The highlight of the coming week is the FOMC rate decision and the US non-farm payrolls release.

At the December meeting, the Fed raised its benchmark rate for just the second time since 2008. Fed also signaled three rate hikes in 2017.

The decision to hike rates in December was uncontroversial… moreover; the financial markets were rock solid (and continue to remain so).

Fed - Faster growth under Trump, but no boom

The minutes of the December meeting released earlier this month showed “officials expect Donald J. Trump’s election to result in somewhat faster economic growth over the next several years, but they see little chance of the boom.”

“Participants emphasized their uncertainty about the timing, size and composition of any future fiscal and other economic policy initiatives as well as about how those policies might affect aggregate demand and supply,” the minutes said.

Any real shift in stance - faster rate hikes/slower rate hikes, would require more clarity on fiscal policy.

Fed on a Wait and Watch mode, little room for dovish talk

• There is little the Fed can do given the fact that the clarity it seeks with respect to fiscal policy is at least a few months away.
• The 5-year forward inflation expectations continue to rise and are currently at the highest level since June 2015. Oil is widely seen testing $60 this year. That should aid further rise in the inflation expectations.
• Also note that the equity markets are no longer afraid of the rising yields. Moreover, markets in general see rising yields as a positive sign.
• So far, Trump has delivered on almost every ‘hard’ promise. Hence, it is logical to assume that a fiscal stimulus is more or less a done deal.

Markets see a combination of protectionism and fiscal stimulus as a net positive for the US economy.

At the most, the Fed could express concerns regarding a strong US dollar. President Trump and Treasury pick Steven Mnuchin attempted killing the US dollar rally, but failed. The fact remains that Trump can’t have it all. The market knows that and thus, Fed’s concerns regarding the strong US dollar could receive a lukewarm response.

The Fed may reiterate that the downside risks to their forecasts includes a possible trade war under Trump, as well as the possibility that his policies may not live up to expectations.

However, markets are in no mood to buy any argument against ‘Trumpflation’.

Inflation expectations suggests Fed could actually sound more hawkish

5-year forward inflation expectations chart

Source: stlouisfed.org, Chart by- Tip TV

• The inflation expectation rate as of January 24 stood was 2.19%. The declining trend line resistance is seen around 2.4%.
• Oil prices currently trade in $50-$52 range. As said earlier, there is widespread belief that prices could rally to $60 in the medium-term.
• Also take into account the increased likelihood of Trump delivering on his fiscal stimulus promise.
• Thus, there is every possibility the inflation expectation rate could breach the trend line hurdle around 2.4%. Such a move would open doors for 3%; a level last seen in 2013 and 2011.

Gold could feel the heat of Fed’s hawkish tone

Despite Gold’s stellar recovery from the December low of $1122 to $1220, the larger picture remains bearish.

Monthly chart

• Take note of the repeated failure at the descending trend line resistance last year.
• The recovery from the December low has run out of steam at monthly 5-MA
• Furthermore, we also see a large head and shoulder formation, with neckline support around $1100 levels.
• The yellow metal could breach the 50-DMA support of $1175 and extend losses towards $1150-1140 levels in case Fed sounds more hawkish than it did in December.

EUR/USD - Potential inverse head and shoulder?

Daily chart

• Failure to take out early December high of 1.0796 followed by a sharp drop on January 26 (accompanied by a surge in volume) suggests the stage is set for a re-test of the area around 1.05 handle on hawkish Fed.
• A rebound from 1.05 handle would lead to inverse head and shoulder formation with a neckline around 1.0770 levels.

SPX - Bulls are in control

Daily chart

• Ascending triangle breakout (bullish continuation pattern) and the fact that higher rates/yields are no longer being read as negative for the equities suggests the index is set to scale new heights.
• Short-term bullish invalidation is seen only below 2254.3 (Jan 12 low).