Sun, Dec 04, 2022 @ 07:38 GMT

All Eyes on Fed

Risk appetite is poor into today’s Federal Reserve (Fed) decision, and after Riksbank shocked the market with a 100bp hike yesterday. That was the most aggressive rate move in Sweden in three decades. The Swedish policymakers said that ‘inflation is too high’, where it’s going is difficult to assess, and further steps will be taken to bring it back to the 2% target level. The announcement couldn’t get the SEK appreciate against the US dollar; it rather got many investors more uncomfortable, and worried that the Fed would do the same today: deliver a 100bp hike.

But it may not

Activity on Fed funds futures still assesses less than 20% probability for a 100bp hike from the Fed today. And more importantly, the FOMC doesn’t have a modern history of making abrupt moves, except for dovish moves which have a sudden positive impact on the markets, like the ones we saw during the pandemic. The ‘whatever it takes’ is clearly easier when pushing money in the system.

So, the expectation is that the Fed will deliver a 75bp hike today. We could see a relief rally in equity and bond markets, if, of course, the dot plot doesn’t show projections going above market expectations.

Tense, tense

We certainly have a couple of tense hours before the Fed decision falls. The S&P500 fell another 1.13% yesterday, to around 3855 mark. Nasdaq lost less than a percent, as the US 2-year yield remained flat a touch below 4%.

One good news in all this is that inflation in Canada eased more than expected last month, both the headline and the core inflation softened. But the data obviously revived the BoC doves and sent the Loonie lower against a broadly stronger US dollar. The USDCAD spiked to 1.3375 as a result. And cheaper oil didn’t help.

Crude oil fell below $85 per barrel, as the US announced it would sell 10 million barrels more from the Strategic Reserves for delivery in November to help keeping a negative pressure on oil prices, after the 180 million barrel release comes to an end in October AND before midterm elections – as the falling gasoline prices in the US have been so benefic to Joe Biden’s popularity in the recent polls.

Else, the EURUSD consolidates below parity, as Cable slipped below 1.14 mark. Christine Lagarde said that the European Central Bank (ECB) may need to ‘raise interest rates to a level that restricts economic growth in order to cool demand and combat unacceptably high inflation’, but in vain. There is no seat left for the ECB hawks, before the Fed hawks decide to make some space.

Across the Channel, the Bank of England (BoE) is expected to raise its policy rate by 50bp tomorrow, as the energy package is expected to have a cooling effect on inflation, which means that the BoE could afford to do less on the rate front.

Good thing about dovish expectations is that there is space for some hawkishness, but would the BoE dare going against Liz Truss and declare war to her?

Gold remains under a decent selling pressure due to strong dollar and rising US yields, that increase the opportunity cost of holding the non-interest-bearing gold. A post-FOMC rally should also benefit to gold, yet be reminded that if risk appetite improves, there is a chance that investors rush toward higher risk, but better yielding assets, such as equities.

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