FOMC delivers no surprise, dollar weaken and commodities rally

No surprise from Federal Reserve last night, as the FOMC committee decided to hold interest rate unchanged in their September meeting yesterday. The Fed’s press release stated that the case for an increase in the federal funds rate has strengthened, but they will need more evidence of continued progress towards its objectives.

Another key message they delivered is that near-term risks to the economic outlook appear roughly balanced. This is something familiar – the last time we saw “risk balanced” from FOMC statement was in Dec 2015, when the first raised interest-rate hike kicked off.

Therefore, this statement basically increased the chances of a December rate hike. According to Bloomberg world interest rate probability prediction, the chance of a 25bps rate hike has increased to above 60%.

Nonetheless, markets are celebrating the Fed’s decision as traders could enjoy at least six weeks of “hike-free” tranquility.
US dollar index tumbled 0.5% to 95.42 last night and continue to slide this morning. Crude oil prices jumped 2.7% and led to a rally among energy sectors. The US equity indices advanced on average 1 per cent, entering into risk-on mode again.

Separately, the weekly DoE crude inventory shows a big drop on Wednesday. Crude oil stocks decreased 6.2 million barrels last week, as compared to the consensus of a 3 million increase. This drop is expected to alleviate glut concerns and will further support the crude oil prices.

Markets respond positively to BOJ’s decisions

Bank of Japan decided to keep its policy rate unchanged at -0.1 per cent and monetary base to fluctuate around 80 trillion yen a year, taking a more flexible approach to control the yield curve. The highlight of the monetary statement included scrapping a target for the average maturity of its government bond holding, thus allowing the bank to buy Japanese Government Bonds (JGB) at various maturities.

The bank has also pledged to expand the monetary base until inflation rates hit its distant target of 2 per cent – that means that there is no deadline of its quantitative easing program until Japan’s inflation - currently at 0.1% - goes above and stabilise at the 2 per cent target. There is still a long way to go from here.  

Markets responded positively to this statement. USD/JPY jumped 0.8% during Asian trading hours, but subsequently falls to 100.14 area after the FOMC meeting. Nikkei Index jumped 1.8%. The rest of Asian markets were lifted too. It seems that markets have learned from the previous lessons and managed to lower the expectation for BOJ’s stimulus quantum.

On the other hand, some analysts believed that this statement shows BOJ has reached its limit on its monetary options, and questioned the sustainability of its asset purchase ability. The central bank now owns a third of outstanding Japanese Government Bonds (JGBs) and about 60 per cent of Japan’s domestic ETFs, draining the market of supply and pushing up the valuation of entire equity and bonds.

Crude Oil West Texas Nov 2016

CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.