LAWRIE WILLIAMS: U.S. recession or no. Mixed views driving asset prices.
This week’s Federal Open Market Committee (FOMC) meeting in the U.S. is now behind us and it has had a profound outcome on global markets of virtually all kinds. The initial reaction to the meeting decisions and the subsequent statement and press release by Fed chair Jerome Powell had been to drive the dollar index sharply lower, although it was picking up again this morning, and gold, equities and bitcoin all higher. But will this euphoric investor reaction last? Perhaps not once more sober analysis is brought to bear on the actual meeting outcome and on Powell’s somewhat contradictory statements.
Interest rates were raised, as generally expected, by 75 basis points, but the interpretations of Powell’s subsequent statement and the ensuing press release proved to be somewhat varied. He did state quite categorically that the U.S. was not in a recession, although we are still waiting, at the time of writing, on today’s figures of the latest Q2 GDP estimates to see whether that is really the case as far as official statistics are concerned. Part of his statement was taken as suggesting that the likely September rate increase might be a little lower than the latest 75 basis point rise, although at the same time he intimated that inflation was still a major concern and if it remained high a repeat of the high interest rate increase, or even higher, might be on the cards.
If one goes entirely by market reaction, and the path of the CME’s Fedwatch Tool, the markets are very definitely for now anticipating a lower rate hike in September and have been moving accordingly. According to the Fedwatch Tool today, 70% are expecting only a 50 basis point rate increase and just 30% a 75 basis point rise in September. None appear to be even considering a 100 basis point rise, which Powell did not rule out in his post-FOMC statement. The Fedwatch Tool, though can be prone to over-reaction. For example in the immediate aftermath of the ultra high Consumer Price Index figure of just over a week ago it was strongly (over 80%) predicting a 100 basis point rate hike at this week’s FOMC meeting, but this came down to under 30% within a couple of days as more conservative counsel prevailed.
U.S. equities rose sharply in late trade yesterday, and although European equities opened on a positive note today they fell back as trade progressed. Gold at one time looked to be heading to $1,750, but after this strong start had fallen back quite sharply at the time of writing to below $1,740 – still stronger than it has been of late, but definitely a disappointment to gold followers given its heady start to the day. It will be interesting to see what happens to all the major asset classes in U.S. markets today. We suspect much will depend on the Preliminary Q2 GDP figures from the Bureau of Economic Analysis. If they come in negative, as many forecasts suggest, that will suggest the U.S. is actually in recessionary territory, whatever Powell says, as technically two successive quarters of negative growth define a recession. Q1 GDP was negative 1.6%, so if Q2 also appears to be negative ...!
Whether the U.S. is technically in a recession or not, it is certainly teetering on the edge of one. Powell’s more optimistic takes look to be an effort to buoy up the markets and help avoid a hard landing which he is so anxious to do. If inflation does stay elevated, which we fear it may as his 2% target looks to be totally unattainable in the foreseeable future, then equities will suffer as current prices are mostly unsustainable in such an economic environment. Gold, and maybe silver, should go from strength to strength as wealth protectors which should not be prone to the ravages of inflation – particularly if the dollar index declines too as it probably will.