LAWRIE WILLIAMS: Long term U.S. Fed forecasts driving markets every which way
There is little doubt that it is U.S. activity which is currently driving global, equity, precious metal, base metal and bitcoin markets. This is largely based on the long term view of what the Fed’s policy may be on interest rates at the next FOMC meeting which is not due to take place until September 20th and 21st.
The Chicago Mercantile Exchange (CME) publishes a daily analysis of the probability of FOMC Federal Fund rate moves for the upcoming meeting using what it terms the Fedwatch Tool. Using 30-Day Fed Fund futures pricing data, which have long been relied upon to express the market’s views on the likelihood of changes in U.S. monetary policy, the tool visualises both current and historical probabilities of various FOMC rate change outcomes for the next meeting date. This varies from day to day but is an excellent indicator of how the markets view the chances of various rate increase outcomes at the forthcoming meeting. Currently the view is pretty finely balanced, marginally in favour of a 50 basis point increase, but with the possibility of a 75 basis point increase following very close behind (51.5:48.5).
The actual minutes of the July meeting are due to be published later today, and these may throw some further light on the deliberations at the last event, and these could well change market opinions one way or the other. These have been coloured by the better than expected Consumer Price Index (CPI) and Producer Price Index (PPI) figures announced last week which have generally been interpreted as suggesting that U.S. inflation may have peaked, although core inflation figures are yet to start reducing.
All in all the latest data seems to have been mostly positive for equities and also saw gold rise to end the past week above the $1,800 level. We saw that as an encouraging sign for gold investors, but as so many times in the past few weeks, trading in the yellow metal, and in silver too, subsequently brought them both back down a few notches and any tentative rally was again shortlived. There is evidence of buying of the dip so all is not lost and upwards momentum could well redevelop. We think it will. But the timing thereof remains uncertain.
There are any number of geo-economic and geopolitical events waiting in the wings which could trigger an upwards surge in the precious metals and an equities and bitcoin crash – not least a resurgence in inflation which hit double digits in the UK today (the U.S. may not be far behind – watch out for the next U.S. CPI release on September 13th and PPI on the 14th to see if the August declines are maintained or reversed).
As long as the Russia/Ukraine war continues, and energy and food product flows remain vulnerable to interruption, global inflation rates could remain volatile. Even China seems to be being affected with a huge drop in its forecast GDP growth figure. However one current positive is that the oil price has been coming down sharply and if this continues that particularly significant contributor to inflationary pressures will reduce. But core inflation will remain troubling regardless.