Divisive Fed minutes puts rate hike in doubt

The overnight session was driven by expectations around US rates.

Federal Reserve
Source: Bloomberg

The US dollar had caught a bit of a bounce after Fed member Dudley had come out and emphasised the possibility of a September hike, despite copious evidence to the contrary. But the Fed minutes (released at 4:00am AEST) provided a much more comprehensive summary of the views of different Fed members and their dovishness has increasingly put a 2016 rate hike into doubt. There is clearly strong disagreement within the Fed with regards to the timing of further rate hikes. Despite some members saying that an immediate hike is appropriate and some saying one would soon be warranted, the more cautious members of the Fed said that they would have 'ample time' to react to a rise in inflation. This does seem to be a noticeable a change from the previous concern that the Fed may 'overshoot' the inflation target. And given this week’s poor US CPI release since the Fed meeting, this view is only likely to gain traction. Nonetheless, market pricing for a December rate hike sits staunchly at 50.5% according to Bloomberg WIRP calculation.

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The bond market has had a choppy week trying to decide on where US rates might be heading. But the TLT iShares 20+ Year Treasury Bond ETF gained 0.6% on the session, despite bonds selling off a bit the past few days over concerns of a slightly more hawkish Fed. These bond market moves also appeared to fuel a renewed push for yield stocks as the utilities sector was the best performer in the S&P 500 overnight, gaining 1.5%.

The bounce in the DXY US dollar index has been a negative for commodities with copper (0.7%) leading the declines in the metals space and iron ore also lost 1.9%. Oil also began to reverse its five days of gains as concerns that Saudi Arabia may continue producing oil at their summer output levels rather than following their usual seasonal slowing of production. However, oil rebounded to close up 0.6% on the session following the release of the weekly EIA inventories report, which unexpectedly showed a decline in crude oil inventories. US crude oil inventories declined by 2.5 million barrels against expectations for a 0.95 million barrel decline, their first weekly decline in four weeks. Gasoline inventories also saw a much bigger decline than the market had expected.

On the price chart though one barely notices that little blip in overnight oil prices. One only imagines that if we see an unexpected decline in Friday’s Baker Hughes drill rig count that the price could continue to push higher.

The Japanese yen ended the session stronger against the USD, which has not set the Nikkei index up for a good performance today. The ASX is set to open fairly flat. The ASX materials sector looks to be decisive for how the index will ultimately close today as it is uncertain whether stocks will price in the pullback in commodities overnight or the bounce they are starting to see in the wake of the Fed minutes weakening the US dollar.

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