We’re seeing some trepidation in markets on Wednesday ahead of the Federal Reserve meeting later in the session and the jobs report on Friday.
The Fed meeting should be quite straightforward, with policymakers having come out in force to soothe market fears of another rate hike from the central bank, claiming recent moves in bond markets may have done some of the job for them.
This followed previous commentary that strongly hinted that another rate hike is likely, aligning with the dot plot from the September meeting, while warning that rates will stay high for a long time.
With no new forecasts due today, it’s all about the tone from policymakers and Chair Jerome Powell, and with bond yields still near their recent highs, I see little chance of another shift.
I expect the Fed Funds Rate will be left unchanged at 5.25-5.5% and the corresponding commentary will be almost a carbon copy of recent statements. This isn’t the time to tweak as the economic data hasn’t yet justified it either way, particularly to policymakers who are not going to pivot until they’re absolutely certain they’ve defeated inflation.
Manufacturing PMIs remain weak but signs of promise in China
We’ve had a selection of manufacturing PMIs this morning and, as we’ve come to expect, they weren’t particularly surprising. The Caixin survey in China dipped back into contraction territory, in line with what we saw from the official reading yesterday, but there is some optimism that circumstances are gradually improving and will continue to do so, despite the obvious challenges.
The UK manufacturing PMI only marginally improved and less than what was expected. It remains deep into contraction territory and isn’t expected to significantly improve any time soon. While far from ideal, it is only a small portion of the UK economy, with the services sector far more important to how it performs, and while that’s also in contraction, it is so to a much lesser extent.
Easing geopolitical risk sees Oil further pare gains
Oil prices are rebounding today but broadly speaking we’re continuing to see them drift back to levels not seen since the Hamas attack on Israel. The geopolitical risk-premium has gradually faded, with traders seemingly more hopeful that it isn’t going to spread into a wider conflict and disrupt oil flows.
The economy also remains a concern, especially considering what we’re seeing with bond yields and the prospect of interest rates remaining higher for longer. I’m not convinced rates will remain at or near the peak that long but with policymakers around the world insisting they will, traders are increasingly concerned about the economic cost.
Gold eases ahead of the Fed decision
Gold has pulled back a little this week but remains not far from recent highs. It’s even broken $2,000 on a number of occasions in the recent sessions, albeit not significantly or for long. The risk environment hasn’t improved in any significant way and yields are not far from the highs which probably explains why gold hasn’t progressed either way in any significant manner.
The dollar has remained strong and will continue to be a headwind, although in this environment perhaps not to the extent is has in the past. The Fed could spring a surprise later today, although I imagine we may have to wait for the jobs numbers on Friday which will be key as a result of the incredible resilience in the labour market.
