Liftoff Uncertainty Rises

The New York Federal Reserve’s President William Dudley sent bond yields tumbling yesterday as comments about the outlook for rates mixed expectations after stronger employment data raised optimism of an imminent hike in the September meeting. After refusing to analyze the latest moves by Chinese policymakers to revalue the Yuan, in a stark reversal from his position earlier in the month, Dudley remarked that the Federal Reserve “can hopefully raise rates in near future.” The lacking confidence in his comments echoes comments from Federal Reserve Vice Chairman Stanley Fischer who highlighted other risks to the liftoff scenario, namely inflation which has failed to move back towards longer-term targets. The dollar softened further against peers during yesterday’s session before staging a rebound late in the session with momentum higher continuing overnight against the Euro and Yen.

Dragging on the Federal Reserve’s outlook has been the reversal lower in oil prices after hitting the lowest levels since 2009 in the last few sessions. Energy prices managed to stage a minor rebound after yesterday’s crude oil inventory numbers showed a smaller than expected drawdown of -1.682 million barrels. Nevertheless, according to the International Energy Agency, the persistent problems with market oversupply are forecast to extend well into 2016. US production numbers released yesterday showed that production numbers continued to fall, contracting by 0.74% last week to the lowest since May as the price war is slowly taking a toll on US shale production. However, supply still outpaces demand by approximately 3 million barrels per day according to the latest numbers, setting the stage for oil prices to drop into the high $30s as producers prepare for prices to remain depressed for longer than previously anticipated.