Markets continue to remain range bound across a wide swath of commodity sectors as participants are split on what action, if any, the FOMC will take on Thursday.
Relative strength in the S&P market as we roughly look at a 50% chance of a rate change should be viewed as a net positive, potentially signaling that a modest .25 basis point raise is priced in as a result of the recent weakness driven by Chinese economic slowing. Further confirmation of this possibility can be found in the weakness of the fixed income market with the 30-year bond price down over a handle and a half as the yield trades higher.
Recently, when the equity rally was due to the idea that the Federal Reserve would leave rates unchanged, we have seen the bond market mirror the rally in price. However, with today’s action we are seeing the market return to a more normal relationship with yields on fixed income products rallying with the equity markets.
Opinions are all over the map as to whether or not we will see a move this week, though it should be noted that there seems to be more hawkish (those advocating to raise rates) talk from the Fed members than we have seen in years. The narrative for those looking for a hike ranges from positive data supporting a move higher to the idea of just doing it to get the monkey off the markets back, so to speak.
In looking at the bulk of the U.S. data it would appear likely that the Fed moves this week with the short term fixed income market being the "best bang for your buck" market should one share that opinion. Fed funds for December 2015 are currently trading at 99.72 which would be significantly over priced should the Fed move up 25 points.
The crude oil maintains its range bound trade as well as it waits for the Fed as well as adheres to conflicting fundamentals. Worse than expected data out of China put a bit of pressure on the price discovery yesterday and this morning before elevated equities and talk about a possible global meeting being brokered by Venezuela with the chief topic being price support for the oversold crude markets turned the price higher.
Any knee jerk reactions to a move by the Fed are difficult to predict. While it would seem that a hike would bring about a risk off move (lower in crude), if the hike is in fact priced in, then the market could trade higher as participants could potentially view a move by the Fed as a vote of confidence in the U.S. economy.
Natural gas has finally shown some further strength yet the price discovery remains in the range. Trade above 2.82 should be visited with further buying over the coming sessions.