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Market Briefing: Markets Go Quiet Ahead of Fed Decision

Good morning and happy Federal Reserve day to all who celebrate. With asset prices resembling Schrödinger’s cat – simultaneously poised for a rally or a crash – bond yields are steady and exchange rates are tightly rangebound ahead of this afternoon’s highly-anticipated announcement.

The central bank is widely expected to raise rates by another three-quarters of a percentage point, while signalling a coming deceleration in tightening. The big question for markets is how Jerome Powell will manage the accompanying communications conundrum, somehow telling investors to expect a slower pace of rate hikes without triggering a drastic loosening in financial conditions. We suspect the Fed chair’s strategy will involve anchoring terminal rate expectations higher, but this will be difficult to execute in a durable manner.

Two consumer price index reports, one personal consumption expenditures update, and two non-farm payrolls numbers will drop between now and the December meeting. Market reaction to today’s announcement and press conference could be short-lived and prone to reversals in the days and weeks ahead.

Longer-term expectations ratcheted slightly higher yesterday after the number of job openings climbed more than expected in September. Accordingly to the latest Job Openings and Labor Turnover Survey, there were 10.7 million vacancies recorded in the month, well above the 5.8 million people employed and far more than economists had forecast – suggesting that wage and inflation pressures likely remained strong.

The Japanese yen is slightly weaker after Bank of Japan Governor Haruhiko Kuroda told parliament he expects inflation pressures to subside next year, making it appropriate to maintain yield curve control policies for longer. Although Japanese markets are closed today, currency traders remain on intervention watch, given the Bank’s penchant for tilting against post-Fed price action and for dropping large yen purchases into illiquid markets.

Oil prices are trapped within tight trading ranges, with West Texas Intermediate going for $88 and Brent changing hands at $95 a barrel. Global demand forecasts continue to fall as central banks keep tightening, but inventories are also weakening: data out later in the morning from the Energy Information Administration is expected to show North American crude inventories falling to 1.6 million barrels, with gasoline stocks down by 1.9 million barrels.

Observers expect the ADP employment report to show 195,000 jobs added in October, but markets are still assessing the payroll processor’s new methodology, and price action around the release should be minimal. There are no other major data releases scheduled for today.

Karl Schamotta, Chief Market Strategist

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