Market Event

FOMC Meeting Preview: Hike not a foregone conclusion?

Michael Baker, Tuesday, 17 September 2019

FOMC SEP

Earlier in the month we heard from Federal Reserve chair Jerome H. Powell as he explained that the central bank is committed to keeping the United States economic expansion on track. In July we saw the first rate cut since 16 December 2008, and estimates are that there is likely to be another cut in tomorrow’s FOMC announcement.

The CME fedwatch tool currently has a chance of a rate cut at 65.8%, which has been dropping throughout the month. Economic data and events have not painted a pretty picture of the economy lately - manufacturing activity contracted in August and global growth is slowing. Trade tensions between the US and China have cooled but have known to escalate quickly.

The FOMC is split on the issue of rates. Hawks have pointed towards solid GDP data whilst doves are cautious of the risky economic outlook. President Trump and many stock analysts have weighed in to the discussion, heavily backing further cuts to keep the US competitive.

If the decision was not already difficult a badly timed escalation in the Middle East has caused oil prices to jump by their biggest amount in 30 years. Higher oil prices tend to be followed by higher inflation. To control higher inflation, central banks look to hike rates and not cut.

So what are we going to see tomorrow? Money markets are expecting a 25 bps cut, which is what we got in July and it’s wise to view the price action from the charts over that announcement. Initial moves in the market back then were ones of disappointment that the FED had not eased more aggressively and failed to pre-commit to further cuts.

Gold

Gold trading around the $1,500 an ounce mark. Long term trend channel still valid, looking for a catalyst to begin the push back down to the lower trend support line. Disappointment tonight may begin to set us in motion for that move south.

SP 500

Pointing towards a down move after breaking out of the rising wedge. It was quite steep but looked like it was pushing towards the upper trend channel and then a possible rally if we didn’t slow down. Market may look to 2970 and from there if we still continue to drop then it’s the much bigger zone of 2950/40 to focus on.

FOMC SP500

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