The FOMC released its May meeting minutes last evening stating that the overall economic assessment was little changed. The Fed sees to raise rates once again is ‘soon be appropriate’. Markets assume that it signals a rate hike in June. The minutes also signals further tightening is expected if the incoming economic data shows improved economy. The Fed sees the weak economic performance in Q1 as transitory, caused by soft consumer spending and inventory investment.
Fed members considered it prudent to wait for further evidence that recent economic weakness was transitory before hiking rates again. The tone of the comments was less hawkish than expected with an increased potential for the Fed to hike rates again in June and then pause to consider developments. After the release of the minutes, per CME FedWatch tool, the probability for a June rate hike remains unchanged at 83.1%.
The minutes also signals shrinking the Fed’s $4.5 trillion balance sheet in holdings of Treasury and mortgage securities later this year, by allowing a gradual maturity, setting a cap and reducing reinvestments.
After the release of the minutes, the dollar index fell from a 3-day high of 97.36, breaking the support line at 97.00, as US Yields moved lower. During the early European session on Thursday the dollar index hit a 2-day low of 96.79 looking to test the support line at 96.70. USD/JPY retreated from the resistance level at 112.00 and rebounded after testing the support line at 111.50.
Yesterday ECB President Draghi focussed on the risks around Euro-zone financial stability and remained optimistic that the central bank’s unorthodox policies did not pose a risk. With the fall in USD, EUR/USD rebounded from a 2-day low of 1.1167, touching a 2-day high of 1.1244. Spot gold rebounded from the significant support line at 1250, touching a 2-day high of 1259.49.
US Equities reacted somewhat favourably to the Federal Reserve minutes with hopes that interest rates would not rise sharply with lower yields providing support. The S&P 500 index gained 0.25%. During the early European session on Thursday, the Dow Jones index reached a high of 21101.25 which was last seen on March 2. The S & P 500 index hit a record high of 2412.68.
The initial USD move seems to deviate from the overall message in the minutes, as markets have priced in the expectations on a June rate hike, and the Fed’s hawkish stance appears to be less strong.
With WTI trading higher the market witnessed a degree of profit taking. Latest EIA data recorded a 4.43mn barrel decline in inventories for the latest week. OPEC is scheduled to hold a meeting today in Vienna to discuss whether to extend the existing output cut agreement. The consensus is that OPEC will extend the agreement. It is likely that we will not see a surge after OPEC announces an extension as markets have largely priced in the expectations since May 5.
On Wednesday, Brent crude spot hit the highest level of 54.80, last seen on April 19. During early European session on Thursday, WTI spot hit the highest level of 51.96, last seen on April 19.