Federal Reserve Punts on Policy

Daily Analysis - 22/09/2016

Latest Forecasts Show Fed Dialing Back Normalization Expectations

With the uncertainty surrounding the Fed and Bank of Japan monetary policy meet’s over, markets around the world saw traders and investors return to financial markets in full force. Major equity benchmarks benefited from the Fed’s more dovish stance as precious metals and energy commodities were also bid as the US dollar sold off versus peers.

Fed Remains a Divided House

The US Federal Reserve kept its benchmark interest rate unchanged on Wednesday as Chairwoman Janet Yellen said she saw no reason to rush, instead preferring to “watch incoming evidence.” But concern among some Fed officials – including the hawkish bloc of Esther George, Eric Rosengren and Loretta Mester - is growing. They reckon the central bank is taking too long to restore borrowing costs to normal levels. All three members voiced their dissent against the official FOMC statement. That was highly unusual considering Yellen's past deftness at keeping members united. The decision to bide time was passed by a 7 to 3 vote, the narrowest margin since the December 2014 meeting. Most economists now believe a rate hike at Fed’s next gathering on November 1-2 is improbable considering its proximity to Election Day. As a result, risk assets climbed, led by performance in equities.

Gold Thrives on Fed Inaction

Precious metals prices were one of the strongest reactions to the latest indecision from the US Federal Reserve as it tempers market rate hike expectations. At the very earliest, futures are now showing a strong probability of rates rising during the December meeting as the Fed tries to avoid being political by adjusting rates ahead of the November elections. Gold prices are rising in Thursday trade after Fed’s decision to leave interest rates unchanged drew buyers to the safe haven metal, especially after the selloff in the US dollar that transpired after the FOMC statement. Gold tends to attracts buying during periods of low interest rates as rising rates make non-yielding assets like gold unappealing to investors. While gold prices are at their highest point in 12 days, most analysts suggest the rally is on its last legs as the likely Fed rate hike in December should cap significant gains.

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Dollar Skids to 4-week Low against Yen

After resounding disappointments from both of the Bank of Japan and the US Federal Reserve, the US dollar slid to a 4-week low against the Japanese Yen on Thursday after the Fed forecast a less aggressive stance to interest rates hikes. The USDJPY pair flirted with 100.10 at one point, the lowest since August 26, before paring some losses to bounce back to the upside near 100.25. Currency strategists expect the dollar to decline further against the Yen in the coming few months. Considering no new easing measures are immediately expected from Japanese policymakers, the Yen strength may persist over the medium-term, hurting exporters and the fight against deflation. The Yen is showing strong signs of resilience as doubts linger over whether the Bank of Japan's latest policy tweak was enough to induce inflation and restore growth.

Crude Inventories Dip for Third Straight Week

Crude oil futures were up in early Asian trade following data that showed a third straight week of falling US crude stockpiles. Figures from the Energy Information Administration showed a larger than expected 6.200 million barrels drawdown in domestic crude inventories for the week ending September 16. The EIA said that at 504.6 million barrels, inventories were at their lowest since February 12. On the NYMEX, light sweet crude futures for November delivery were last trading at $45.82 a barrel, up almost 1.00% during the Globex session. Brent crude for November delivery on London’s ICE exchange also gained 1.00% to $47.33 a barrel. However, analysts remain cautious, restating that the global market still remains highly oversupplied. Output from the Organization of the Petroleum Exporting Countries has been steadily increasing in recent months on the back of record Saudi production.