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Fed sticks to less hawkish script, manufacturing PMIs weak

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By Craig Erlam  

Markets saw some trepidation on Wednesday with the Federal Reserve keepings rates unchanged and ahead of the jobs report on Friday.

The Fed’s FOMC meeting was quite straightforward, with policymakers having come out in force to soothe market fears of another rate hike from the central bank, claiming recent moves in bond markets may have done some of the job for them.

This followed earlier commentary that strongly hinted that another rate hike was likely, aligning with the dot plot from the September meeting, while warning that rates will stay high for a long time.

It was all about the tone from policymakers and Chair Jerome Powell, and with bond yields still near their recent highs, I see little chance of another shift.

The Fed Funds Rate were left unchanged at 5.25-5.5% with a corresponding commentary almost a carbon copy of recent statements.

This isn’t the time to tweak as the economic data hasn’t yet justified it either way, particularly to policymakers who are not going to pivot until they’re absolutely certain they’ve defeated inflation.

Manufacturing PMIs remain weak

We’ve had a selection of manufacturing PMIs and, as we’ve come to expect, they weren’t particularly surprising.

The Caixin survey in China dipped back into contraction territory, in line with what we saw from the official reading on Tuesday, but there is some optimism that circumstances are gradually improving and will continue to do so, despite the obvious challenges.

The UK manufacturing PMI only marginally improved and less than what was expected. It remains deep in contraction territory and isn’t expected to significantly improve any time soon.

While far from ideal, it is only a small portion of the UK economy, with the services sector far more important to how it performs, and while that’s also in contraction, it is so to a much lesser extent.

Easing risks sees oil pare gains

Oil prices were rebounding on Wednesday but broadly speaking we continue to see them drift back to levels not seen since the Hamas attack on Israel on October 7.

The geopolitical risk-premium has gradually faded, with traders seemingly more hopeful that it isn’t going to spread into a wider conflict and disrupt oil flows.

The economy also remains a concern, especially considering what we’re seeing with bond yields and the prospect of interest rates remaining higher for longer.

I’m not convinced rates will remain at or near the peak that long, but with policymakers around the world insisting they will, traders are increasingly concerned about the economic cost.

Gold eases

Gold pulled back a little this week but remains not far from recent highs. It even broke $2,000 on a number of occasions in the recent sessions, albeit not significantly or for long.

The risk environment hasn’t improved in any significant way and yields are not far from the highs which probably explains why yellow metal hasn’t progressed either way in any significant manner.

The dollar has remained strong and will continue to be a headwind, although in this environment perhaps not to the extent it has in the past.

We may have to wait for the jobs numbers on Friday which will be key as a result of the incredible resilience in the labour market.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.