U.S. stocks are drifting lower ahead of the Fed’s last policy meeting of the year and as a critical trade deadline is just under four days away. This policy meeting should be an easy meeting for Fed Chair Powell. The Fed has eased market conditions, stabilized the dollar and barring any shocks to the economy, they seem poised to deliver a soft landing.
The data since the last policy meeting for the most part highlight a robust labor market and limited impact from the 20-month long trade war. The data-dependent Fed can put policy on cruise control for a few meetings as inflation remains anchored and risks to the outlook will firmly remain in place. A phase-one trade deal between the world’s two largest economies will likely be all we see done this side of the 2020 election.
The Fed’s dot plots will be updated, but this could be the least meaningful update. Until we have a clearer picture with the downside risks to the economy, these dot plots might as well be written in pencil. A rate hike may start to get priced in by 2021, but the greater likelihood is the Fed will resume easing to defend against either deflation or recession concerns will return as pressure enters the credit markets.
The biggest focus out of today’s policy meeting will come from the press conference where Powell will get grilled on what the Fed will do keep short-term lending markets healthy. Year end is always a tricky time for banks and the repo market will once again get tested. The Fed’s liquidity operations have not sufficed and the Fed will need to contemplate another round of QE by purchasing coupons instead of bill, a move that would unwind the quantitative tightening mistake.
Impeachment-lite
The market impact was very limited after House democrats revealed two articles of impeachment against President Trump. The White House reaction was classic Trump, as the he did not back down and called the democrats efforts “impeachment-lite”. The House should get a final vote next week, but it will not likely matter as no one is expecting 20 republicans in the Senate to cross party lines.
The two articles of impeachment are for abuse or power for seeking to pressure Ukraine’s government to investigate his top 2020 presidential rival and obstructing Congress in its investigation of his dealings with Ukraine. Unless we start to hear some Republican senators become critical of President Trump, the market impact will remain limited.
Aramco
The Saudis can pop open some champagne, the Aramco (SE:2222) trading debut was a success. Shares opened limit up, climbing 10% at the open. It took four years to get this IPO done, but the Saudis have successfully made the world’s largest oil producer reach a market cap of $1.88 trillion, very close to the Crown Prince’s initial goal of $2 trillion. In order for the Aramco stock listing to be successful, we will need to see stable oil prices in the short-term.
Oil
Oil prices have steadily been declining after yesterday’s API crude inventory report showed a 1.41 million-barrel build. Later this morning, the EIA official data is expected to show a 2.9 million barrel draw.
After last week’s Saudi surprise at the OPEC + meetings, a firm top has been put in place for oil and we could see the prices remain under pressure even if we see a small draw with the EIA report. Demand worries are firmly in place and we may only see that alleviated if the Trump administration scratches the December 15th tariff threat and if they are able to finalize the phase-one trade deal with the Chinese this side of the New Year.
Gold
Gold prices are little changed ahead of three huge events; today’s Fed policy decision, tomorrow’s UK general election and the Trump administration’s December 15th tariff deadline. Today’s policy decision could open the door for QE4 as the Fed will try to alleviate concerns over strain with repo markets.
The promise for more stimulus should be supportive for gold, but the tone of today’s press conference might be too optimistic about the U.S. economy. If Powell is too optimistic about the economy and not forthcoming with what the Fed will do eliminate short-term lending pressures, gold could remain trapped in a tight range even after today’s Fed meeting.
Gold’s next move will likely be driven by the Brexit outcome and whether the Trump administration scratches the December 15 tariff threat and if they are able to finalize the phase-one trade deal with the Chinese this side of the New Year.