S&P 500 ahead on flat markets, waiting for Fed decision

Equity markets marked time ahead of the Fed’s FOMC meeting on Wednesday, with bond yields edging up, the dollar unchanged, oil bouncing off an important support and gold seeing profit-taking.

TODAY’S MAJOR NEWS

Traders listen for guidance at Fed meeting, no rate change expected

The Federal Reserve’s interest rate meeting is the focus on Wall Street this week, as traders look for key economic data to be released in the same week as further guidance is received from the Fed regarding monetary policy. This week sees US consumer price and producer price data released on Tuesday and Wednesday, and retail sales data is released on Thursday. Virtually nobody expects a rate change from the Federal Reserve when it meets this week to discuss potential shifts in its monetary policy. Traders will focus on any potential changes in forward guidance that might emerge from the meetings.

Wall Street analysts expect a first rate cut to come in March, while the majority of analysts expect it to come at the May meeting. This might be over-optimistic. The Fed repeatedly said that it is committed to not repeating its mistake of 1980, when it pivoted too soon, allowing inflation to get a stronger foothold. The “super-core” inflation numbers that it is focused on still do not show sufficient progress to justify a pivot, based on previous statements by the Fed. In fact, last week’s data suggested a tightening of the labor market with sustained wage inflation pressures.

Sending a signal to the consumer and to the markets now of an approaching pivot would likely increase those inflationary pressures. And the economy remains resilient enough to give the Fed the latitude to maintain rates at current levels. That said, I have no doubt that Fed Chair Jerome Powell will face increasing difficulty in continuing to get his more dovish members to continue to support unanimous decisions by the policy group, which could provide some interesting drama.

Chinese deflation mires economy

China released its CPI data for November today, reflecting deflationary pressures as its economy continues to struggle. China’s CPI was down 0.5% year-on-year in November, after being down 0.2% in October, although core CPI that excludes food and energy prices still fell by 0.3% month-on-month and was up 0.6% year-on-year. The ailing property sector continues to be a problem for the Chinese economy, with 60% of family assets tied to their property ownership. Consumers worried about the eroding value of their property tends to make them more conservative in their spending, which reduces retail sales, providing a drag on the economy. That then becomes a drag on manufacturing, combined with reduced exports to Europe and to the United States.

TODAY’S MAJOR MARKETS

S&P 500 leads flat markets

• Equity markets were flat ahead of the Fed’s rate decision, with the S&P 500 up 0.3% and the NASDAQ and Russell 2000 up 0.1%
• The Nikkei 225 bounced back after recent weakness, up 1.5%, with the Dax up 0.2% and the FTSE 100 off 0.1%
• The VIX, Wall Street’s fear index, edged up to 12.7

Bonds yields rise, Dollar flat

• US bonds sold off, with 2- and 10-year yields rising to 4.73% and 4.26%, respectively.
• 10-year TIPS index-linked yields rose to 2.05%
• The dollar index rose 0.1% to 104.1
• Versus the dollar, Yen fell 0.9%, with the Euro and Sterling unchanged

Oil prices rally, gold sees profit taking

• Oil prices bounced off a $70 per barrel support price, up 0.5% to $71.6 per barrel
• Gold prices fell 0.9% to $1,996 per ounce, while Silver prices fell 0.5% to $23.2 per ounce
• Grain and oilseed markets with mixed, with soybeans are putting weather risk premium back in prices,
• Wheat sold off hard on a lack of fresh export sales news, with corn prices caught in the middle, lacking news of their own currently
• Day trading Algo traders appear to be magnifying the moves in both soybeans and wheat.

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@stonex.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com