Fed: Will they or Won't the Cut?

09/18/2019 1:15 pm EST

Focus: MARKETS

Bill Baruch

President and Founder, Blue Line Futures

Recent market disruptions and a tick up in inflation readings has added some uncertainty to today’s FOMC announcement, notes Bill Baruch.

E-mini S&P (ESZ)

Yesterday’s close: Settled at 3008, up 6.50

Fundamentals: U.S benchmarks jumped to session highs on yesterday’s close, ahead of today’s big Fed decision. For the last two months, the Federal Reserve has been fully expected to cut rates with nearly a 100% probability. In recent days, since another stronger than expected CPI read Thursday, those odds have dissipated.

Are the odds of a cut today truly a coin flip? As of Friday’s close, we certainly believed it was more accurate than the 85% probability markets were exuding. There have been two major market developments since then that have helped us believe a cut today is now very appropriate. Obviously, the attacks on Saudi Arabia over the weekend added another layer of geopolitical uncertainty. This comes during a time of broadly deteriorating growth around the world. Although the price of crude oil has been reined in, it rose as much as 15% and while this is inflationary such a move also raises concerns as extremely sharp increases in energy prices have been known to lead to a recession. Another reason is the massive jump in the overnight lending rate from the Fed’s benchmark 2%-2.25% to as high as 10.%. For the second day in a row the Fed is expected to inject $75 billion through repo operations ($53 billion yesterday). Industrial Production yesterday was the latest economic data point to come in much better than expected. Despite the growth picture domestically signaling less need for concern, China’s data Sunday night was at some of the worst levels since 2002. Furthermore, there has been no known headway on U.S.-China trade talks, the major culprit in that deteriorating economic outlook globally.

The Federal Reserve is not the world’s central bank but with pockets of uncertainty continuing to flash red (the overnight lending rate), we see no reason for them to alter the path they intended to set course down on July 31.

Technicals: Price action has been firm since the Sunday night open and gap lower. Still, the gap has brought a strong overhead hurdle and price action has not been able to chew through major three-star resistance in the S&P 500 at 3008.50. For the NQ, price action has bled through this level at 7908.25 but has not been able to hold out above here, we now aligned this with yesterday’s settlement at 7914.50. 

Crude Oil (CLX)

Yesterday’s close: Settled at $59.10, down $3.56

Fundamentals: Crude oil is back to levels seen at last week’s high and up only 6% on the week compared to 15% at the height of concern. Contradicting headlines yesterday led to a very volatile session. There were early reports that Saudi Arabia would recover production fairly quickly and then there was again doubt to the timeline. The price of November crude slipped from $62 to $58.50 and back to $60. In the end, new Saudi Energy Minister Prince Abdulaziz bin Salman said the country will be able to restore the lost production by the end of September, adding that it has been able to meet ongoing demand by drawing from storage.

Adding pressures to what was arguably an exacerbated tape is last night’s private API survey. They showed a build of 592,000 barrels, much less than the 2.496 million barrel draw analysts expect from today’s official EIA report. Additionally, API reported +1.599 million barrels Gasoline and +1.998 million barrels of Distillates. If EIA confirms something in line with API rather than analysts’ estimates of -2.496 million barrels of Crude, -0.538 million barrels of gasoline and +0.535 million barrels of distillates, we are likely to see additional pressures barring further contradictions out of Saudi Arabia or news of retaliation, which would be overwhelmingly bullish factors.

Technicals: Price action has slipped below major three-star support that was now at $58.80, a level tested two times since Sunday night, bringing buying opportunities, before the third test into yesterday afternoon was enough to break through.

Gold (GCZ)

Yesterday’s close: Settled at $1,513.4, up 1.9

Fundamentals: Its Fed decision day and gold has held ground extremely well above $1,500 despite odds of a cut dissipating to a coin flip. As we discussed in the S&P section, we think a cut is now warranted compared to our belief last week that it was not so much. Given the sharp rise in overnight lending rates and the Fed’s repo operation to stabilize rates back to their benchmark, there are budding liquidity issues. A cut should pave the way for higher gold and silver but traders do want to keep a close eye on Fed Chair Powell’s post-statement press conference in case he throws cold water over the move; he did this on the July 31st cut when he called it merely a mid-cycle adjustment.

Technicals: Gold achieved a close back above the $1,510 level and now it must maintain such. This has reinvigorated our near-term bullish bias as we have remained unequivocally long-term bullish gold long term.

Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com.

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