FOMC emphasises improving labour market

Thursday, January 29, 2015

Positive commentary coming from Fed officials during yesterday’s FOMC press conference highlighted the overall pace of expansion as “solid” despite a moderation in performance throughout December. This time, however, policymakers chose to play down the threat of deflationary pressure and while still acknowledging the possibility of further declines in the near term, FOMC members expected inflation to rise gradually to its 2% target “over the medium term”. The outlook for the labour market was deemed as “strong” compared to the previous meetings “solid”, which will no doubt leave the majority of market participants agonising over the potential implications of this wording change. Encouragingly, the overall outlook and impending decision to increase interest rates seemed less sensitive to the lower inflation outlook than what has been hinted at previous meetings. Despite the overall positive outlook, both the S&P 500 and DJIA extended declines closing 1.35% and 1.13% lower respectively as energy stocks led the move lower.

The weaker investor sentiment managed to carry over to the overnight session with most major benchmarks stock indices across Asia experiencing heavy selling pressure with Chinese mainland stocks one again leading the way down. Both the CSI 300 and Shanghai Composite posted losses between 1.1-1.2% overnight as regulators continued to review the margin lending requirements that up until recently helped the indices gain almost 50% over the past four months. Risk appetite was crimped further as crude prices extended declines with front month WTI prices closing below $45/bbl for the first time since February 2009.

Spot gold prices closed 0.6% lower yesterday on comments from the Fed which signalled that US economic growth was on track and that a potential rates rise this year was increasingly likely. Prices for the precious metal close briefly slipped back below $1,280/oz before partially recovering some of the day’s losses, closing a cent below $1,284.50/oz as investment demand waned. Despite the overall risk averse mood among market participants, an encouraging medium to longer term outlook from FOMC members increased the likelihood of a late 2015 interest rate rise, prompting investors to pull out of the safe haven and take short term profits off the table. The yellow metal rallied towards $1,310/oz this month, gaining 10.8% since the start of the year as uncertainty surrounding the outcome of the Greek elections and ECB stimulus encouraged safe haven buying. However, with policymakers and central bankers offering a clearer outlook for global capital markets we expect to see prices extend the retracement. Currently gold prices are trading within the week’s range, with firm support at the 50 week MA, any moves in breach of this level could see losses extend back towards $1,250/oz and below.   

Front month WTI prices close below $45/bbl

CL1 Comdty Generic 1St CL Fut 2015 01 29 07 58 22

Spot gold prices remain within the week's trading range

XAU Curncy Gold Spot Oz 2015 01 29 07 58 42

Events for today

0855

DE

Jan

Unemployment Rate

1000

EZ

Jan

Consumer Confidence

1330

US

w/e

Jobless Claims

1500

US

Dec

Pending Home Sales

1530

US

w/e

EIA Nat Gas

2330

JP

Dec

CPI

2330

JP

Dec

Industrial Production

E

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