Market Review 21st September 2026
Everything you need to know, Simplified!
Warsh walks the walk: from tough talk to tough action
Summary
Central banks turned more hawkish: The US Federal Reserve (Fed) raised interest rates by 25 basis points (bps) and signalled further hikes, while the Bank of England held its rate but saw three of its Monetary Policy Committee members back an immediate increase; the Bank of Japan also raised rates, though a divided vote weakened the yen
Geopolitical tensions escalated: Ukraine launched its largest-ever drone attack on Moscow, while Russia struck targets near the Polish border, raising concerns about broader regional and NATO-related risks
Markets navigated artificial intelligence (AI) and policy uncertainty: AI safety warnings briefly hit chip stocks, but sentiment recovered as investors looked past the concerns, while higher rate expectations boosted US Treasury yields (government bonds) and the dollar.
Market Review
Warsh walks the walk
As the Danish proverb goes ‘It’s hard to make predictions, especially when they’re about the future’ – this is one of the reasons why Fed Chairman Kevin Warsh refrains from providing forward guidance on future interest rate policy decisions.
The other is that reading the market is an important aspect of the conduct of monetary policy, and to influence the market through the provision of guidance obscures the very signals they are trying to read. This has not been a challenge in recent weeks; the market has demanded this rate hike and if the Fed had not delivered the weakness across the US bond market would have become even more acute.
Since taking the helm at the Fed Warsh had talked tough but done little and investors were beginning to question the Fed’s credibility in the deliverance of price stability. The bond market demanded action and the Fed delivered with a unanimous 12-0 vote.
In our view, Warsh is fundamentally a price stability pragmatist and questions over his credibility are unfounded. His commitment to price stability is sincere and this hike is necessary. During the press conference, Warsh said he would be "hard pressed to describe financial conditions as restrictive", signalling that further rate rises remain possible. While Warsh may not be in the forward guidance business, his reaction function here is clear, in making these statements he leaves open the door for further interest rate increases. The FOMC concur with the dot plot showing eight members expecting a second hike this year and a third in 2027 while four see a further two hikes this year. The median expectation across the FOMC is for one further hike this year and none in 2027 – on this basis the Fed remains behind the market which has a more hawkish expectation.
On inflation we have held the view for some time that pressures are primarily coming from two areas: energy and AI. In this regard there is no better argument than August’s data on import prices. Import prices rose 7.0% year-on-year in August, the fastest pace since August 2022. Petroleum import prices rose 27.3%. Import prices from the newly industrialised Asian countries surged 12.6%, consistent with the intense demand we are seeing for the semiconductors, servers, memory and other electronics required for the AI build-out. The AI build out continues to put upward pressure on prices – this is likely to continue until AI adoption produces enough productivity enhancements to offset the demand/supply imbalance – while this could happen, like a leprechaun's gold, such productivity gains seem to be getting further away the closer we get.
The week ahead
S&P Global PMI survey
The September flash PMI releases due Wednesday are the standout data point of the week, covering the US, eurozone, UK, France, Germany and Japan. Consensus expectations are broadly constructive, though the key question is whether elevated energy costs are beginning to weigh on activity.
Middle East conflict
Brent crude remains elevated at over US$100 per barrel (+68% year-to-date) as the US-Iran conflict keeps Strait of Hormuz transit risk in focus. Investors will be watching for any escalation in Houthi attacks on Gulf infrastructure or, conversely, diplomatic progress at the UN General Assembly (where Trump is meeting Gulf leaders this week).
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