The big story overnight has been a growing rally in resource markets. Australia's index has been the top performer overnight, gaining 1.0%. Meanwhile, resource dollars are also outperforming with AUD following CAD's charge forward.

What is most interesting about this rally is that it comes in the face of falling commodity prices including a 1.0% drop in WTI crude oil. WTI has come under pressure between inventory reports. A 2.75 mmbbl build in API US oil‎ confirmed last week's big DOE surprise increase. An IEA forecast suggesting non-OPEC production growth could outpace demand growth in 2018 isn’t helping matters either. This week's DOE report is due mid-morning. The street is looking for a 2.0 mmbbl drop but a build appears possible. The question now is whether last week's build was a one-off or the start of a new upswing.

Resource markets continue to benefit from this week's comments from Governor Poloz of the Bank of Canada and Deputy Governor Wilkins. Canada's central bank has essentially indicated that, despite the day to day price noise, the Canadian economy has adapted to a lower oil (and commodities generally) price environment and it is looking at cutting back stimulus. This would likely mean reversing the two 2015 cuts that took the overnight rate from 1.00% down to 0.50% as the oil price crashed. It also would help the bank to reload in case trade talks with the US go awry.

The main event today is expected to be the US Fed interest rate decision and statement, followed by a press conference with chair Janet Yellen. The FOMC is widely expected to raise interest rates by 0.25% to 1.00-1.25%. After that, however, opinions diverge dramatically. A June rate increase would keep the Fed on track for its party line of three or four hikes this year. The recent political turmoil in Washington, however, raises the chances that budget and debt ceiling negotiations could end in a government shutdown sometime between late August and October. This pretty much rules out a September rate hike leaving December as the next potential window for an interest rate increase. 

The question facing the Fed is how to signal its future plans. Some of the more dovish FOMC members think the US may already be nearing its neutral interest rate, while others think the focus should shift from rate hikes to running down the Fed’s inflated balance sheet. The central bank has already indicated it would start slowly and steadily ramp up cutting back on assets. 

Since the March meeting, the US Dollar index has dropped from near 102.00 toward 97.00 while the Dow, S&P and DAX have all hit new all-time highs this morning, indicating traders are expecting the Fed to conduct a dovish hike, raising rates but with a less hawkish outlook. In the statement, traders will likely watch for comments on when shrinking the balance sheet could start In the member forecasts, a cut to inflation expectations looks likely which could be seen as dovish. In the dot plot, traders may look for signs of whether another increase is still on the table for this year and if the Fed is planning to continue raising rates into 2018 or if it could pause at some point. 

On the other hand, if the Fed indicates plans to stay the course or turn more hawkish, it could boost USD and take the wind out of stocks’ sails. The other hawkish surprise could come from rumblings of Congress possibly trying to pass a clean debt ceiling increase. If the Fed believes this (if so I have some great Florida real estate to sell them), it could leave the door open to a September rate hike. 

Ahead of the Fed, US retail sales and consumer prices provide the final big hard data points before the decision. Earlier today, UK employment was a bit soft on both jobs and wages. China retail sales were essentially in line with expectations. 

Thursday, central bank meetings continue with the Bank of Japan, Bank of England and Swiss National Bank all making decisions and issuing statements. It will be interesting if the hawkishness on interest rates seen in North America this week is spreading out into other parts of the trading world. 

Corporate news

There have been no major corporate developments this morning. 

Economic news

Significant announcements released overnight:

US API crude oil inventories    2.75 mmbbls

China retail sales            10.7% as expected
China industrial production    6.7% vs street 6.6%

UK jobless claims            7K vs previous 19K
UK 3M employment change    109K vs street 125K
UK unemployment rate        4.6% as expected
UK average weekly earnings     2.1% vs street 2.4%

Upcoming significant economic announcements:

8:30 am EDT        US consumer prices        street 2.0% vs previous 2.2%
8:30 am EDT        US core CPI            street 1.9%
8:30 am EDT        US retail sales            street 0.0% vs previous 0.4%
8:30 am EDT        US retail ex auto        street 0.2%

10:30 am EDT        US DOE crude oil inventories    street (2.4 mmbbls) vs previous 3.2 mmbbls
10:30 am EDT        US DOE gasoline inventories    street (1.0 mmbbls) 

2:00 pm EDT        US FOMC interest rate         0.25% increase to 1.25% expected
2:00 pm EDT        US FOMC economic and interest rate projections
2:30 pm EDT        FOMC Yellen press conference 

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