The Federal Reserve's latest meeting minutes were released yesterday afternoon, showing no major changes. In subsequent meetings, most Federal Open Market Committee members favored "flexibility and optionality".
Market flows appear to be stabilizing, and movements are becoming more consistent with published economic data. After the Christmas break, it's time to get back to the fundamentals of the financial market. Following a strong start to the new year, the US dollar has remained in a range and in fact today it's slightly up from yesterday's close. Market interest rates remain stable but relatively low compared to the year's highs, putting downward pressure on the US dollar. Everything will be determined by the economic indicators that are being published these days, such as labor market figures.
The JOLTs data published yesterday showed that job offers were well above forecasts, pushing the US dollar slightly up. Also, when the JOLTs numbers went up, the American stock markets fell quickly before returning to where they were before, amid sentiments that the Fed would raise interest rate in the next policy meeting given the stronger labor market figures that signal the economy is growing.
In theory, this data does not have to be a precursor to the most important employment figure, non-farm payrolls, which will be released tomorrow and will have a greater impact on the market. Furthermore, today's ADP non-farm employment change figure is often a sign of what tomorrow's non-farm payrolls number will be, but it can also affect the market. ADP employment data excludes the farming industry and government and shows the estimated change in the number of people employed in the private sector over the previous month. In short, the market is more reliant than ever on published economic data that is likely to be used to guide the Federal Reserve's interest rate decisions.
The minutes from the most recent meeting of the Federal Reserve were made public yesterday afternoon, showing no major changes from previous meetings. However, most Federal Open Market Committee members leaned toward "flexibility and optionality" in subsequent meetings. This means that the Fed will probably only raise interest rates by 25 basis points at its next meeting. This will give the Fed more time to determine how recent monetary policy decisions have affected inflation. Although nothing changes in terms of how far the Fed funds rate will rise, it does open the door to a pause, or even an end, to the increases if inflation continues to fall, or the economy, particularly the labor market, shows signs of vulnerability.
In fact, after the Fed minutes, treasury yields were flat, even falling just a few basis points. The North American indices experienced another session of ups and downs after the minutes were released. They have been trading in a narrow range for nearly two weeks now. Oil was the most important mover, dropping $4 to trade below $73 as predictions of a drop in global demand put more pressure on the market.
Sources: Bloomberg, Reuters