How will oil prices influence the Fed's next moves?

Caution is the word on financial markets on the eve of a major decision by the Fed on its key interest rates, with futures on the main Wall Street indices remaining flat this morning. There is little suspense about the decision itself, but there is much greater uncertainty about what comes with it, including the stance of US central bankers and their intentions for the future. And rising oil prices are only adding more worries.

On Western equity markets yesterday, the palette ranged from the bright red of France's CAC40 at -1.39% to the light green of the US Nasdaq 100 at +0.15%. In a way, the session rebalanced the small gaps seen the previous week. Europe lost some of the ground it had built up, while the US erased or almost erased its slight weekly losses. The mood is clearly one of wait-and-see, as we await tomorrow’s announcement by the Fed of a pause on interest rates (almost certain: there is a 99% chance the central bank's Federal Open Market Committee will not raise rates this time, according to the CME FedWatch Tool). Investors are also expecting updated economic forecasts from the central bank, as well as an offensive stance on the need to fight inflation (also almost certain).

I'm going to talk about rates, but let’s start with oil prices. The rise in the price of crude towards USD 100 is yet another headache for monetary policy. Brent crude oil touched USD 95 this morning, after rising 30% in six months. For collectors of historical statistics, its last foray above USD 100 was at the end of August 2022. I'm hardly going out on a limb here by announcing that the Fed will be mentioning the oil market situation on the sidelines of its monetary policy decision tomorrow. No doubt to justify its ever-vigilant approach to the inflationary situation. There is little doubt as to the choice that will be made on Wednesday: futures contracts show that a status quo on US central bank rates wins 99% of votes. Most of the stakes lie in the meetings on November 1 and December 13. For the time being, the market does not see rates moving from their current range (5.25% to 5.50%). The Fed is due to publish its famous "dotted chart" - well, famous in authorized circles, let's say - which is supposed to give some indication of short-term monetary policy. If this chart is more favorable than expected to another rate hike, and if Jerome Powell uses the surge in oil prices to toughen his rhetoric, the cursor could shift a little and cause the equity markets to lose some of their current carelessness.

Oh, and while I'm on the topic of negative things this morning, the Fed's countdown coincides with the return of questions about the federal budget, which were somewhat forgotten last week. By the end of the month, the US Congress must reach agreement on public spending. Failure to do so could result in a shutdown, i.e. the closure of certain non-essential government departments. History shows that these episodes sell more papers than they have an impact on the economy. But they do constitute phases of disorder and reinforce the polarization of American political life, which generally manages quite well in these matters without having to go through the psychodrama of the shutdown.

Today’s economic highlights:

Eurozone consumer price index, US building permits and housing starts. The full agenda is here. 

The dollar is trading at 0.9348 and GBP 0.8062. The ounce of gold reaches USD 1935. Oil resumes its upward march, with North Sea Brent at USD 95.39 a barrel and US light crude WTI at USD 91.80. The yield on 10-year US debt falls slightly to 4.31%. Bitcoin trades at USD 27,120.

In corporate news:

• Ford, General Motors - The United Auto Workers (UAW) union has threatened to extend the current strike action to other US carmaker sites if no significant progress is made in the current negotiations.
• Alphabet on Tuesday appealed to the Court of Justice of the European Union (CJEU) to overturn a €2.42 billion fine imposed by the European Commission for abuse of a dominant position in price comparison services (Google Shopping), arguing that regulators had failed to demonstrate that the group's practices were anti-competitive.
• Block is down 1.1% in pre-market trading, in reaction to the announcement that the CEO of its subsidiary Square is to step down on October 2. She will be replaced by Block chairman Jack Dorsey.
• Maplebear, the parent company of US shopping delivery platform Instacart, a company backed by Japanese conglomerate Softbank, will make its New York stock market debut on Tuesday at a guide price of $30 per share, valuing it at $9.9 billion.
• Target announced on Tuesday its intention to recruit almost 100,000 employees for the festive season, and to offer significant price reductions from October onwards.
• Rocket Lab plunged 15.3% in pre-market trading after the postponement of a satellite launch scheduled for the end of the third quarter. The company expects to revise its outlook for the current quarter in the next few days.
• Norfolk Southern announced on Monday the launch of a program to compensate homeowners around East Palestine, Ohio, who were forced to sell their properties at a discount following a train derailment on February 3, which resulted in the release of toxic chemicals in the area.
• Starbucks fell by 4% in pre-market trading, with TD Cowen downgrading the stock from "outperform" to "perform in line with sector" due to uncertainties over China.

In corporate news:

• Adobe inc: DZ Bank AG Research maintains its buy recommendation with a target price of USD 600.
• Amazon.com: Baptista Research upgrades to outperform from hold with a target price of USD 170.30.
• Apple inc: Baptista Research upgrades to outperform from hold with a target price of USD 210.
• Canadian national railway: RBC Capital maintains its sector perform rating with a target price of CAD 163.
• Cloudflare Baptista Research upgrades to outperform from hold with a target price raised from USD 64 to USD 73.30.
• Dell: Daiwa Securities upgrades to outperform from neutral with a target price raised from USD 50 to USD 80.
• Eli lilly: Baptista Research downgrades to underperform from hold with a target price raised from USD 460 to USD 591.50.
• Micron tech: Aletheia Capital Limited upgrades to buy from hold with a target price of USD 86.
• Natwest group pl: HSBC downgrades to hold from buy with a target price reduced from GBP 3.40 to GBP 2.60.
• S4 capital plc: Barclays downgrades to equalweight from overweight with a target price reduced from GBP 2.15 to GBP 0.95.
• Vulcan materials: Baptista Research upgrades to outperform from hold with a target price raised from USD 219 to USD 249.50.