For our oil market at least, it seems as if there is a conspiracy in events to keep us in a quiet range. The United Kingdom hosted Germany, France (coined E3 after being so named in the Iran nuclear deal) and Ukraine in what was hailed as a show of solidarity for President Volodymyr Zelenskyy. To cast a commercial and possibly cynical eye over the proceedings in London yesterday, and further meetings in Europe today involving Zelenskyy, one wonders what has been achieved other than adding more intrigue. There are now tri-partite negotiations, American and Ukrainian, Ukrainian and European and European and American, before any reference is even made toward the war-making ‘baddie’. Vladimir Putin must be rubbing his land-grabbing hands together as Europeans, reverting to stereotype, proceed to slow everything down by pompous grandstanding, bloviation and complication.  Meanwhile the Russian war machine inches further forward into Ukraine fuelled by the less-than-complex strategy of its President telling all and sundry it is willing to sing-along with John Lennon and ‘give peace a chance’. 

The reparation loan scheme devised in Europe where seized Russian assets will be used to aid Ukraine’s war effort is being held up by Belgium. Sanctioned booty to the tune of €165 billion is captured in the international depository Euroclear of Brussels, with the lowland country being unwilling to find itself liable to a massive future Russian claim for reimbursement if it agrees to unfreeze all or part of the monies held in legal escrow. Europe rightly feels threatened by a prowling land gobbling Russian bear, but if it is to interfere it must do with purpose rather than virtue signalling. At present all this does is serve well the intentions of Russia and antagonise the United States. And, back to commerciality, along with events about to be unveiled within the US Federal Reserve, help to cloister our market.

A Fed fascination

The stage is set, the lights are bright, the interlocutors gather, let the jawboning begin. Yes of course, the US Federal Reserve and its Federal Open Market Committee will hold all attention, as it has done for the last fortnight with the interest rate decision which might shape the future of interest rates in the United States. Strike that, more likely the whole globe’s cost of borrowing due to the incredible influence of the US Dollar. In a world that has dropped into special forces behaviour in only dealing with what is two metres in front, this one has had arms stretched towards it since Donald Trump announced an intention to fire Fed governor Lisa Cook back in August. Even though the Supreme Court allowed Cook to continue in her role, the damage is done in how the market perceives executive governmental influence into what should be an independent body. 

The numerical decision in moving the rate is important enough, yet how the members line up to vote might well be more keenly watched. One of the major roles for the Fed is to display calm and togetherness, and while members in the past must have found points of argument and internal dissention, the overt impression needs be one of accord and unanimity. This meeting is unlikely to show such bonhomie, and many analysts are lining up behind the idea of several dissents over the next two days of meetings. One might assume that argument comes from the progressive members led by the new kid on the block and Trumper, Stephen Miran bearing in mind his vote for a double 50-basis point cut in October, but it is in fact from up to five members of the twelve-person board who are unhappy with the state of interest rates and their upward drift away from the bank’s 2 percent target. The core personal consumption expenditure price index, which excludes food and energy items considered by the Fed as their key inflation indicators, rose 0.2 percent month-on-month and 2.8 percent year-on-year in September. Hawks can easily be conceived as pointing out that after the longest government shutdown in US history, to rely on three-month old data may not be sound judgement no matter what the screaming reaches of stock market bulls declare.

The members are not in the business of looking after the welfare of investment positioning in equities, but any extension of periods that are deemed ‘overvalued’ in stock market circles will instead likely ping on antennae of members sensitive to inflationary pressures. Coming up on the rails of things that have been overlooked will be the release of the fourth quarter Summary of Economic Projections. This allows longer-run looks at rates of growth, employment and inflation, but again if the Fed is somewhat split on a rate decision in the immediacy, the clash of opposing views will be recorded and markets will be well told on what is causing divergence, not only now, but possibly for the future. 

This is as anticipated a meeting as we have witnessed all year and might culminate in being a deemed a hawkish cut. Curious, but nonetheless accurate. Pricing in such mechanisms as the CME FedWatch tool all but guarantee the probability of a cut, but it does not map what could be in the future. This is where the Fed might just put out its stall of defensiveness. There will always be a caveat on how the central bank will ‘follow the data’ and with the next decision due at the end of January almost guaranteed to be a push while any reaction from a December cut is measured. There is also the distinct possibility that the US government will once again be in shutdown with a possible repetition of a data desert. Any future accelerative swing in inflation, no matter how mild, will be greeted with quite a stringent-stingy dot-plot for the March to June 2026 period with further two-way dovish/hawkish risks coming from the battle royal in the transition when Jerome Powell yields his Chair in May.

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