European futures are pointing to a higher open on Wednesday ahead of the FOMC decision and statement this evening, which could offer clues on the timing of the first rate hike in more than nine years.
While indices are expected to open higher, reflecting a higher risk appetite among investors, there is likely to be an element of caution in the markets today. While no change in interest rates is expected from the Federal Reserve, this is the final meeting before September which is when many believe that first hike will come.
That makes the wording of today’s statement all-the-more important, especially as it isn’t accompanied by a press conference. The wording of the statement is going to be over-analysed to the extreme as investors try to determine whether September is still on the table.
As is often the case, there is likely to be a case of confirmation bias going on which is why it’s so important that the Fed gets this right. It does not want to cause enormous shocks in the markets when it does raise interest rates and until now, a lot of people have not been accepting the message that it wants to raise rates this year. If anything in that statement confirms these suspicions in any way, the Fed may be setting itself up for big market volatility down the road. Unless, of course, its view has actually changed, at which point it should make this perfectly clear.
The chances are, the statement is going to be barely changed and any changes are the usual caveat on everything being data dependent will be included. What is changed though, no matter how small, is going to be picked up and taken very literally.
Any suggestion that September remains the preferred lift-off date would be very interesting for the markets because, until now, I think people have been in denial. The Fed must be aware of this and will probably also stress that future hikes will be slower than normal, to offset too large a reaction. In this scenario, the reaction in the dollar and Gold will be very interesting. The latter has had a rough ride recently and while it has stabilized, the threat of a rate hike could set it off again and open up the possibility of a move back to $1,000.
There isn’t too much data being released today to offer a distraction from the Fed statement. German Gfk consumer climate and UK net lending to individuals figures this morning may be of some interest, as will US pending home sales data later on. The most interesting for me is the crude inventories data, given the steep decline seen in oil prices again as of late. Brent crude has stabilized in the last 24 hours following four straight sessions of declines but another surprise build today could push it back below $50 for the first time since 30 January.
The FTSE is expected to open 23 points higher, the CAC 21 points higher and the DAX 39 points higher.
For a look at all of today’s economic events, check out our economic calendar.