LAWRIE WILLIAMS: Fed minutes boost gold and equities towards end of week
With both the Thanksgiving holiday/Black Friday intervening in the world’s biggest economy, and the football (soccer) World Cup distracting attention in much of the rest of the world, markets remained relatively little changed over the past week. There was a little volatility for sure, but it was mostly centred around levels which had been set at the beginning of the week and overall gold, the major equities and cryptocurrencies saw relatively little change over the period, despite some potentially market-moving announcements. All the asset classes seemed to perform positively Monday to Friday, but by around 2% or less. Equities performed better than gold, which in this writer’s view continues to be something of an anomaly as all indications are that global economies are heading for recession, and the dollar index has been slipping which should be more positive for the gold price.
Across-the-board sentiment has been boosted by expectations that the U.S. Fed may start to reduce the pace of its interest rate increases as soon as at the December FOMC meeting. The consensus opinion as expressed in the Chicago Mercantile Exchange’s Fedwatch Tool, which calculates day to day market expectations of the size of the next FOMC meeting imposed interest rate rise is currently predicting a 50 basis point jump at the December meeting rather than a 75 point one, as has been imposed at the previous four such meetings. The Fedwatch odds of this are currently around 76:24. This would bring the year-end Federal Funds rate to between 4.25 and 4.5%. Expectations would see perhaps a rate of 5or even 5.25% by mid-2023, although this would still depend on the Fed being confident that inflation was beginning to be brought under control without having too much of an impact on what we see as already-massaged unemployment figures.
There will be Personal Consumption Expenditure and Consumer Price Index data releases forthcoming on December 1st and December 13th respectively which will be in time to influence FOMC meeting deliberations due on December 13-14. These are expected to show a small fall in inflation, but whether even this will be sufficient to cause the Fed to slow down its pace of interest rate increases remains to be seen. It should also be noted that even a 50 basis point rate increase, which is the likely minimum rate rise the Fed might consider at the meeting, would have been considered excessive back at the beginning of the year for a market which had become used to a near zero interest rate environment and would likely have caused a market crash at the time!
The markets will, however, have received a degree of comfort in their expectations from the release of the minutes from the last FOMC meeting which took place earlier in the month. I am indebted to Martin Murenenbeeld’s always highly pertinent Gold Monitor newsletter for highlighting the following paragraph from the Fed minutes which very much sets the tone for both the positive performances for gold and equities over the latter part of the week:
“ … a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate. A slower pace in these circumstances would better allow the Committee to assess progress toward its goals of maximum employment and price stability. The uncertain lags and magnitudes associated with the effects of monetary policy actions on economic activity and inflation were among the reasons cited regarding why such an assessment was important …”.
This was taken by an optimistic market as suggesting that the ‘slowing of the pace of increase’ would start as soon as at the December FOMC meeting, but as we have hinted above this may still be dependent on supportive inflation data. I am also grateful to the same newsletter for pointing me to the following chart from the Wall Street Journal which highlights how steep the latest Fed interest rate tightening programme has been in comparison with other recent past interest rate increase cycles.
As can be seen, even if there is only a 50 basis point rate increase next month – and that is the likely minimum – the 2022 tightening cycle will be by far the steepest in the past few decades.
Looking ahead to next week we will see the aforementioned PCE inflation report come out on Thursday and the latest employment figures on Friday, both of which could have an impact on the markets and precious metals one way or the other. If the PCE figures follow other recent data and suggest inflation may have peaked, or indeed may be beginning to come down, even if only by a little, then the influence on the markets could well be positive. Unemployment may also begin to be impacted adversely, and the dollar could suffer a little which could also be positive for gold.
We do remain nervous about equities and cryptos, though. The former have to be adversely affected as realisation grows that global recession could be with us for some time and the latter from continuing economic weakness and fallout from the FTX debacle.