European markets are jittery once again today as investors are a little skittish about the longer term trend. Last night, Wall Street lost most its momentum as the focus turn towards the upcoming FOMC minutes and this remain the focal point today. Investors are certain that the Fed surely wants to increase the interest rate next month provided that the economic data does support their view. The CPI data released yesterday has provided Fed some subtle signals about inflation and the Fed must be feeling a lot more confident if they are going to trigger the button on a rate hike during the next month.
Last month we had the best US non farm payroll data for some time and this augmented another 2.5% move for the dollar. Unfortunately, the manufacturing sector still remains as one of the worst sector for the US and it is suffering its worst period since 2008. Janet Yellen has been preparing the markets for some time about the rate hike and she has delivered very hawkish comments for the last few months. Hence, the FOMC meeting minutes, which are due later today will be dissected by traders. Investors will not only like to have the confirmation that a rate hike is taking place next month, but they will also try to guess how much these will be rising as well.
Market participants are widely pricing in that Miss Yellen will increase the rate by twenty five basis points. However, what is more important is that there is no such mandate for them to follow and the fed is allowed to to raise the interest rate as they desire.
Therefore, for us, hiking the interest rate is not that much of an issue, but the surprise element could be in their approach and how much they will be lifting this up. They can unquestionably take a very dovish approach and raise may be only 10 basis points which will make the market participants think that the Fed are not that serious in brining the rates back to their normal level and hence, we could see a much stronger rally for the equity market.
On the flip side, if the Fed increases the rate by more than 25 basis points, this will give a very hawkish message – although, the odds are very low for such an event. Not that the market will be surprised by such an event, but it could also trigger a much bigger sell off.
Therefore, today’s minutes will provide the insight sentiment about the fed’s intention to raise the interest rate month and the pace of those rate hikes.