Trump, Fed Minutes Fuel Major Reversals Across the Board

It was a day of reversals on Wednesday with several futures markets changing direction during the course of the trading session due to a political decision by U.S. President Donald Trump and mixed U.S. Federal Reserve meeting minutes. September 10-year U.S. Treasury Notes traded lower before closing higher on a drop in yields. The U.S. Dollar responded by erasing all of its early gains to close lower and gold rebounded to close higher after early session weakness.

Political News

The first wave of volatility hit the markets after President Trump tweeted that he would disband his advisory councils filled with leaders of corporate giants. This served as a reminder to some that Trump may not have the experience to run a government.

Economic News

The second wave of volatility was fueled by the minutes from the Federal Reserve’s July meeting that highlighted a split between FOMC members who wanted to stay the course and continue to raise rates and those members who preferred the Fed slow down the tightening process.

The more dovish meeting participants expressed “concern about the recent decline in inflation” and said the Fed “could afford to be patient under current circumstances.”  The “argued against additional adjustments” until the central bank was sure that inflation was on track.

The more hawkish FOMC members “worried about risks arising from a labor market that had already reached full employment and was projected to tighten further.” They also argued that delaying a steady dose of rate hikes could cause the Fed to overshoot its employment target and cause financial instability.

FOMC members also agreed that the process of reducing the Fed’s massive balance sheet should begin “relatively soon,” with some members arguing for a more concrete date to be set.

In their assessment of the economy, the FOMC members were largely impressed, especially in the areas of employment and household spending. Fed officials were less optimistic about the federal government doing its part to stimulate the economy through fiscal policy.

Financial Market Response

Both Trump’s announcement and the Fed minutes were surprise events and investors responded accordingly, first driving U.S. Treasury yields lower. This news made the U.S. Dollar a less attractive investment, encouraging investors to sell the Greenback against all major currencies. A weaker U.S. Dollar made gold look attractive, increasing foreign demand for the dollar-denominated asset.

In essence, the U.S. Dollar and gold mirrored each other with the dollar falling from its session high and gold rallying from its session low.