The eve of the Federal Reserve’s decision: Oil prices exceed 100, U.S. bond yields exceed 5%, what traders will watch tonight

When oil prices return to $100 and U.S. bond yields exceed 5% again, the market is reassessing whether the Federal Reserve will tighten policy again?

The recent rise in energy prices and the resurgence of inflationary pressures have caused rapid changes in interest rate expectations.

The market, which originally paid more attention to “when the Federal Reserve will relax”, has begun to re-discuss “whether it is necessary to raise interest rates and how long high interest rates will remain.”

This has also significantly increased the importance of this week’s FOMC meeting.

At 2 a.m. Beijing time on September 17, the Federal Reserve will announce its latest interest rate decision and simultaneously update its economic forecasts.

For traders, what is really worth paying attention to at this meeting is not just the final interest rate number, but the Fed’s latest judgment on inflation, energy prices and the future path of interest rates.

Why is this Fed meeting suddenly more important?

Changes first come from inflation.The latest announced U.S. CPI in August rose 0.4% month-on-month and 3.4% year-on-year, with gasoline prices rising 3.9% in a single month, contributing more than one-third of the overall CPI increase that month.

At the same time, supply risks posed by the situation in the Middle East continue to push up energy prices.

As of September 15, Brent crude oil has risen to around $107/barrel.

Strong inflation data coupled with rising oil prices also quickly changed the market’s judgment on this meeting.

Previously, the market had discussed more about whether the Fed would continue to remain on hold, and the latest Reuters survey showed that 85% of economists surveyed expected to raise interest rates by 25 basis points this week, raising the federal funds rate target range from the current 3.50% to 3.75% to 3.75% to 4.00%.

In fact, the Federal Reserve made it clear at its July meeting that inflation is still above its 2% target, and supply shocks such as energy are also pushing up some prices.

So the real question to be answered at this meeting has become whether inflationary pressures are enough for the Fed to restart raising interest rates, and how much longer the tightening is likely to continue.

Why did the 10-year U.S. Treasury bond exceed 5% again?

Changes in interest rate expectations have been reflected in the bond market in advance.

On September 15, the U.S. 10-year Treasury bond yield once rose above 5.021%, breaking through near the October 2023 high and entering the high range since 2007.

The logic behind it is not complicated.

Rising oil prices have increased inflationary pressures, while inflation risks have strengthened market expectations for further tightening of policy by the Federal Reserve.

In this case, bond prices come under pressure and yields rise.

The 5% 10-year U.S. bond yield deserves attention because it not only affects the bond itself.

As an important global reference for long-term interest rates, U.S. bond yields continue to remain high, which will further affect corporate financing, housing loans, stock valuations, and global capital flows.

Therefore, after this FOMC, whether U.S. bond yields can continue to remain above 5% will also become an important signal for observing how the market repricing interest rate expectations.

What is the most worth watching in this Federal Reserve decision?

If interest rate hikes have become the mainstream expectation of the market, then whether there will be an eventual rate hike may not necessarily be the most important information.

The first thing worth paying attention to is the economic forecast and the future path of interest rates.

The September meeting is a quarterly meeting with the Summary of Economic Projections (SEP), where the Fed will update its judgment on economic growth, unemployment, inflation, and policy interest rates.

Traders need to pay attention to two issues in particular:

Will interest rates continue to rise in the future? How does the Federal Reserve evaluate the impact of energy prices on inflation?

If the Fed believes that current inflationary pressures still require further tightening, the market may continue to increase expectations for subsequent interest rate hikes.

Conversely, if the Fed raises interest rates but remains cautious about its next policy move, the hawkish expectations that the market has already priced in may also be revised.

What market reactions can traders pay attention to?

For EagleTrader traders, there are several types of markets that can be focused on following this resolution.

The U.S. dollar index, EUR/USD, and USD/JPY can directly reflect the market’s rejudgment of the path of U.S. interest rates;

Gold needs to pay attention to changes in the U.S. dollar and U.S. bond yields at the same time; crude oil is still under the dual influence of geological risks and high interest rates.

The U.S. 10-year Treasury bond yield may be one of the most direct indicators to judge how the market understands this meeting.

If the Fed releases a more hawkish message than market expectations, expectations of high interest rates may be further strengthened;

If the policy stance is not as tough as the market had previously bet on, it could trigger another round of revisions to expectations.

Therefore, when the Federal Reserve decision is about to be announced, instead of judging in advance which direction the U.S. dollar, gold or crude oil will move, it is better to pay attention to whether there is a new “expectation gap” between the final announced policy and the expectations that the market has already factored in in advance.

This may also become the key to the re-pricing of the U.S. dollar, U.S. debt, and major global assets in the coming period.

This article is only shared as EagleTrader international macro and market information and does not constitute any investment advice.

There are risks in the financial market, please trade with caution based on your own circumstances.