Not tonight Josephine

There was a sense at the end of last week that we could have a bit of bear closing into the month’s end. Both the US dollar and Vix index falling in the previous week set up the potential for a modest bounce in equities, and so it proved. Eurozone inflation fell more than expected to 2.9% in October, which will definitely support the view the ECB will not be pushing rates any higher, and at this rate, as that economy continues to falter, introduce the debate as to whether a cut could be on the horizon.

The Chinese economy continues to falter as the release of the latest Purchasing Manager Surveys for both manufacturing and services came in below expectations, helping to support the view the Bank of China will do more to stimulate that economy. It’s a busy week for central bankers as news that the Bank of Japan said on Tuesday it will take a more flexible approach to controlling yields on 10-year government debt, saying the 1% level was now a reference point.

Tonight we get the outcome of the meeting of the Federal Reserve, fair to say it’s pretty much a slam dunk that interest rates will remain unchanged. The question is what will the rhetoric that accompanies the announcement from the Fed? That again is fairly predictable. The Fed’s jobs are not done yet, inflation remains above the Fed target and the central bank must remain vigilant. Powell will probably refer to the resilience of the consumer, the recent GDP report, but may also on the more dovish side, note some signs of a weakening in the jobs market. We will get further insight on the jobs market later on Wednesday from the release of the latest jobs openings report. Post the announcement and Powell’s press conference we shall see what happens in the bond market and will two-year yields, which currently hover around 5%, fall below that figure. Will it be a dovish or hawkish pause I guess is the question?

Although we have had something of a bounce in equities towards the month’s end, equities overall have had a pretty lacklustre couple of months. At this time investors usually prepare for the Yule Tide rally. This year it feels harder to get a sense of what might drive that year-end cheer. What’s going to drag investors’ desire to take their hard-earned cash, currently being safely invested in government fixed debt, with the economic and political uncertainties, from there into equities? On the plus side, those who wanted to sell probably have done so and sentiment is generally pretty depressed, after the correction that has taken place already, which may limit any further major declines. Tonight is unlikely to be the night to change that view.