LAWRIE WILLIAMS: Market vulnerability after sharp upturn
Investors would have been wise to have kept a wary eye on the direction the CME’s Fedwatch Tool was taking. This tends to give a pretty good guide to the way the markets view likely Fed interest rate policy announcements at the next FOMC meeting. After easing somewhat, the consensus has moved back to predicting a more aggressive Fed and a 75 basis point rise, as opposed to a 50 basis point one, as being the more likely outcome in November with odds of around 71:29 in favour of the higher rate being imposed. The higher rate makes a deeper economic recession and a stronger dollar a more likely consequence – in combination negative for most markets, but particularly so for equities and bitcoin in the short to medium term.
The implication also is that the Fed’s relatively aggressive interest rate raising policy to date is having little, or no, effect so far on bringing down U.S. inflation to the Fed’s target levels. Nor is it likely to do so in anything but the ultra long term in our view. And what happens in the U.S. is likely to be replicated, or worse, in far more vulnerable economies elsewhere.
The PCE index release in the U.S. last week should have provided warning signs, given that it is the Fed’s preferred inflation measure. The overall picture wasn’t too bad, but the core inflation figure was 0.4% up on the month previous and that should have rung warning bells. The markets seem to have ignored this and rose sharply, but then came down again and could be looking vulnerable and may remain so for some time to come.
So far the downturn, such as it is, has been mild and has affected all markets including precious metals. Indeed bitcoin has even seen a bit of a continuing pick-up but without generating any real strength so far. The next key announcement that could move the markets will be the U.S. Bureau of Labor Statistics’s Consumer Price Index (CPI) call due on October 13th which may well show a fall in the headline inflation rate, but it is the core rate which will be of particular concern. If this remains elevated, expect the Fed to remain on its aggressive track and most markets remain vulnerable to further falls. As usual we would divorce gold and silver from this vulnerability – there is evidence that their safe haven aspects may already be coming to the fore in Russia in particular, China, parts of Europe and elsewhere – and demand seems to be beginning to pick up again in the key Indian and Turkish markets. However, we have been wrong in this assessment in the past and could be again. We are not infallible!
As precious metals commentators we follow, and receive, commentary from a number of fellow scribes who may well have similar, or contrary, points of view. Some of these we dismiss as totally misguided and some we follow with extreme interest as expressing opinions – sometimes in an extremely forthright manner perhaps foreign to our more typically reserved British sensibilities, but which certainly raise questions which are worthy of far more detailed exposure and analysis.
One of these is the always thought-provoking The Credit Strategist monthly newsletter from Michael Lewitt, now published on www.Substack.com. This does not pull punches and is probably one of the best reads out there in its analysis of the dire economic situation in which we have been deposited by politicians and central bankers worldwide. As an alternative, and well-reasoned, view to much of the ‘rosy outlook’ bs and claptrap to which we are exposed by our politicians and media on a daily basis, a subscription to this is highly recommended, even if one is not located in the U.S. It is like a breath of fresh air in a polluted media environment – in my opinion at least. (Disclosure – Michael gives me free access to The Credit Strategist, but I am under no obligation to publicise it. I do so because I think it is a hugely worthwhile resource.)