Commodities drop with U.S. stocks before Fed as Treasuries climb

Fuels and precious metals led commodities lower and Treasuries rose before the Federal Reserve announces its plans for monetary policy tomorrow. The Standard & Poor’s 500 Index fell while the benchmark gauge of equity volatility extended gains to a two-month high.

The S&P GSCI Index of commodities lost 0.5% by 4:36 p.m. in New York as gold and gas oil fell at least 1%. The S&P 500 slipped 0.3% to 1,781.00 as the VIX volatility rose a sixth day to the highest level since October. The Stoxx Europe 600 Index fell 0.7%, paring back yesterday’s advance. Ten-year Treasury yields dropped four basis points to 2.84% and the yen rallied versus most peers. Turkey’s stocks and currency slid amid a corruption probe.

The cost of living in the U.S. was unchanged in November from a month earlier, a government report showed today, with the Fed to announce its decision tomorrow on whether it will maintain or reduce its $85 billion monthly bond buying program. The U.S. Senate advanced the government budget agreement to a final vote while German investor confidence increased more than economists forecast in December, data showed.

“There are so many people watching the Fed’s decision, so much money on the edge, that the market is sort of just jumpy right now,” Sam Wardwell, an investment strategist at Pioneer Investments in Boston, said in a phone interview. His firm manages about $225 billion. “Everybody knows the Fed is going to taper sooner or later. The question is, are people putting on too many short positions, or not enough short positions? This is everybody betting on the outcome so the market is going to be volatile.”

Fed Watch

The Chicago Board Options Exchange Volatility Index rose 1.1% to close at 16.21, after earlier retreating as much as 1.4%. The gauge of S&P 500 options known as the VIX gained in all but two of the past 16 days, adding more than 30% since Nov. 22. The S&P 500 has slipped 1.5% since its last closing record reached Dec. 9.

The Fed has kept its benchmark interest rate, the target for overnight loans between banks, at almost zero for five years. The odds of an increase by January 2015 are about 16%, based on data compiled by Bloomberg from futures contracts. About 34% of economists surveyed by Bloomberg on Dec. 6 predicted that the Fed will start paring bond purchases when it concludes a two-day policy meeting tomorrow.

No change in the consumer-price index followed a 0.1% decrease in the prior month, the Labor Department’s report showed today. The median forecast of 83 economists surveyed by Bloomberg called for a 0.1% advance. The core measure, which excludes food and fuel, rose 0.2%.

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