The Overnight Report: More Fed Hikes Coming

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This story features DYNO NOBEL LIMITED, and other companies.
For more info SHARE ANALYSIS: DNL
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

Markets fell after Fed Chair Warsh's press conference, delivering a more hawkish tone post the 25bp hike in the Fed Funds rate.

The Australian market rose yesterday with ASX200 futures pointing to a weak start for Thursday.

Good Morning,

The ASX200 rose on Wednesday by 24 points or 0.28%, led by the Materials sector which rose 1.28%.

The market remains down -4.21% for the month of September.

Dyno Nobel’s ((DNL)) 2026 Investor Day, RBC Capital extract

“We view Dyno’s trading update at its 2026 Investor Day to be positive as the mid-point of the FY26 NPAT range is 4% ahead of market (albeit boosted by lower net interest and tax).

“The company stated it had a clear line of sight to the FY28 EBIT target of $600m (cf market $579m) and the company introduced a new FY31 EBIT target of $800m (cf market $607m), including $30-40m from the two North American defence energetics contracts. 

“The North American business is exceeding expectations with broad growth across all end user segments and distribution channels, the APAC business had a strong second half given robust customer demand and Moranbah debottlenecking, and the company had customer wins in Latam and Africa. The company also ceased its share buyback program to strengthen the balance sheet to fund higher returning opportunities.”

For more details and to stay in touch with which companies are going ex-dividend, check out the FNArena Calendar https://fnarena.com/index.php/financial-news/calendar/

Today’s Big Picture, J.L. Bernstein extract

The Fed Hiked, Then Warsh Moved The Market

Unanimous 12-0, a quarter point, target range now 3.75% to 4%. The market took the first increase since July 2023 in stride for about half an hour.
 

Then Warsh said the move only removed “a dose of accommodation” and that he would be hard pressed to call financial conditions restrictive, which is a polite way of saying he wants them tighter.

Sixteen of eighteen officials penciled in at least one more hike this year, putting the median at 4.1, and Warsh declined to submit a projection of his own for the second meeting running.

Banks took the brunt, with Goldman Sachs, Wells Fargo, Bank of America and Citigroup all logging their worst session since February.

The 10-Year Above 5 For The First Time Since 2007

The yield sat at 4.95% before the decision and settled at 5.003%. The 2-year did more work, moving from 4.602% just before the announcement to 4.712% after.

This is the number that sets mortgages, not the Fed’s.

The 30-year was at 6 in February and is closing in on 7 now. Credit cards and auto loans reprice off the Fed within a billing cycle or two, but housing math tracks the bond market, and the bond market moved today.

Diesel Is The Inflation The Fed Can’t Touch

Diesel hit a record US$6.31 a gallon while crude closed under US$102 and Brent eased. The problem is refining, not barrels, made worse by Ukrainian strikes on Russian energy infrastructure.

Former New York Fed president William Dudley put it best: diesel is acting as though oil were at US$200.
 

Freight is wearing it first, with the Dow transports on a fifth straight weekly decline, the longest run since April 2025. Americans have spent US$108 billion more on fuel since the Iran war began, according to Brown University’s Climate Solutions Lab.

CBA US economics: Fed starts tightening cycle

What did the Fed decide?

The Federal Reserve increased its Funds rate by 25bp to a range of 3.75% to 4.00%. The increase was widely expected by US economists and financial markets. Today’s increase is the first since July 2023. No voters dissented. The unanimity is somewhat surprising given Governor Waller’s recent comments that inflation is expected to ease.

The Fed increased the Funds rate because the economy has strengthened, inflation was not easing fast enough, and it wants to bring inflation down to its 2%/yr target quicker. Despite the hike, the Fed will continue its policy of maintaining ‘ample’ reserves in the banking system.

In his press conference, Chair Warsh restated his concerns over ongoing high inflation. He pointed out too many categories of goods and services had annualised price gains above 3% on a 6-month and 12-month basis. Warsh characterised the increase in the Funds rate as removing ‘a dose of accommodation so that financial and credit conditions would be more consistent with our ultimate objectives’. He indicated more hike(s) ahead: ‘today’s action starts to show we’re serious about this’ (our emphasis).

The Fed’s updated forecasts

The Fed made a number of important tweaks to its economic forecasts that suggest the economic expansion will continue.

