What to Expect from the Fed Today?

Wednesday November 2: Five things the markets are talking about

Current market consensus believes the Fed will leave short-term interest rates unchanged later today (2pm EDT), but remain on track to raise them at next months meeting, Dec. 14.

With the Fed’s Yellen not scheduled to hold a press conference, and with U.S officials not releasing any new economic projections, only leaves the market to sift through today’s statement for clues on next steps.

Twelve months ago the Fed’s “language” suggested a rate increase might be “appropriate” at the next meeting. Sure enough, officials held their word and raised +25bps in Dec. 2015. Can we expect a similar signal today? Not necessarily – a number of Fed officials have grown rather wary of signalling a particular date. Expectations for a hike a year ago was much lower than today’s current odds (+78% fed funds), hence why a signal was required, so at best, expect a subtle signal.

In September, Fed officials indicated that the case for a rate increase had strengthened, but they wanted to wait “for the time being” for “further evidence” of a strengthening U.S economy before moving again. An adjustment to their current thinking could be reflected in slight tweaks to that particular comment/sentence/line.

Any improvements to the Fed’s assessment of the economy would also be considered as a subtle signal for a hike next month. Last go around, the Fed indicated that the U.S labor market had continued to strengthen and that economic growth had picked up from H1. Data since then certainly continues that trend.

In December 2015, the Fed’s statement indicated that risks to their economic outlook were “balanced.” Last September they were “roughly balanced.” If today’s statement indicates a “balanced” language release, this may suggest that in December we could have lift off.

In September the vote was 7-3 – Mester, George and Rosengren all dissented – However, Rosengren has already indicated that he is comfortable waiting until next month!

1. Global stocks see red on political polls

U.S. stocks and bonds have kicked off this month with declines as investors broadly retreat from risk.

Global shares have dropped to multi-week lows overnight, as a new poll showing Trump leading the U.S. presidential race is spooking investors – an ABC News/Washington Post tracking poll showed with a +1pt advantage over Clinton for the first time, leading +46% to +45%.

In Asia, Japan’s Nikkei Stock Average was down -1.8%, Hong’s Kong’s Hang Seng fell -1.4% while Korea’s Kospi was down -1.4%. In Australia, S&P/ASX traded -1.2% lower.

In Europe, the Stoxx 600 index has opened lower; banking and financial stocks are leading the losses across the board, as participants remain cautious amid fears over a potential Republican victory. The FTSE 100 is currently seeing some early pressure from both financial stocks and energy names.

Futures on the S&P 500 Index have fallen -0.3% ahead of today’s Fed decision.

Indices: Stoxx50 -0.6% at 3,000, FTSE -0.5% at 6,884, DAX -0.8% at 10,442, CAC-40 -0.7% at 4,441, IBEX-35 -1.3% at 8,926, FTSE MIB -1.1% at 16,712, SMI -0.4% at 7,733, S&P 500 Futures -0.3%

2. Crude prices finds no love

Crude oil prices are falling for a fourth consecutive day after industry data again showed U.S inventories have increased.

API data, released yesterday afternoon, indicated that U.S crude stockpiles have risen by +9.3m barrels in the week to Oct. 28, more than nine times the amount expected by the street.

Brent crude Jan futures are down -32c at +$47.82, atop of its one-month low print of $47.72 in yesterday’s session. U.S. West Texas Intermediate has had fallen -42c, or -0.9%, to +$46.25.

Note, prices had already been under pressure ahead of the report, as market hopes have faded that oil producers, OPEC and non-OPEC members, would settle their differences and agree to output cuts in Vienna on Nov. 30.

The market will now take its next cue from today’s U.S. government’s Energy Information Administration release at 10:30am EDT.

In commodities, gold has rallied +0.5% to $1,296.55, after surging +1.0% yesterday now that the market in back trading in ‘risk-off’ mode on Trump poll numbers.

3. U.S yields fall from five-month highs

At one point Tuesday U.S 10-year’s yielded a high of +1.877%, stopping shy of last week’s five-month high, supported by U.S’s ISM’s manufacturing PMI beating expectations and remaining in expansion territory (51.9).

Nevertheless, despite all the details of the report being encouraging, safe-haven demand has global sovereign benchmark yields falling across most of the developed world.

The yields on the U.S 10’s have fallen to +1.808%, while 10-year German bunds yield +0.136%.

Currently, there are a few G20 exceptions, New Zealand’s 10-year bond yield have rallied overnight to +2.77%. Despite the market pricing in an RBNZ rate cut to a record-low of +1.75% at next week policy meeting, futures prices have cut strongly the odd’s for any further cuts next year to +11%, from +36% a few weeks ago.

4. Peso: The Trump barometer

The Mexican peso or MXN is highly sensitive to developments in the U.S. presidential race and has weakened to $19.32 overnight; it’s lowest print outright since October 7.

The peso is deemed highly correlated to the election, as Trump has campaigned on a commitment to renegotiate trade deals, including NAFTA, which he has described as the worst deal the U.S. has ever signed or was that TPP or both!

With opinion polls showing an increasing risk of victory for Trump on Nov. 8 is having a material impact on the USD and safe-haven currency pairs. The CHF has rallied to a four-month high against the EUR (€1.0755), while the ‘mighty’ dollar is broadly lower – risk aversion demand is helping JPY (¥103.49) and EUR (€1.1083).

5. Alabama gas pipeline to firm up U.S inflation

Monday’s pipeline explosion in Alabama will have a massive impact on U.S pump prices. Investors should expect these rising pump prices to help the Fed reach its +2% inflation target sooner rather than later.

Analysts are forecasting that retail gasoline prices are sure to follow current futures prices higher, at least until the pipeline is reopened.

U.S annual inflation hit a nearly two-year high print in September, led by gasoline prices, which are now up year-over-year for the first time in nearly three-years.

On Monday, the Dallas Fed indicated that underlying U.S inflation rates are “coming alive.” This will go along way in justifying the Fed’s next move!

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