The Day So Far
The minutes from the July FOMC meeting cast doubt on whether the Fed will raise rates in the September meeting, just 21 trading days away now. Firstly, they suggested that the consistent jobs gains seen this year still haven’t led to significant wage growth; and secondly, ‘the incoming inflation had not yet provided grounds for reasonable confidence that inflation would move back to 2% over the medium term’ and hadn’t yet met their criteria for firming up monetary policy. The fall in energy prices and commodities in general is definitely weighing on their decision-making, as is the deteriorating macroeconomic picture, and it now remains highly unlikely the Fed will hike until December at the earliest. Predictably, t notes rallied strongly on the news and have continued higher this morning, moving above the 128 handle and dragging the Bund higher too to some 20 ticks shy of the 156 handle.
Crude has continued lower today, the surprise build in supply revealed by the DoE yesterday acting as a fresh catalyst for sellers to force WTI below $41 a barrel, just a 1% down move from breaching $40. It hasn’t seen any respite from the weak dollar seen versus other major currencies in the wake of the FOMC minutes, reflecting the ongoing weak fundamentals for oil at this point.
The Afternoon View
We are short across the board for this afternoon’s session. Equities remain on the back foot, the idea that the Fed will probably not raise rates in September not enough to alter the bearish sentiment in equities, particularly European equities where a combination of euro strength and the fear of snap elections in Greece next month are causing real concern for investors. In such a weak environment, we maintain our short bias for crude and a test of $40 handle looks inevitable in the coming days. Probably the hardest call for today is t notes, understandably getting a decent lift from the dovish FOMC minutes, but looking overbought and vulnerable to a pullback, particularly if crude bounces from $40.
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