One notable thing about the sharp rally seen in stocks at the end of last week was that it wasn’t accompanied by a similarly strong rebound in commodity prices, and in particular oil prices whose performance since the lows in August had until last week more or less mirrored the performance of equity markets.
When equity markets and oil prices rebounded from their low points on the 24th August the ebb and flow between the two had been more or less synchronised, until the end of last week when equity markets surged to multi week highs, while oil prices were simply unable to follow, weighed down by excess supply levels against a backdrop of a weak demand outlook.
This concern about the economic outlook in the US was reinforced yesterday by another batch of disappointing US economic data as September durable goods declined 0.4%, while August was revised lower to -0.9%, further undermining the narrative of a US economy that is supposed to be ticking along nicely, and could on the way to slowing down quite sharply.
It is against this backdrop that the Federal Reserve will be making its penultimate decision of 2015, with policymakers probably more divided about when to raise rates than at any other time in the past few years.
While no change is expected today the statement will be closely scrutinised for any change of tone with respect to the timing of a rate rise this year. In its last statement the Fed referred to an improving labour market with solid job gains, but since then we’ve had a poor September payrolls report as well as a downward revision to the August number, raising the prospect of a softening labour market.
More importantly will the committee keep the line that “risks to the outlook for economic activity and the labour market as nearly balanced,” or will they soften the language in a way that, reflects the concerns of Fed governor and permanent voting member Lael Brainard in comments made recently, that economic risks are “tilted to the downside”
In truth the window for raising rates this year appears to be getting ever smaller and was probably slammed shut last week in Beijing when the People’s Bank of China cut rates again for the fifth time this year, in an attempt to help boost the slowing Chinese economy so that it doesn’t miss its 7% GDP target by too much.
With the potential for yet more policy easing from the ECB at its December meeting, and the effects of a stronger US dollar starting to trickle down into US earnings numbers, it is hard to imagine a scenario where the Fed would feel comfortable raising rates at a time when GDP targets are being revised lower on an almost weekly basis, with the latest Atlanta Fed model for Q3 GDP now at 0.8%.
In short if the Fed weren’t prepared to raise rates in September, they are hardly likely to now, or in six weeks’ time, given that since that meeting the data has been shown little sign of any improvement, if anything it’s been heading in the opposite direction.
You would need to see a Lazarus like turnaround in the data, not only in the US, but also in China and Europe to increase the current odds on a December move which currently sit at 32.8%.
EURUSD – continues to find support just below the 1.1000 level with longer term support at 1.0970 from the lows this year at 1.0465. Below that we have major support at the 1.0820 level and May and July lows. For now we have resistance at the 1.1100 area as well as the 50 and 100 day MA.
GBPUSD – the pound continues to look soft, falling below the 1.5300 level opening up the prospect of further declines towards 1.5200 trend line support from the 1.4565 lows. Resistance sits at 1.5420 and 1.5510.
EURGBP – having slid below the September lows last week the rebound off 0.7170 currently looks a little weak, and needs to get back above the 200 day MA at 0.7250 to suggest a strong rebound.
USDJPY – the move through 121.00 proved somewhat short-lived with the September highs above 121.70 proving strong resistance. Above 122.00 could suggest a return to the 124.00 area. We have support at the 120.20/30 area, with a break retargeting the 119.20 area.
Equity market calls
FTSE100 is expected to open unchanged at 6,365
DAX is expected to open 32 points higher at 10,725
CAC40 is expected to open 20 points higher at 4,867
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