The Fed will not hike rates tonight. So in the absence of a press conference or any “dot plots” (those will happen next in the December meeting), what could move the markets on tonight’s announcement of monetary policy. All eyes will be on the wording of the FOMC statement which could give a lean (either dovish or hawkish) for the next meeting. Market sentiment will be impacted and volatility could become elevated. Despite there being no expectation of any move tonight, the FOMC statement is still set to drive markets in the near term. I look at how the potential scenarios could play out this evening for key markets.
There is almost no chance of a Fed rate hike this evening. According to CME FedWatch, the Fed Funds futures are pricing in a 6% probability of a rate hike tonight. There is a whole raft of reasons why the Fed will not hike. Here are just a few:
- US economic data continues to tail off (the lack of inflation and solid earnings growth are the main factors here)
- The global conditions have not improved enough from the September meeting to the extent at which the committee (which is naturally dovish) would deem adequate for a hike.
- There is no press conference or economic projections this month – despite FOMC members suggesting the meeting is “live”, there is no way that the committee would take such a momentous decision without the capacity for a press conference to discuss why the decision has been made.
I have been talking about my expectation for a December hike for months, however the deterioration in the US economic data and slowdown in corporate revenues that have been seen in recent months are really questioning my stance. The market is still forecasting March as being the first month likely (with a 57% chance), see the below table from CME FedWatch.
So, why all the fuss about the FOMC tonight? Well they have a tendency to tweak the wording of the statement and focus will surely be on exactly how they word the “global economic and financial developments”. The focus effectively on the China slowdown (which admittedly is impacting across the US exporting corporates) was seen as effectively being the main reason behind why the Fed did not hike rates in September. Did this give the FOMC a “third mandate” that it could not control?
However the volatility in financial markets is significantly lower now, than it was at the time of the September meeting six weeks ago, whilst the People’s Bank of China has also just cut rates for a sixth time last week. Quite how these factors drive a change in the statement will be really interesting. A hawkish bias to the statement would talk about these factors reflecting improvement.
A dovish statement would keep the concerns over the international developments but also keep the below section the same. However, the most recent data they have to go on includes headline Non-farm Payrolls dropping, average hourly earnings stagnant and inflation still failing to improve.
So how would the two scenarios impact on markets?
Any hawkish hint in the statement would be a surprise (considering the market is now pricing in a March hike). This would therefore be:
- Dollar positive – helping to drive EUR/USD decisively below $1.1000 and re-open the $1.0810 support. It would also put downside pressure on Cable towards $1.5200 and upside pressure on Dollar/Yen towards the range resistance 121.50/121.70.
- Gold would also come under pressure to the downside once more. There could be a breach of the $1156 support (therefore from my perspective aborting the positive medium term outlook) and perhaps even result in a move towards a test of the reaction low at $1136.50 (below which would turn the outlook negative again).
- Equity markets would also come under downside pressure. The reaction on the markets recently would suggest that good news is bad still and this could pull the S&P 500 back to test the support band 2020/2040.
However, the flip side of this would be the FOMC remaining dovish (my preferred scenario). Thus would also impact key markets:
- The dollar would be volatile with perhaps some sort of initial spike against the dollar, however when the dust settles, it would be seen as much of the same. EUR/USD could spike towards $1.1100 but ultimately probably settle back into the $1.1050/$1.1100 pivot band. GBP/USD may be able to then generate some support above the key near term higher low at 1.5200 and engage a rally. Dollar/Yen would probably pull back towards the 119.60 near to medium term pivot within the trading range – and then settle in for the Bank of Japan on Friday.
- The Gold price would be able to continue its technical improvement that has been underway in the past couple of days. This might include a push on towards the resistance around $1180 near term.
- Equity markets would take it as a mild positive as it would continue to look as though a hike in December was increasingly unlikely.