Consumers Are Still Spending, Making a 50bps Interest Rate Cut Less Likely

Also, 30-year T-bond, silver, crude oil and Japanese yen futures

1. S&P 500 E-mini futures (/ES): +0.43% 

2. 30-year T-bond futures (/ZB): +0.15% 

3. Silver futures (/SI): -0.21% 

4. Crude oil futures (/CL): +0.51% 

5. Japanese yen futures (/6J): -0.39% 

The last big data point to drop ahead of tomorrow’s Federal Reserve interest rate decision tempered expectations for the 50-basis-point (bps)rate cut, with retail sales data showing the U.S. consumer continues to spend money. U.S. equity futures moved higher after the opening bell, with hopes that a 25bps rate cut will signal confidence in the soft-landing narrative the Fed has chased for years now. Elsewhere, the dollar rebounded, and crude oil prices rose. About 12% of oil production in the Gulf of Mexico remains shut down after Hurricane Francine moved through Louisiana.  

Traders appear confident ahead of the expected Fed rate cut, as S&P 500 futures (/ESZ4) rose about 0.5% Tuesday morning. Intel (INTC) is up 5% in pre-market trading after it was revealed the chip maker would spin off a foundry business. That would enable it to raise money more easily with the business segmented from its larger operations, which haven’t impressed investors in recent years. Microsoft (MSFT) is also making gains after the company boosted its quarterly dividend. This morning’s retail sales data also firmed up expectations for a soft landing, which added a tailwind to market sentiment.

The retail sales data showed the Fed isn’t facing harsh conditions as it prepares to cut interest rates this week. That sent bond yields slightly lower along the middle- and long-ends of the curve. 30-year T-bond futures (/ZBZ4) rose 0.07% ahead of the New York open. The Treasury will auction 20-year bonds today. 

Silver prices (/SIZ4) are stalling near levels not traded at since mid-July, as the dollar catches some bids ahead of reaching its August low. The upbeat economic conditions highlighted by the retail sales data reduced the chances the Fed would cut interest rates by 50 bps, which would likely benefit the non-interest-bearing asset. Meanwhile, gold prices (/GCZ4) also face some pressure this morning.  

Today is all about inventory numbers from the American Petroleum Institute (API). Crude oil prices (/CLX4) rose slightly this morning, continuing a trend higher from the Sept. 10 swing low, but there is still plenty of work to do to recover from losses suffered earlier this month. China’s refinery activity dropped for a fifth month, which kept traders on edge over the faltering demand story that has plagued oil recently.  

Japanese yen futures (/6JZ4) declined slightly today after reaching levels from early January. The reduction in the chances for a larger Fed rate cut is pulling on the Japanese currency, although it should remain slated for more gains through the year as the policy divergence between the Fed and Bank of Japan shifts. That said, buying into weakness is likely the move to watch in the yen.  

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

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