Fed Recap – Stocks rise and dollar tanks as rates are going nowhere anytime soon and after Powell’s dovish presser, Oil slumps, Gold’s back

The Federal Reserve’s last policy meeting of the year for the most part went as expected with a slightly dovish tone after policymakers kept rates unchanged and forecasted no changes throughout 2020.  The Fed’s dot plots show a strong consensus for rates to remain on hold and for the next move to be a rate hike in 2021.  The Inflation outlook saw softness in 2020 before rising back towards 2.0% over the next couple years.  No surprises came out of the last policy meeting of the year. 

US stocks climbed higher and the dollar initially strengthened after the Fed statement optimistic tone highlighted the removal of the reference to uncertainties around the outlook.  The dollar’s gains were however short-lived as the knee-jerk reaction to the easing of downside risks will not likely see any strong catalysts for further optimism on the trade front and on muted inflation pressures.    

Fed Chair Powell delivered a very clear message that they are hold and that economy seems to remain in a very good place.  For Powell, he would need to see rate hikes, he would need to see a significant move up with inflation, something it seems we are nowhere near.  The dollar extended its declines following Powell’s comment on what it would take for him to raise rates. 

Regarding the repo markets, Powell kept the door open to purchase coupons aka QE4, but highlighted the current plan to purchase bills seems to be working.  Powell added the Fed is considering tweaks to help ease repo funding market, possibly delaying any announcement of a standing repo facility. 

The Fed is done with their mid-cycle adjustment and next move will likely be more rate cuts as US resilience will not be able to overcome the weakness with the global economy, deflationary pressures, and lingering risks to the outlook. 

Oil

Oil prices saw little reaction to the Fed’s last policy decision of the year and continued to drop from 12-week highs mainly off the EIA weekly inventory report that showed a surprise build with stockpiles.    The overall report was very bearish as demand fell off a cliff and total stockpiles climbed to the highest level in seven months.  Today’s initial selloff eliminated a good part of the Saudis surprise cut announcement from last week.  With a steady decline with rigs, its no surprise US crude production fell 100K from the record highs to 12.8m bpd.   Refinery utilization also came down 1.3ppt, a miss of the expected rise of 0.7ppt, implying demand could be decreasing.

Oil remains vulnerable despite the OPEC + promise for deeper cuts as today’s oil report implies domestic demand is dwindling, the overall global demand outlook remains uncertain and with the backdrop that the first half of the year will also see stronger oil output from Norway, Brazil and Guyana.

Gold

Gold prices rose after the Fed’s final policy meeting of the year came with a dovish tone and signaled rates are on hold for the foreseeable future.  If we continue to see dollar weakness for the rest of the year, we could see gold make a run back toward the $1,500 an ounce level.     

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