Preparing For Liftoff

Daily Analysis - 09/07/2015

Federal Reserve Poised to Raise Rates in September According to Minutes


The Federal Reserve is rapidly approaching a potential rate hike according to the latest meeting minutes. However, divisions amongst policymakers remain amid the mixed economic backdrop as members are split on the outlook and conditions.

FOMC Sees Headwinds

Although the latest minutes confirm more the hawkish bent of the Federal Open Market Committee, the Federal Reserve is nevertheless cautious owing to multitudinous external factors including Greece and China. One Federal Reserve member was prepared to raise rates in June, but the prevailing sentiment was that a further rebound in economic activity and inflation was needed before the Central Bank would consider a shift in monetary policy. Certain members are concerned that current conditions merit cautiousness and that any premature move to increase interest rates could have negative knock-on effects in the real economy. The recent downtick in oil prices is also giving way to the idea that inflation might not be fully anchored at this point in time. The reaction in financial markets was extremely muted after a glitch in the software systems at the NYSE put a halt to virtually all US cash equity trading.


Crude Inventories Extend Build

Following last week’s surprising build in crude oil inventories after experiencing 8-straight weeks of drawdowns, yesterday’s inventory figures showed another 348,000 additional barrels held in storage versus the prior week. This comes amid a minor uptick in production which is trending just shy of cycle highs. Even though the Energy Information Administration noted a small uptick in US crude oil demand on Tuesday, these observations were quickly forgotten as the crude carnage resumed yesterday following the inventory data. WTI fell over $1.70 before staging a recovery and retracing the majority of the move and the spread to Brent has widened to $5.25 after narrowing substantially earlier in the week. Today’s rig count data from Baker Hughes could provide another catalyst for momentum in crude oil prices, especially if the count grows, improving on last week’s additions after slumping for nearly 8-straight months.


IMF Calls for Restructuring

After releasing the infamous report last week citing the unsustainability of Greek debt, the International Monetary Fund is calling for a restructuring of Greek obligations in order to provide a more sustainable path for the beleaguered nation. According to comments released yesterday from the IMF’s Managing Director Christine Lagarde, “debt restructuring needed in Greece.” This comes on the heels of a German decree that Greece will be provided absolutely no debt relief and instead must propose more dramatic concessions to creditors, conveyed in an increasingly belligerent tone. This is increasingly the level of confrontation between creditors as the ECB remains mostly mute on the subject in order to maintain its political independence. Greece is unlikely to consider the latest imposition by European partners as a genuine interest in negotiating, setting the stage for a default and exit from the Euro Area as the nation prepares to introduce a parallel currency.


CAC-SEP15 Descending Triangle Technical Pattern

European stocks continue to be impacted by the unmitigated turmoil emanating from Greece as the likelihood of exit increases with each passing day without a deal. Although equity benchmarks managed to bounce yesterday after experiencing losses earlier in the week, continued uncertainty is likely to weigh on the outlook for stocks until the ECB moves to introduce an expanded quantitative easing program. The French CAC-40 futures are still trending lower despite the brief uptick in stocks yesterday with the index consolidating between a near-term downtrend and support at 4602. The descending triangle pattern has a predominantly bearish bias with any move below the support line indicating a potential triangle-based breakout to the downside. Any breakout will be accompanied by increased volume and substantial momentum with a move above the near-term downtrend line likely indicating a reversal or breakdown in the pattern.


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