Warsh has made it clear he does not like the forecasts. So it is curious that he was the only Fed member to demur from providing forecasts again.

Almost all voters expect the Funds rate to be increased by a further 25bp by the end of 2026 to a range of 4.00% to 4.25%.

The median voter expects to make no change to the Funds rate in 2027, though a significant minority expect another 25bp hike. A single 25bp cut is expected in 2028. By the end of 2029, the Fed expects the Funds rate to reach the upper end of the ‘neutral range’ of 3.0% to 3.6%.

The median estimate for the ‘neutral’ interest rate was increased again by 0.1pp to 3.2%. A faster pace of non-inflationary growth has pushed up the neutral interest rate.

The FOMC upgraded its forecasts for US economic growth over the next two years but not in the long run. The FOMC now expects strong economic growth of 2.3% this year (previously 2.2%), followed by 2.4% (previously 2.3%) and 2.2% (previously 2.2%) in 2027 and 2028, respectively. These are strong rates of growth in an economy close to full employment.

The long-run growth rate remained at 2.0%.

Reflecting strong economic growth, the FOMC’s projections of the unemployment rate were pulled down to 4.1% throughout the forecast horizon from a range of 4.2%-4.3%.

The Fed’s forecasts for core PCE inflation were increased slightly and remain above target throughout the 2026 to 2028 period. Given that inflation has been high since 2021, that is a very long period of above-target inflation. The increase in expected inflation in 2026 is interesting because downward revisions are expected to be released before year end.

Our view

Since March, we have predicted the Federal Reserve will start an interest rate hiking cycle in 2026. With the unemployment rate on a downward path, we expect wage growth to re-accelerate.

Stronger wage growth will add to business costs and consumer inflation and encourage the Fed to tighten monetary policy even further.

Inflation has been above the Fed’s 2%/yr target since 2021. We still expect three (possibly four) 25bp increases in the Funds rate in the current tightening cycle to take the Funds rate to a range of 4.25% to 4.50%.

The US economic outlook is not without risks. The US-Israel-Iran war and a possible collapse of Artificial Intelligence capital spending are the major downside risks to the US economy. However, US retail sales have been resilient despite the war significantly pushing up energy prices. The tax cuts have more than offset the petrol price increase so far. In addition, the hyper-scalers have increased their estimates of AI spend in 2026 and 2027.

The Congressional mid-term elections on 3 November are only seven weeks away. Today’s hike will be politically damaging for President Trump and the Republican Party. Cost of living is the most important issue heading into election day.

An interest rate rise will not only increase cost-of-living pressures but will generate media coverage of President Trump’s failure to rein in inflation.

The interest rate hike will also renew political and media scrutiny of the Iran war, which has contributed to rising prices. Voters already rate Trump’s performance on inflation poorly (chart 5). The betting markets now expect the Republicans will lose their majorities in both the House and the Senate.

President Trump has publicly advocated for lower interest rates as recently as the weekend, and has admonished members of the Fed for not cutting the Funds rate. There is a risk that today’s hike triggers further attacks on Fed board members, including Chair Warsh.

However, in our view, political targeting of the Fed would further erode confidence in its independence, likely increasing long-term interest rates further and exacerbating the political costs for President Trump and the Republicans.

President Trump will likely criticise today’s hike, and the Fed personally, but would stop short of measures that risk alarming the bond market.

Fed Review: First hike from the Fed and two more to come

• The Fed raised rates by 25bp to 3.75%-4.00%. All members voted in favour. This was more hawkish than we expected, as we saw a risk that 2-3 members would favour unchanged rates.
• Warsh repeatedly highlighted the economy’s and labour market’s resilience, allowing the Fed to focus on bringing inflation back to target.
• We think the macro case for further tightening remains strong and maintain our call for 25bp hikes in both December and March.
• The UST curve flattened.

We received the economic projections and ‘dots’, despite uncertainty given Warsh’s preference for less forward guidance. As in June, Warsh did not submit projections himself or comment on whether they would continue from here.

The dots show consensus for one more hike in 2026, in line with our expectation. For 2027, the median signals no further hikes, but 8/18 participants call for one more hike to 4.25%-4.50%, in line with our call.

