Ahead of the FOMC

Markets are sending negative signals about the global economy but economic data isn't, at least not yet. The Fed is inclined to focus on data confirming its bias toward higher growth and inflation in 2016 so the risks are skewed toward disappointment. Markets were upbeat Tuesday and that will take a bit of pressure of the Fed. The latest Premium Video is up, tited "How High is the Rebound? Yen, Stocks & the Rest" assesses the technicals and fundamentals of the bounce in indices and dissects the latest similarities and differences from 2007-2008. The existing Premium trades are also revisited, with a preview to the Fed, RBNZ and key GDP reports.

Wednesday's FOMC decision only includes a statement, no press conference or forecasts. That limits the Fed's playbook to changing its guidance. Even then, the chance of a deviation from expecting “gradual” hikes is a longshot because the Fed has invested credibility in its optimistic outlook and a rough month in markets probably isn't enough to change that.

A token nod to markets or global financial markets in the statement would send a small message that the Fed is aware, worried and watching. That could be accompanied by a nod to downside inflation risks from oil. The combination would make a March hike extremely unlikely without completely taking it off the table (something the Fed doesn't want to do).

The risk is that markets kick and scream because the FOMC doesn't do enough. In that case, look for the commodity currencies to suffer further.

The economy continues to send mixed messages. US consumer confidence improved to 98.1 from 96.5 expected in January while the Markit flash services PMI was at 53.7 vs 54.0 expected. The Richmond Fed was square-on expectations at +2.

A separate spot to watch is gold. It broke out to a three-month high on Tuesday despite positive risk sentiment. The next two weeks will tell us a great deal about the gold market.

First is the Fed. Gold bulls would prefer a dovish outlook but we're more interested to see how it behaves if the Fed is less-dovish. If it could rally anyway, that would be powerful signal.

The other event to watch will be Chinese New Year. January is the strongest seasonal month for gold and that was true once again this year. Buying ahead of the Chinese holidays may have been the driving factor. If it sags as February begins and Chinese celebrations start, then it the bulls might quickly head to the exits.

The Australian dollar is a little firmer after trimmed mean (core) CPI rose 0.6% q/q vs exp 0.5% q/q. The RBNZ decision is also tomorrow, shortly after the Fed.