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Oil and USD climb, stocks mixed, Sterling slides on a big day for trading in the US and UK

Having held $35.00 support no WTI yesterday, crude oil appears to have completed a trading correction and has resumed its recovery trend. The rebound started when US API oil inventories rose less than expected. It has been helped along by reports in the press that the big meeting to discuss a production freeze is likely to happen in mid-April, could involve 15 countries and may proceed with or without Iran, who is still in the process of restoring its production to pre-sanctions levels. Oil could be active through the morning

The UK is also in focus this morning following a mixed employment report that saw jobless claims and weekly earnings come in better/higher than expected but 3 month job creation miss badly. GBP is falling again on the news, but today’s decline against USD of 0.3% is moderate and similar to other major currencies like JPY. UK markets could be active around today’s budget speech  which could be particularly significant coming within the Brexit campaign. It will be interesting to see if Chancellor Osborne joins Governor Carney in trying to steer a neutral policy course, or if the budget speech tries to take sides.        

As the day progresses, focus crosses the pond to North America where the main event is this afternoon’s FOMC interest rate decision, monetary policy statement and member projections due at 2:00 pm EDT with Chair Yellen’s press conference at 2:30.

The US central bank is generally not expected to raise rates this meeting but with inflation pressures growing and the US economy still strong, the Fed is likely to use the statement, forecasts and press conference to signal another hike is likely in the spring (April most likely).

There are currently three factions at the Fed setting up the potential for a big showdown today. The dovish camp is worried about recent volatility and thinks the Fed should slow down, the hawkish camp realizes volatility is normal when the Fed changes direction, expects the recent storm to blow over and thinks the Fed should keep to its original plan of 4 rate hikes this year. The neutral camp thinks the Fed should keep its options open and see how the markets and data play out.

Because of this, what happens to the Fed’s inflation forecast may be particularly significant as an increase would point toward an imminent rate hike with the Fed not wanting to fall behind the curve and have to scramble to catch up later. The forecast could be influenced by this morning’s consumer price report and rising oil prices, and the recent rise in core PCE inflation, the indicator the Fed uses.

With markets on the rise and US data mostly coming in better than expected since the last Fed meeting in late January, the dovish case has weakened but the fence sitters could convince the hawks to wait for one more meeting before pulling the trigger on another increase.

The infamous “dot plot” of member projections on the Fed funds rate at the end of this year may also be significant. After today, the Fed has six meetings left in 2016 with September and October likely out for a move due to the election campaign. A downshift in the party line from 4 hikes this year to 2 or 3 appears most likely, less than that would be seen as highly dovish. The number of planned rate hikes could send a significant signal to the markets about the Fed’s confidence in the US economy and the prospects for corporate earnings.

Heading into the meeting, USD is still pricing in multiple rate increases this year. Bonds have been pricing in no hike this month but the chances of an increase in April and June have been steadily rising over the last month. I think there’s a 20% chance of a hike today (low but it can’t be ruled out). A decision to hold rates steady could bring out at least 2 hawkish dissenters (Mester and George most likely).

For the hour following the news and through the press conference, we could see significant swings in both directions as traders digest the developments and sort out their implications.

Hawkish news or signals may boost USD and could send stocks initially lower then higher as a signal of tighter monetary policy driven by a stronger economy.

Neutral to dovish news or signals could undermine confidence in the US economy and stock market while also sending USD lower.

Corporate News

Oracle            $0.64 vs street $0.62

Chipotle Mexican    same store sales (26.1%), guides Q1 EPS ($1.00) way below street $0.02

Economic News

Significant announcements released overnight include:

US API crude oil inventories        1.5 mmbbls vs street 2.5 mmbbls

US Primaries results

    Trump and Clinton win in Florida, Illinois, North Carolina
    Kasich and Clinton win in Ohio
    Missouri very close but Trump and Clinton had slight leads
    Rubio drops out of Republican race
    Clinton and Trump increase their leads in delegate count

UK jobless claims change    (18K) vs street (9K)
UK 3M employment change    116K vs street 144K and previous 205K
UK unemployment rate        5.1% as expected
UK average weekly earnings    2.1% vs street 2.0%

UK Osborne budget speech to Parliament

Eurozone construction output    6.0% vs previous (0.4%)

Upcoming significant announcements include:

8:30 am EDT        Canada manufacturing sales    street 0.5% vs previous 1.2%

8:30 am EDT        US consumer prices        street 0.9% vs previous 1.4%
8:30 am EDT        US core CPI            street 2.2%
8:30 am EDT        US real avg weekly earnings    previous 1.2%

8:30 am EDT        US housing starts        street 1,150K
8:30 am EDT        US building permits        street 1,200K

9:15 am EDT        US industrial production        street (0.3%) vs previous 0.9%
9:15 am EDT        US manufacturing production    street 0.1% vs previous 0.5%

10:30 am EDT        US DOE crude oil inventories    street 3.2 mmbbls
10:30 am EDT        US DOE gasoline inventories    street (2.2 mmbbls)

2:00 pm EDT        US FOMC interest rate        0.25%-0.50% no change expected
2:00 pm EDT        US FOMC statement and member projections
2:30 pm EDT        FOMC Yellen press conference


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