Investors Positioning Ahead of Next Week’s Fed Monetary Policy Decision

Positioning ahead of next week’s U.S. Federal Reserve monetary policy meeting is primarily driving the price action in the U.S. Dollar and other dollar-denominated commodities such as gold and crude oil. Early Thursday, the U.S. Dollar is mounting a slight recovery from early session weakness. This is pressuring gold and putting a lid on crude oil prices.

An Early Look at the Fed Meeting

The Federal Open Market Committee (FOMC) will hold a two-day meeting on December 18-19. It is expected to raise its benchmark interest rate 25 basis points, however, the focus for investors will be on the number of rate hikes protected for next year. Expectations for further rate hikes in 2019 have tempered lately due to fears of weakening U.S. economic growth.

Government Debt Yields Slip

U.S. Treasury yields dipped on Thursday after the European Central Bank announced the end of its nearly four-year bond-buying program at the end of December. Yields fell because the end of the central bank’s quantitative easing program means more supply will be available in the debt markets. Investors will see the amount of debt purchased by the ECB drop from 15 billion Euros per month to zero.

U.S. Economic Data

It was a light day as far as economic reports were concerned. Import Prices fell 1.6%, more than the expected -1.0%. Weekly Unemployment Claims came in better than expected at 206K. Traders had priced in a reading of 226K.

The Federal Budget Balance fell 204.98 Billion. This deficit was worse than the expected -193.5 billion. The Treasury’s 30-year Bond Auction came in at 3.17 percent, down from 3.42 percent.

The Weekly Unemployment Claims report attracted the most attention. It showed that the number of Americans filing applications for jobless benefits tumbled to near a 49-year low last week, which could ease concerns about a slowdown in the labor market and economy.

Initial claims for state unemployment benefits dropped 27,000 to a seasonally adjusted 206,000 for the week-ended December 8, the Labor Department said on Thursday. Last week’s decline in claims was the largest since April 2015. Claims hit 202,000 in mid-September, which was the lowest level since December 1969. During the week-ended November 24, claims rose to an eight-month high of 235,000.

The four-week moving average of initial claims, considered a better measure of labor market trends as it levels out week-to-week volatility, fell 3,750 to 224,750 last week.