The subdued start to the week for many markets has continued this morning with no major moves in stock markets or the FX space. Investors are likely biding their time ahead of this evening’s Fed rate decision where the US central bank is widely expected to hike rates for the 8th time in the current cycle. One market that has seen some volatility in recent days is Brent Oil with crude hitting a 4-year high yesterday and in light of that, this afternoon’s inventory data from the US will be viewed even more keenly than usual.
Fed language and dot-plot in focus
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Open account Try demo Download mobile app Download mobile appGiven that markets have already widely discounted another 25 basis point increase in the Fed funds rate, the main action from this evening's event will likely come from elsewhere. An increase to 2.25% would see the base rate move above inflation (as measured by core PCE price index) and a such real rates would turn positive. This would mark the first time in a decade that the real interest rate is in positive territory and as such one of the main takeaways from the release will be whether the bank chooses to drop the word “accommodative”, that has been a mainstay in the statement for several years when describing monetary policy.
Another aspect that is sure to be closely scrutinised is the dot plot, with 1 additional hike (after today) expected this year and 3 in 2019 according to the previous release in June. In addition the 2020 and long term dots could offer some insight and although Fed chair Powell has stated the diminished importance of their signalling power - due to their distance from the present - it is perhaps telling that the median dots for next year are above the long term forecasts. Any movement higher or lower could be taken as a hawkish or dovish signal and could well provide the main market moving news. Finally, investors will be looking out for any remarks related to the recent turbulence in Emerging Markets and also Quantitative Tightening (QT) - the process whereby the Fed are presently reducing the size of their balance sheet and unwinding Quantitative Easing (QE). Hints of an increase in the pace of this process would boost the buck and US yields, whereas suggestions of a cautious approach could do the opposite.
Attention turns to US inventories
A strong move higher in the oil price on Monday has brought increased attention to the market, with Brent Crude hitting its highest level since 2014 after OPEC+ refrained from increasing their production despite the imminent decline in Iranian supply and pressure from US president Trump. The weekly US crude inventory figures from the EIA often cause large moves in the oil price and given the recent rise, this afternoon’s data could gain even more importance. The private API inventory figures, released last night, showed a weekly increase of 2.9M barrels and a similar size rise today could see the recent gains pared in the near term. However, with the EIA release showing 5 consecutive weekly drawdowns, a 6th would provide more fuel for Oil bulls and could provide the catalyst for further gains. The longer term picture for this market is more likely to be driven by OPEC+ policy and the impact of US sanctions on Iranian production but in the short term price will no doubt be sensitive to the latest inventory releases.
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