LAWRIE WILLIAMS: Less downbeat FOMC boosts gold and equities but latter could be false dawn
Tuesday and Wednesday’s U.S. Federal Open Market Committee (FOMC) meeting deliberations ended with a statement from Fed chair Jerome Powell which somehow eased the worst market fears as to the likely future effects of Fed policies to ease the current severe inflationary trends afflicting the U.S. economy and equity markets. We do not think the content of the post FOMC press release and Powell’s subsequent statement should have done so, and that the ensuing equity market recoveries as a result are in any way sustainable.
These statements were indeed taken as less hawkish in that they appeared to rule out 75 basis point rate increase impositions at future FOMC meetings, which some had been considering as likely after increasingly disappointing inflation news. Indeed Powell had hinted that inflation control was likely to be challenging and that further 50 basis point rate increases were thus likely to be imposed at at least the next couple of FOMC meetings. Only a few days ago such news would have depressed the equity markets, but because some market analysts had been perhaps expecting worse, the markets breathed a sigh of relief and regained most of their losses sustained over the previous few days. We doubt that this recovery can be retained and anticipate they will come back again sharply over the next few days as reality strikes and the new CPI and PPI figures are released next week.
As for gold. initial reaction took the price back up over $1,900 again, albeit briefly, but it managed to remain in the high $1,890s in European trade and was testing $1,900 again at the time of writing. European equity markets were following their U.S. counterparts upwards, a trend not followed by Asian stocks which were rather more circumspect in their reactions to the FOMC news and the big U.S. market gains, with both the Nikkei and Hang Seng indexes falling back, although neither substantially. Early US equity market reaction was to see the Dow down quite sharply – we think Wednesday’s sharp gains were an over-reaction and something of a miscalculation of what the real impact of the Fed moves were likely to mean in the markets,
We had assumed that the post FOMC markets would steady with gold perhsps running a little higher, as has proved to be the case, but equities probably falling back for which the reverse has occurred so far, but with even a 50 basis point interest rate rise probably doing little, or nothing, to arrest the ongoing rise in inflation, leading to more and more of the same medicine being applied through the remainder of the year, portents for equities going forwards do not look good. Investors have become used to mostly positive markets, but with inflation cutting into disposable incomes, some kind of economic turndown looks to be inevitable to this observer, with the only likely beneficiary likely to be traditional safe havens like gold in an attempt to protect one’s wealth against the ever declining purchasing power of one’s domestic currency.