Oil Should Give The Fed ‘Pause’

December 18, 5:00 pm EST

Stocks hover around the February lows, as we head into tomorrow’s big Fed decision.

Although the calls for the Fed to pause on its rate hiking path have been building (including many requests via Twitter from the President), the market remains prepared for a hike.  The interest rate market is pricing in about a 72% chance.

We’ve talked about the influence of oil prices on the Fed.  Oil continued the aggressive slide today.  After breaking $50 yesterday, it was down another 7% today.

This gives the Fed more reason to pause — increases the chances of a surprise tomorrow.  Remember, they have a history of taking action in response to big adjustments in oil prices.

We had a similar scenario in late 2015, early 2016.  They made their first post-crisis hike in December of 2015.  But by January, they realized that the collapse in oil prices were threatening another global financial crisis. The Fed had forecasted four hikes that year.  They took three off of the table (effectively easing) in response to the vulnerabilities that were bubbling up in the global economy from the dive in oil prices.  At the time, with oil prices under the level of profitable production for the shale industry, over 100 companies were already in bankruptcy.  And the default clock was starting on countries that are highly depending on oil revenues.

On that note, Saudi Arabia released its 2019 budget today and needs crude oil 60% higher to meet its 2019 spending needs ($84 in brent or equivalent of $74 in wti crude).  Oil in the $40s today looks like it may be as dangerous as oil in the $20s and $30s two years ago.

Here’s a look at the crude chart today…

dec18 crude

You can see crude has retraced about two-thirds of the move off of the bottom in 2016.  This hits a big technical support level (a 0.618 Fibonacci level).

Remember, back in 2016, it took a coordinated response by central banks to stop the collapse in oil and turn the tide (China, the Fed, the BOJ and the ECB).

The BOJ intervened in the dollar the same day oil bottomed.  Interestingly, tomorrow the Bank of Japan will follow the Fed with a decision on monetary policy.  We’ll hear from the Fed tomorrow afternoon, and from the Bank of Japan tomorrow night.

We’ll see if they respond to an increasingly concerning fall in financial markets.

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