The Federal Divided Open Market Committee : Th-th-th-that's all folks!" or is it?


The Fed's central message is it's done with rate cuts. However, the truth is it's highly divided while tasked with balancing the trade war malaise against healthy consumer and jobs sectors.

However, the unchanged from here guidance is all but a grand illusion as data dependency is the real messaging. Eventually, the tariff damage will cause data to deteriorate and the Fed to cut more.

Beyond today's 0.25% cut, there is no consensus on the FOMC. However, fed funds are moving lower. That's the lesson obscured in the boggy FOMC doublespeak. 

The Fed is beholden to steer clear of politics and play as straight as an arrow and likely wanted to reinforce that point in their central messaging to the dovish President Trump. 

However, the real guidance is data-dependency and everything in the Fed's crystal ballpoints to a further weakening of the U.S. economy because of trade and tariffs. For the markets then, though the knee-jerk reaction to what appeared to be on the surface a hawkish Fed was understandable, it was quickly digested as wrong. 

The next move in Fed funds will be a cut – most likely December. Moreover, as the U.S. economy slows further through 2020 as tariffs bite the consumer sector, the Fed could become increasingly itchy, so if it holds to its expansionary mantra, it may keep cutting for some time. 

With very few shifts in languages or nuance, the FOMC was a mild disappointment to those expecting a more dovish waxing as between the ECB and Fed; central banks are giving the appearance of walking back from the cliff edge of the rate cut abyss while only meeting the markets minimums wants.

The supportive U.S. economic data gave the Fed "a perfect opportunity to walk down some of the market's dovish ambitions while holding back a policy deluge for rainier days. After all, it is about the data, isn't it?

Not surprising rates markets reacted to the event in a volatile fashion, but this was driven more by the unwinds of overly dovish bets rather than a shift in the overall rates market structure. The Fed message today, after all, is still consistent with Powell's Jackson Hole speech where the outlook remained positive against a backdrop of trade uncertainty and downside risks. Also, the net bottom line for them to maintain a gradual easing approach rather than either become more aggressive or even pausing for now.

10y yield and front-end pricing are directly back to where things were before the repo flare-up got the market tongues wagging.

Amid a funding crunch in the repo market, the Fed also cut interest on excess reserves ( IOER) which should provide enough grease and duct tape to  bridge the funding squeeze brought on by the Fed balance sheet unwind , the colossal amount paper floating in September and of course as primary dealer is burdened to take on more supply . 

 

 Markets

U.S. stocks are trading higher on the Fed rate cut and as investors take comfort as a sense of normalcy returns to the oil markets after Saudi Arabia has reported most of its oil output will return to normal production levels in weeks.

Investors are likely confused with the Feds messaging, and the ultimate problem with this type of FOMC dispersion model is that it's confusing, which means more uncertainty, and uncertainty is going to lead to risk reduction. Not the most optimistic outlook I've had on equities of late where I've probably been far too bullish for my own good. 

 

Oil market

Traders appear less focused on the politics of war today while quickly turning to the reality of a speedy return of Saudi Arabia's crude production amid market calming rhetoric from International Energy' Agency's Executive Director Fatih Birol who said the oil market remains well supplied with ample stockpiles, despite the weekend attacks.

Given that Saudi Arabia oil production will soon return to normal. It might weigh on supply risk premiums which were starting to build along the forward curve. However, with the weekend approaching traders will be more apt to maintain hedges against possible weekend headline risk especially in the absence of a measured response from the U.S. or Saudi Arabia. Unless traders are convinced to unwind supply risk premiums to a more significant degree, it should keep a bid under oil markets. However, the tide is gradually shifting lower.

Also weighing on WTI prices, there was a less accommodating Fed than markets wanted while crude stocks rose 1.1Mb, bearish vs consensus for a 2.5Mb draw and the 5-year average of -0.4Mb, and slightly above the 0.6Mb increase reported by the API yesterday. 

The markets will ultimately remain in a heightened state of alert as to how Saudi Arabia retaliates for the attack. President Trump has already walked back all his fire and fury now suggesting the U.S. will add "some very significant sanctions" and announce them within the next 48 hours. While Saudi Arabia, keeping in mind their position as the de-facto leaders of OPEC, frankly, I don't think they want to stir up a middle east hornet's nest all of which is suggesting a more measured response.

 So, with the U.S. and Saudi appearing more likely to take the sanction rout against Iran, it would not necessarily add to an already heightened level of supply risk premium.

 

Gold Markets

The gold market is a little confused this morning; this is because the markets are in a state of confusion about Fed policy. Which isn't necessarily bad for gold markets as confusion ultimately means more uncertainty, and uncertainty is going to lead to risk reduction and more demand for Gold.

Gold initially fell as the Fed failed to meet the markets dovish forward expectations but held above $1480 thought to be a significant crossroads for fundamental and technical analysis. While gold prices have started to show signs of recovering after bouncing off support

The post FOMC selloff has the hallmarks of fast money-driven flows as core strategic long gold positioning is thought to be involved at an excellent level and should be under little threat at current price levels. Hence the quick price recovery after fast money traders received a no joy signal after trying to test $ 1480 resolve

Provided the $ 1480 gold investor attitudes will likely remain upbeat, although short term views will probably now be influenced by the trade war calm which could continue to lessen gold's glittering attraction

However, real rates are unequivocally the long-term critical driver for fold now, while the dollar's influence is somewhat muted.  

While we could see further corrections over the next few weeks as trade headlines continue to influence, ultimately, the lower for longer interest rates outlook should lend support.

While the Fed didn’t signal a deluge of easing; I think it's safe to assume the next policy move will be lower. 

So, while we could see further corrections over the next few weeks as trade headlines continue to influence, ultimately, the lower for longer interest rates outlook should lend support.

 

Currency Markets

The dollar is trading higher as F.X. traders interpreted the Fed mildly more hawkish than expected. However, with the Fed maintaining a cheery outlook regarding the U.S. economy, regardless of what stress test you want to put the dollar under, it will continue to come up smelling of roses and is unlikely to drift too far from the recent high watermarks.

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