Overview: The US dollar’s gains scored in the wake of the Fed’s signal that will continue on course to gradually hike rates have been extended. Most emerging market currencies are lower as well. Equity markets are heavy. Bond yields in Europe and US are a little lower, with the exception of Italian bonds. The concern about the clash between the EC and Italy is nearing an inflection point as Italy’s formal response is due next week and the government is not prepared to back down. Oil prices continue to trade heavily amid strong supply indications. A decline today would extend the streak to ten sessions, the longest losing streaks in last thirty years. Prices have dropped more than 20% since early October. OPEC countries meet in Abu Dhabi this weekend. If quotas are to be re-introduced, this weekend’s meeting is not the likely forum, though intentions and sentiment will be important.
North America
As universally expected the Federal Reserve did not change policy yesterday. Its assessment of the economy was essentially unchanged. Growth is strong. Unemployment is low. Inflation and inflation expectations stable. Gradual hikes will continue. Barring a major shock, which is more than a correction in the stock market, the Fed will raise rates in December.
The tensions in the money markets will continue until at least the December FOMC meeting. Some are disappointed the Fed did not act now to reassert control over rates as some repo rates have traded above the upper end of the fed funds range. Bloomberg reporters have emphasized the role that unwinding the balance sheet may be having. Their solution is to slow down the unwind, not because of the economic impact but because of the technical consequences. What is less understood is the Fed’s response. In the minutes from the September FOMC meeting, the Fed pushed back against that hypothesis which is being treated as a fact. Fed officials argue that the increase in bill issuance (and therefore settlements) coupled the rising rate environment and technical development in other repo markets appear to be the main culprits.
