Daily Market Color

Oil Boosts Risk Assets but Markets Struggle for Direction After Timid Fed Statement and Mixed Data

US stocks and Treasuries both fluctuated as investors digested yesterday’s FOMC announcement, mixed economic data, and corporate earnings.  The Fed statement didn’t contain any major surprises as the rate policy remained unchanged, but there were some notable changes in the language that the market interpreted as largely dovish.  The Fed retained asymmetric guidance language which suggests that its next move remains a tightening, but the tentative tone did nothing to suggest that a move at the next meeting in March is likely.  The statement omitted the key phrase that the Fed is “reasonably confident” that inflation will return to the 2% target over the medium term.  The committee added that the forecast for inflation “is expected to remain low in the near term, in part because of the further declines in energy prices”.  The Fed also acknowledged the recent market volatility by saying they are “closely monitoring global economic and financial developments” and assessing the implications on the US outlook.  The main takeaway is that the Fed wasn’t prepared to remove the possibility of a March rate hike, but the tone of the language suggests it is now less likely and that four rate hikes this year may no longer be the Fed’s base case.

Crude climbed for the third straight day to the highest level in three weeks on hopes that an agreement can be reached among producers to cut supply.  Russian Energy Minister Alexander Novak said that Saudi Arabia, OPEC’s largest producer, had proposed oil production cuts of up to 5% after previously being opposed to any such move.  This would be the first global deal to cut production between oil producing countries in over a decade.  A few issues still remain, including how to oversee the cuts and because of the position of OPEC member Iran.  Iran wants to raise output, not curb it, after the recent lifting of western sanctions related to the nuclear deal.

US economic data released today had mixed results.  The number of Americans filing for jobless claims benefits declined from a six-month high last week, falling by 16,000 to 278,000.  Durable goods orders, however, plunged 5.1%, declining by the most in ten months.  A drop in aircraft orders is responsible for part of the decline, but bookings for non-military goods excluding aircraft, a proxy for business capital spending, also fell 4.3%. 

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