The market is absolutely, positively certain that the FOMC will increase the FED funds rate by its Greenspanian 25 basis points, although there are some Wall Street pundits suggesting the possibility of a 50 basis point hike because of the recent return of robust data. I have suggested that the FED would have done well by raising rates in a more aggressive fashion. But with the November elections within polling range, Trump’s trade policy causing angst in the emerging markets and several of U.S. trading partners, it’s looking very unlikely (less than 5 percent chance).
The key elements of the FOMC will be revealed during Chairman Jerome Powell’s press conference which begins at 1:30 p.m. CDT. Powell has been straight forward when conveying FED intentions so be patient and listen to any concerns the FOMC may have about a speedier pace of inflation stemming from the questionable fiscal stimulus and the tax cut.
But, it will be important to listen for Powell’s concerns over global trade tensions and if the FED sees the tariff impact as transitory. The most important market reactions to watch for tomorrow is how the DOLLAR, precious metals and other commodities respond to a well-telegraphed rate hike. The GOLD has held up well in the face of rising rates all along the curve. Also, the 10-YEAR YIELD holding north of 3 percent has pushed French and German yields 10 basis points higher, but have not impacted the precious metals or energy markets.The important indicator will be if the metals can take out recent highs after a rate increase.
The DOLLAR has been weakening against the EURO, Swiss and pound, as well as the commodity-based currencies. If the FOMC‘s language — and Powell — is hawkish and the DOLLAR fails to rally it may signal a shift in market sentiment, regardless of the U.S. equity market strength and Trump’s tariff talk. Trump is meeting with Japanese Prime Minister Abe so listen for some aggressive talk from president Trump in an effort to get some concessions from the Japanese on U.S. autos and agricultural products. The YEN has been the weakest of the major currencies versus the DOLLAR as the EUR/YEN has shown renewed strength. Who is Trump to raise the issue of a weak yen fostering Japanese exports?
There are many things to watch as indicators of changing market sentiment. Be prepared with your technical levels for risk. The U.S. dollar has been a favorite long position for global investors but has not be rewarding. Failure of a rate increase to buoy the DOLLAR will be a problem for long-held dollar positions. Be patient until low risk levels can be traded.
Tags: Fed, FOMC, Gold, Japanese yen, rate hike, U.S. Dollar
September 26, 2018 at 1:36 am |
This blog had some time ago discussed the conundrum of a flattening yield curve in the face of a robust economy.
Here we are looking at another one. With many emerging market currencies plunging, with an economy that is outpacing the rest of the world, with new and anticipated tariffs in existence meant to lower our trade deficits, why isn’t the dollar making new highs along with the Dow? What piece of the puzzle are we missing? Is the world’s reserve currency that is looking at annual budget deficits in the trillion dollar category becoming suspect in maintaining its exclusive status since Bretton Woods a lifetime away?
Any good suggestions?
September 26, 2018 at 6:50 am |
Asherz–great question .It may well relate to the statement by German Finance Minister Heiko Maas’s concern about the worlds desire to find an alternative to the dollar because the U.S. can exert its WILL by imposing sanctions by using control of the SWIFT transfer system
September 26, 2018 at 8:00 am |
Yra— An Axis of Germany, China, Russia, Turkey and other targets of the Trump policy of exerting the US financial might, by establishing an alternative to SWIFT, the Battle of the Titans is beginning to take shape. Will Frankfurt and Shanghaib be able to compete with Washington and London?
This war will not be fought in the trenches but on the wire systems of the world’s banks and trading relationships. An unprecedented era from which a military confrontation will be difficult to avoid.
September 26, 2018 at 9:25 am |
From Yra—I issue this insight about today’s meeting—-watch how the vote plays out to see if the newly born HAWKS—Lael Brainard and John Williams vote for a 50 basis point hike in an effort to raise the hawkish profile of this FED—Brainard’s newly found inflation fears may be more politics as some on the FED act to impact the elections—2018 and 2020 –remember that Brainard trumpeted her contributions to Democratic candidates in the 2016 elections—be not naive as to how political the FED can be—see the history of Arthur Burns and Johnson’s berating/beating of Chair Martin
October 8, 2018 at 7:00 am |
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