Markets quiet ahead of Fed
Volatility is low across the board as traders await the Federal Reserve meeting. Broadly speaking, economists are expecting interest rates to be hiked by 0.5%. Also on the agenda will be the Fed’s balance sheet, which currently stands at around $9 trillion, it is speculated the central bank will announce its intention to reduce the balance sheet by $95 billion per month, starting in June. A hawkish update from the Fed is expected, hence why we have seen weakness in stocks recently – the S&P 500 fell to its lowest mark in almost one year on Monday. Last week, the US dollar index rallied to a five-year high, but it has since cooled.
Yesterday, the Reserve Bank of Australia lifted interest rates for the first time in over one decade, and that sparked a major rally in the Aussie dollar, the upward trend continues today.
The latest US ISM non-manufacturing data was a little concerning. The headline reading ticked lower from 58.3 to 57.1 in April, but the finer details paint a less rosy picture. The prices paid metric edged up to 84.6 from 83.3 – suggesting we are not out of the woods yet with regards to rising prices. Activity is clearly cooling as the new orders reading was 54.6, down from 60.1. To matters worse, the employment metric swung from 54 to 49.5, a reading below 50.0 indicates contraction, so that spells trouble for future demand. There were already worries the economy is coming off the boil, and this report fuels those fears.
WTI and Brent crude are driving higher because the EU announced plans to impose a ban on Russian oil. It appears the bloc will look to stager its embargo and the aim to is halt the importation of oil from Russia in six months. Last week, Germany dropped its opposition to an EU wide ban on Russian oil, so the news from Brussels was not a shock. Even though the US dollar has pulled back from its peak, gold is still under a little pressure ahead of the Fed meeting.