The USD weakness has paused in the wake of the US jobs reports, but traders will resume selling the dollar if the FOMC signals that it will keep the Fed funds rate near zero into the medium term.
FOMC position squaring has stalled the momentum in stocks but has not quashed it. As you can see by today's markets, the relentless rebound in equity markets continues to endure, suggesting no one’s willing to call a top.
But the primary question remains: has the market's recovery bought the Fed some time not to use all its bullets, or will they keep the pedal to the metal?
If the Fed wanted to knock it out of the park, bring in YCC and a ramped-up more extended duration buying feast with open-ended mandates. That should carry the market well into 2021 and beyond, provided the reopening recovery remains uninterrupted by a secondary virus cluster.
Basic FOMC primer
There’s not much of a conviction heading into the FOMC; sure, some are intrigued after the stellar US jobs report, while others view it as a non-event.
I always think the FOMC is an absorbing set-up – especially these days. After all, the Fed orchestrated this market recovery and are now set to offer its latest thoughts, estimates and, hopefully for market sentiment, an actionable go-forward plan.
The tape is at highs, credit spreads are back to some range of normalcy and no doubt the Fed wants to remain supportive, but the rest is a bit foggy. That’s not to suggest we’ll get to peer into the Fed long-term crystal ball tomorrow, but we’ll hopefully get a read on the inflation targets and their desire to continue monetizing all debts.
Why equities higher post FOMC?
The S&P 500 is very tolerant of higher yields these days – recall it wasn’t so long ago that 10-year Treasury nominal yield was north of 5%, yet equities still rallied.
The problem is not the nominal yield levels. What drives equity flows, at least from its sibling markets, is the price and availability of money. Do worry if real rates are rising, but much less if inflation was triggering the move.
There’s no new fundamental data that would justify a shift in sentiment. Most of the current problems around inventory builds are explainable and reversible, while OPEC unity and resolve appear to be solid enough to form the foundation of more constructive pricing.
Most of the traders in my crew are pocketing oil contracts on dips ahead of possible new formulations of OPEC's target methodology – but how does it judge success?
In the early 2000s, targeting was quite simply a price band. After 2015, OECD liquids inventory versus a five-year rolling average was used as a metric.
Possible new targeting methodology
If either of these methodologies is agreed upon, it will be very bullish for oil markets.
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Stocks soar, powered by first-rate earnings and a dazzling run of economic data; Gold plays catch as G10 falls flat while oil basks in the afterglow