accomplish that would be to push back against speculation for rate cuts next year, stressing that rates will have to remain elevated for a prolonged period to bring down inflation, regardless of whether the economy slows down.

With the rest of the world looking even gloomier than the US, it's tough to call for a trend reversal in the US dollar even after a recent pause in its uptrend. The escalating energy crisis in Europe has crippled heavy industry and consumers, almost ensuring a brutal recession that the European Central Bank cannot deal with due to inflationary implications.

Events of today

As we look ahead to the start of tomorrow's Jackson Hole Symposium, it appears that today will be a quiet day regarding the economic data, with US durable goods orders and pending home sales for July. As for durable goods, orders are expected to rise 0.2%, down from 0.4% in June. Pending home sales are expected to slow by only 4.0% after a dramatic decline of 8.6% in June.