LAWRIE WILLIAMS: Fickle Fedwatch tool your best guide to global market sentiment
It has become obvious that it has been the U.S. equity, commodity and precious metals markets which have been driving global ones of all types, even though they may account for less than half the value of these in monetary terms. And U.S. markets are incredibly prone to short term shifts in sentiment on an almost daily basis, frequently driven by various economic data releases from U.S. government sources, despite most of these having been massaged in the past to present matters in the best possible light from a governmental point of view. For example, U.S. Consumer Price Index (CPI) data tends to have a far greater impact on global markets than the European Central Bank (ECB) equivalent, despite the latter relating to a similarly sized marketplace. Such is the power of the U.S. markets on global patterns.
There is however a relatively simple way of following the daily ups and downs in U.S. overall market sentiment. That is by following the daily movements in the Chicago Mercantile Exchange (CME)’s Fedwatch Tool. This predicts the market’s assessment of the likely size of the next U.S. Fed interest rate increase at the next Federal Open Market Committee (FOMC) meeting. It too can be as fickle on a day to day basis as overall market sentiment. As I write it is pretty evenly balanced between predicting a 50 basis point rate rise at the September meeting and a 75 basis point one, but has swung over the past couple of weeks from being wildly in favour of the higher rate rise and vice versa.
There is still 28 days to go before the FOMC meeting takes place with some significant inflation-related data releases before then, not to mention a presentation from Fed chair Jerome Powell at the Jackson Hole Economic Symposium on Friday, before then. All, or any, of these could move market sentiment dramatically one way or the other and affect prices accordingly. There is still plenty of time for markets to shift – perhaps significantly.
To an extent the markets are clutching at straws anyway. Even a 50 basis point rate increase – which the markets seem to consider the lesser of two evils – marks yet another aggressive move by the Fed in its attempts to bring back inflation to 2% - a forlorn short term hope we believe in any case. It would likely be followed by a similarly sized rise at least at the November meeting and depending on whether inflation would be seen to be peaking thereafter a series of 25 basis point increases may follow. But if inflation is not seen to be controlled larger increases may continue.
There is the chance, of course, that the Fed will view ongoing figures through rose-tinted spectacles with its desire to avoid a hard landing for the U.S, economy, and that is very much what the markets have been gambling upon. Equity prices have been largely ignoring the recession threat and this week’s revised Q2 GDP figures may either confirm, or reverse, the preliminary findings of a 0.9% fall in Q2 GDP following Q1’s 1.5% downturn. If the former we may see a brief equity surge, but if the downturn is confirmed look for further equity weakness.
Gold is in something of a dichotomy. The recent strength in almost all calculations of the U.S. dollar index has not been helpful and it has been falling in dollar terms, although not as much in some other currencies. A recent slight change in sentiment with disappointing PMI and new housing start readings in the U.S. saw a small downturn in the dollar indexes and a small pickup in the gold price, but anything more permanent will probably need to await tomorrow’s U.S. GDP announcement and Friday’s Personal Consumption Expenditure (PCE) inflation index – the Fed’s preferred measure – and Powell’s Jackson Hole speech. All, or any, of these could impact the markets heading into the weekend and next month.
We are coming to the end of the northern hemisphere summer holiday period and a general return to work in the U.S. after the Labor Day general holiday could see a new direction in the markets. It has proved to be an inflection point for the markets in the past and it may be so again in a time of such economic uncertainty.