Attention turns to the conclusion of the FOMC

The Day So Far

Some decent earnings reports from Europe this morning helped lift sentiment at the European open, as Total, Barclays and Peugeot beat estimates, to go with some strong earnings from the US yesterday (Ford, Pfizer and UPS all beating expectations). For Peugeot, it represents the first H1 profit since 2011, helped no doubt by the weaker euro and a good reminder for investors that there is good earnings growth in Europe to go with the added tailwind of ECB QE. This, coupled with a strong close to the Asian session, helped underpin the broad-based equity strength today.

Crude oil has traded on the cusp of the $48 handle as it looks to recover some poise after the recent sell-off. Prices are likely to rebound here, stuck in the ‘new normal’ range from $45-$62 as private producers scramble to cut capex and adapt to lower prices and OPEC sit tight hoping to wait and the storm and grab market share in the downturn. We discussed yesterday how the disinflationary impact of falling crude has likely led the Fed to push back its timing for a first hike, and now with crude looking to push higher once again, T notes and the Bund should come under pressure as investors price in higher energy-induced inflation in future.

The Afternoon View

Attention today turns to the conclusion of the FOMC meeting tonight followed by a statement. The committee are likely to adopt a cautious, data dependent view and to leave plenty of flexibility for the first hike at any one of the next three meetings. It will be interesting to look whether their inflation outlook has changed after recent slide in oil prices and also yesterday’s weak consumer confidence survey, the lower reading since September 2014. This, combined with the Chinese stock market turbulence, leave Yellen & co. with much to ponder.

We maintain our short bias for T notes ahead of the meeting, albeit with modest profit expectations. Probably the hardest to call today is crude, but we are sticking with our bullish bias whilst acknowledging that trading the DoE release has become very unpredictable indeed. API inventories released last night showed a drawdown of 1.9 million barrels.