Tonight’s the Night – Will the Fed Blink?

There is just one show in town tonight and that is the FOMC meeting of the US Fed.  Will or won’t they hike and if they hike will they say that’s the last for a while.  Simple options but huge implications.

Only a month or so ago a 0.25% hike tonight seemed almost certain.  Since then we have seen a deteriorating global economy and for the Fed’s attention, heavy falls across the board on US financial markets.  Indeed this December is the worst December since the onset of the Great Depression in 1929.  And it’s been across the board with big cap broader industrials, tech, and small cap, with the latter now officially in bear territory…. (via ZH)

  • Dow -12.7% from highs (correction)
  • S&P -13.7% from highs (correction)
  • Nasdaq Composite -17.3% from highs (correction)
  • Dow Transports -19.4% from highs (correction)
  • Russell 2000 -20.6% from highs (bear market)

In contrast gold is up 6.6% from lows in USD and 7.6% in AUD…

Throw in persistent badgering from the US President imploring them not to hike and last night even imploring them to stop unwinding there QE debt via QT at their projected $50B/month.  As a side note, interestingly they have only achieved around $32b… and still we have this issue…

As we wrote a couple of weeks ago, the Fed then seemed to ‘blink’ amid this chaos.  And so we have seen the odds of a rate hike fall to just 67% last night.  Below 70% is considered by analysts to represent a ‘surprise’ for the market.

However herein lies the often discussed dilemma for the Fed.  Whilst the market is desperate for a reprieve from tightening, should the Fed turn dovish and pause or even end the tightening (either or both through hikes and/or QT) that ironically sends a signal to the market that the Fed thinks things are so bad that it can’t maintain its trajectory.  Remember that trajectory is partly a mission to get rates high enough again that they can cut them on the next recession to help ease the market through it.

Trump, in one of his tweets to the Fed asked the question why they would hike when the world is ‘blowing up’.  At the moment the US is the shining light on the global economic scene (by comparison at least).  However recently we’ve seen weakening industrial metrics, weakening housing, and of course the barometer of the sharemarket itself.  Should the Fed pause, they effectively confirm to the market the US is in trouble too and you could see, after an inevitable relief pump, US shares then recommence their fall on this realisation.

Either way, expect some volatility ahead.  Gold tends to love volatility and it’s at an interesting juncture right now.  Analyst AG Thorson had this to say about the technical set up depicted below:

“The next 72-hours are critical. It seems nearly every market is at a significant tipping point. Tomorrow’s Fed decision will either extend or reverse the current trends. Expect increased volatility.

It looks like gold prices are trying to break higher from the small bull flag. Resistance coordinates between $1258 – $1270. If we are going to see a top within the next 72-hours, it should appear among those numbers. Finishing the week above $1270 would extend the rally and support a test of $1300 – $1310 by year-end. That would likely be the result of an overly accommodating Fed.”