Growth projections were revised slightly higher to 2.3% in 2026 and 2.4% in 2027, from 2.2% and 2.3%, respectively. Inflation projections were broadly unchanged. Unemployment projections were lowered to 4.1% for both this year and next, from 4.3%.

In the risk assessment, no participants now saw risks tilted towards weaker GDP growth or a weaker labour market anymore.

This allows the Fed to focus fully on inflation risks, which nearly all participants see as skewed to the upside. The short statement was essentially unchanged, with the only minor addition being “domestic spending has been resilient”.

In his speech, Warsh repeatedly highlighted the resilience of the economy and labour market. He also repeated his Jackson Hole remarks that financial conditions do not seem restrictive.

We have long argued that nominal growth would eventually push the Fed towards a tightening bias, which it now also sees unfolding.

We think the macro case for further tightening remains solid.

The 2Y UST yield rose around 13bp after the rate decision and the press conference, with markets now pricing three additional hikes over the coming year. Our call remains 2x25bp in December and March. The UST curve flattened as the 10Y yield rose less.

Corporate news in Australia:

• Reliance Worldwide ((RWC)) agrees to a $4bn takeover by Brookfield at $4.75 per share, with completion expected in 1Q27
• Antipodes agrees to acquire Bennelong Funds Management, adding around $4bn in investments
• Viva Leisure ((VVA)) appoints EY to market its Meridium Global technology and payments platform to prospective buyers
• Austal ((ASB)) board reportedly seeks a whole-company takeover as Hanwha and Wildcat compete for Austal USA with bids of up to US$1.35bn
• First-round bids land for Apax’s $1.5bn sale of Pickles Auctions, with EQT reportedly leading an all-private-equity field
• Bain Capital emerges as the leading bidder for Blackstone’s $1bn-plus Australian clinical trials business Nucleus Network
• Emerald Resources ((EMR)) secures a US$200m acquisition facility from Sprott and Macquarie, scalable to US$400m, to fund future gold acquisitions
• TPG closes its TECA private equity fund at $1.85bn, exceeding its hard-cap target
• MA Financial ((MAF)) has around $670m of problem loans in its $2.3bn real estate credit fund as stalled property projects pressure the portfolio
• Firmus pitches a US$5bn IPO at an implied valuation above US$60bn, while questions are raised over disclosure gaps and data centre claims
• Firmus names Meta as a cornerstone customer for Project Southgate, while prospectus forecasts point to negative free cash flow of -US$2.5bn in 1H27
• Swipejobs advances plans for a potential $2bn IPO, arranging Sydney and Melbourne fund manager meetings following its $16m acquisition of Expert360
• Goodman Group ((GMG)) raises US$455m for its US$2.7bn Hong Kong data centre partnership to fund the HKG10 development

On the calendar today:

-NZ 2Q GDP

-EZ Aug CPI (final)

-EZ ECB’s Lane speaks in Frankfurt

-EZ ECB’s Rehn speaks in London

-UK BoE rate decision

-US Continuing claims

-US Initial jobless claims

-US Sep Phil Fed, Aug Bldg permits (prelim), Housing starts

-A2 MILK COMPANY LIMITED ((A2M)) ex-div 6.71c (100%)

-EDU HOLDINGS LIMITED ((EDU)) ex-div 3.00c (100%)

-EMBELTON LIMITED ((EMB)) ex-div 20.00c (100%)

-FLIGHT CENTRE TRAVEL GROUP LIMITED ((FLT)) ex-div 30.00c (100%)

-LYCOPODIUM LIMITED ((LYL)) ex-div 37.00c (100%)

-SOUTH32 LIMITED ((S32)) ex-div 7.52c (100%)

-SOLARIS AUSTRALIAN EQUITY INCOME PLUS LIMITED ((SET)) ex-div 0.50c (100%)

-SKS TECHNOLOGIES GROUP LIMITED ((SKS)) ex-div 6.50c (100%)

-SUPPLY NETWORK LIMITED ((SNL)) ex-div 44c (100%)

-TOURISM HOLDINGS LIMITED ((THL)) ex-div 6.25c (8%)

-WEST AFRICAN RESOURCES LIMITED ((WAF)) ex-div 20.00c

-WAM INCOME MAXIMISER LIMITED ((WMX)) ex-div 0.65c (100%)

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

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