US markets spent the day in retreat, dragging European indices down for the ride as disappointing US economic data dragged on sentiment. Durable goods were particularly poor, coming in below expectations for September and August being revised even deeper into the red, while consumer confidence took a tumble as well.
In recent years, this kind of down data ahead of a FOMC decision would have sparked stimulus speculation and a rally in stocks. Since the last Fed meeting, however, the market reaction to dovish news has changed with traders seeing economic weakness as a sign corporate earnings and resource demand could decline in future.
Worries about oil demand, and the potential sale of some of the US Strategic Petroleum Reserve to fund the proposed debt limit deal sent WTI sharply lower again Tuesday and sparking related declines in CAD and NOK. JPY and NZD have been among the stronger currencies ahead of the Bank of Japan and RBNZ meetings later this week indicating that traders do not expect a repeat of last week’s ECB/PBOC dovishness.
The two-day FOMC meeting is underway with the big decision due tomorrow afternoon. Even though it appears a deal has been reached to raise the debt limit out to 2017 and past next year’s Presidential Election, the risk, although smaller, still remains of a potential government shutdown in December. Between this and the soft US data (although volatility and instability in China have subsided) the Fed remains likely to remain on hold this week.
The big question is whether the Fed will signal whether an increase remains possible for December (hawkish hold) or if liftoff could be pushed off to 2016 (dovish hold) , as this could have a big impact on market confidence for the next six weeks.