The FOMC is like a box of Chocolates-you never know what you will get”   Photo: Shutterstock

By Michael O’Neill, Agility Forex, Senior Analyst

Forrest Gump’s Mama said “life is like a box of chocolates. You never know what you are gonna get”. Financial markets would say the same thing about the Janet Yellen led Federal Open Market Committee. Another FOMC meeting is in the history books and the timing of even one Fed rate hike, let alone two, is as clear as mud.

For many highly qualified, highly paid economists, the July 27th statement was hawkish. They focused on the positive tone about the labour market and this sentence in particular; Near-term risks to the economic outlook have diminished.” They believe that the Fed was signaling a higher probability of future rate hikes with some going as far as suggesting that a September rate hike may be coming.

Just as many other economists (who are also highly qualified and well-paid), acknowledged the Fed’s nod to diminished near-term risks, but thought the statement was doveish, noting the emphasis on inflation. The statement said that “inflation is expected to remain low in the near term” and then added the need to “carefully monitor actual and expected progress” to the 2% inflation goal. The dove side is winning out.

A quote attributed to former Federal Reserve Chairman, Alan Greenspan, sums up this and other Fed communications best: “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant”

The impact from this Fed meeting is already fading and the next meeting is nearly two months away. August is known for being a hot month but not for being a hot-bed of market activity. This year may be different. There are already signs that this end-of-July, beginning of August market is starting to look a lot like the January -February 2016 market, except there is a lack of snow.

Japan’s Prime Minister, Shinzo Abe, announced a new 27 trillion ($265.3 billion) fiscal stimulus package on July 27th, a move that was widely expected. What wasn’t expected was the FX reaction in USDJPY. The currency has recouped over half of its earlier losses when Mr. Abe’s news was still a rumour. That harkens back to the reaction that occurred immediately following the end-of January 2016 when the Bank of Japan cut interest rates into negative territory. That move kicked off a six- month decline in USDJPY.

The similarity to January isn’t confined to the Japanese yen. The oil market is behaving the same way. In January, West Texas Intermediate (WTI) was still in freefall from the October peak causing risk aversion to ripple across global markets. Today, rising oil inventories and dwindling demand has awoken the bears. WTI prices are threatening to blast below $40.00/barrel enroute to $36.50/b. But just like the lack of clarity in the FOMC statement, this move is questionable as well. The same issues that led to the current downward pressure in WTI were readily apparent in June, except at that time they were ignored. Instead traders were concentrating on optimistic forecasts for increased demand and slowing production. Those forecast still exist. In fact, this week, the World Bank bumped its forecast for crude oil prices to $43.00/b from $41.00/b for 2016, saying that “We expect slightly higher oil prices for the second half of 2016 as oil market oversupply diminishes,”

The UK’s “Brexit” decision is another wild card for markets. The British government has already said that they wouldn’t trigger “Article 50” (the “get-me-out process” until 2017 but that doesn’t mean that the Bank of England won’t provide some fireworks of their own. The governor, Mark Carney hinted at some sort of stimulus package being announced at the August 4 meeting. If so, Sterling is likely to retest the post-Brexit low.

The major central banks are in easing mode. The Bank of Japan may lower rates on July 28th. The Reserve Bank of Australia, the Reserve Bank of New Zealand and the Bank of England may be chopping interest rates in August. The European Central Bank may be waiting for September to push rates deeper into negative territory. Oil prices may be getting set for another rebound. If that plays out, the dog days of August will have some bite.

dog barking

“The dog days of summer could prove to be vicious”  Photo:  shutterstock