Oil price surge complicates Fed decision in volatile markets

Markets:

• WTI crude oil advanced $4.56 to $105.99
• Gold declined $2 to $4295
• US 10-year yields added 4.7 bps to 5.01%
• S&P 500 slipped 0.4%
• USD led, JPY lagged
• Bitcoin dropped 3.9%

Oil posted its 11th gain in 12 sessions and, as might be expected, it lifted yields and weighed on riskier assets. Markets are now pricing in a 92% probability of a rate increase from the Federal Reserve tomorrow, with another cut fully priced in before the end of the year. The key question for Warsh is how hawkish his tone will be. Pushing up the front end could help him build credibility on the long end, but his preference for strategic ambiguity may ultimately be interpreted as dovish. Either way, he will face a challenging situation in Washington on Wednesday afternoon.

On the oil front, prices were declining early in New York trade before Libya announced field closures due to protests. Shortly after, Saudi Arabia suspended loadings at its sole Red Sea port because of pipeline attacks. Rumors circulated that the Saudis told customers not to expect oil deliveries until November. There were no credible moves toward peace, but oil edged off its highs in the afternoon. Late reports of explosions in Saudi Arabia and airport closings pushed prices higher once more.

The dollar was broadly stronger, and Bessent's remarks on the yen suggest limited capacity for further intervention. The Fed decision is also a major factor in dollar trading.

Wednesday's decision arrives at a delicate moment for AI, amid calls for a slowdown. At the same time, stock markets have shown remarkable strength this year, even as expectations shifted from Fed rate cuts to 97 bps of hikes over the coming 12 months. That is the backdrop going into the big decision.

Late in the session, the crypto-related CLARITY Act failed in the Senate, triggering a slump in bitcoin and other cryptocurrencies.