LAWRIE WILLIAMS: Markets mixed to positive post FOMC – so far.
With U.S. markets closed on Monday for the new Juneteenth Federal holiday, to celebrate the emancipation and supposed freedom from oppression of racial minorities in the U.S., it has been difficult to yet judge the ongoing reaction from the decisions taken at last week’s FOMC meeting. To recap, up until the Friday prior, markets had been anticipating a 50 basis point Federal Funds interest rate rise in the Fed’s latest attempt to bring down inflation. Then came the release that day of the latest Consumer Price Index (CPI) data from the Bureau of Labor Statistics (BLS) which came in at a well-above-expectations 8.6% year-on-year, which many feel understates the real level.
Immediately the BLS figure was released, consensus expectations for the likely interest rate rise to be imposed at the forthcoming FOMC meeting a few days later moved up from 50 basis points to 75 basis points – some had even suggested 100 basis points. In the event the 75 basis point rise was the actual result as announced on the 15th at the end of the FOMC meeting.
One might have expected something of a stock market meltdown at such an announcement, and maybe a boost to precious metals prices, but this was not to be. Indeed, almost the reverse happened, perhaps boosted by Fed chair Jerome Powell’s subsequent presentation which served to play down some of the worst analyses. Indeed some of the anticipated fallout will have already been in the pipeline ahead of the meeting’s outcome.
Over the past couple of days since the U.S. holiday weekend, , on initial trade, stocks and bitcoin seemed to be moving higher on a surge of optimism – wholly unjustified in our opinion - while gold continued to weaken a little, although was quite volatile in its path. There has, though, been a bit of a turnaround in European trade this morning, with gold recovering and European stocks and bitcoin dipping again, but it remains to be seen whether this trend will follow through into the key U.S. markets today. We think it should as the true ramifications of the Fed’s moves sink in, but markets are fickle and prone to optimistic manipulation. Investors tend to believe what they want to believe.
There was little in Powell’s summary statement, in our opinion at least, that really promised much in the way of optimism. The Fed has an abysmal track record on predicting future inflation levels and one suspects that Powell’s suggestion that future 75 basis point increases would be unlikely should be taken with the proverbial pinch of salt. If the next CPI data release, due out on July 13th, to be followed by an FOMC meeting on the 26th and 27th, comes out at around, or higher than, June’s 8.6% year on year increase, then we would put the higher rate rise level as the more likely despite Powell’s apparent tentative insistence to the contrary.
Unless there is a swift, and seemingly at this time, unlikely, end to the Russia/Ukraine conflict, we suspect inflation will remain elevated, and possibly rise further, as the key elements in its rise – energy and food prices – are hugely impacted by the war and thus totally outside any Fed moves to try and control them. We had pointed this out ahead of the June release when we had predicted an inflation rise, contrary to mainstream and Fed optimism, and in our view the situation has not changed for the better since then. We are likely stuck with high headline inflation levels for many months yet to come.
True the year-on-year figures may start to fall from around October as it was from October last year that the big headline inflation levels started to be recorded. This will, no doubt, be seized upon by the optimists as showing that the Fed measures are beginning to take effect, but with headline inflation still likely to be excessive that will be small comfort to the consumer. Prices will remain high and whichever domestic currency you trade with will be unable to purchase what it used to. Such is inflation. It lowers the purchasing power of your cash and savings, and at the current rate these are going down fast!
Powell is predicting a ‘softish’ landing from the Fed’s moves. He has lost much of any economic forecasting credibility he may have had with his insistence for many months that any inflationary trends would be ’transitory’ and his ‘soft landing’ predictions may well be just as far off the mark. In our view the U.S., and much of the rest of the world, is heading for a recession, and a steep one at that. There is probably little the Fed, or other central banks can do to ward one off. There is a strong raft of opinion that thinks the only option that lies ahead is for the Fed, and other central banks, to return to Quantitative Easing to re-stimulate their respective economies before too long, but this has to be a recipe for ever increasing inflation – in the worst case scenario perhaps hyper-inflation and the end of the economic world as we know it.
Gold may be one of the only protectors under these circumstances, although one obviously hopes it doesn’t come to this, but it is as well to be prepared. So far though gold has not performed as expected but has shown signs of weakness in the face of rampant inflation, deteriorating economics and weaker equities, whereas we might have expected it to have performed rather better under such circumstances. But we still remain confident that its attributes in a recession-headed economy will at least lead to its role as a wealth protector come to the fore. We are not so confident on the other precious metals, though, as they are all much more dependent for their demand on growth in the global economy, which we feel may be in for a hiatus period.