US and European futures are trading almost today as traders are in the process of digesting the Fed minutes which came out yesterday. The largest disappointment in them and the policy risk was that the Fed members did not believe that they will be cutting the interest rates in 2023. Remember, so far, the price action was very much pricing in that the Fed will begin the process of rate cuts as they can’t risk another policy mistake. The fact is that this ultra-hawkish monetary policy could hurt the growth of the US economy, and as a result, we could see a prolonged period of recession which isn’t a base case scenario for many.
Nonetheless, the focus today will be the US ADP data which will be coming out at 1:30 PM GMT. The bar is set low, and if the number comes above expectations, we could see more weakness for the US equity market as the signal would be that the Fed is correct in predicting the economy and will continue to expect a hawkish stance from the Fed.
Fed Minutes
The Fed minutes brought a lot of disappointment for market players yesterday. Market players had thought that the Fed will show some mercy to its ultra-hawkish monetary policy. However, in the minutes, there were no signs of mercy. The Fed is determined to continue hiking rates and they believe that inflation has a long way to go and for them to achieve price stability, there are plenty of rate hikes in the pipeline. In addition to this, the Fed minutes also didn’t indicate any sign of fear that a recession is taking place in the country, as this is the single biggest concern among traders and investors. The Fed believes that economic data is pretty robust and it supports their case of hiking interest rates.
The most disappointing element in the Fed minutes last night was that they didn’t indicate that the committee members are of the mind frame of lowering the interest rate this year once they have reached the peak of the interest rate cycle. This piece of information is highly important to pay attention to as traders are largely priced in that the Fed will begin the process of cutting the interest rate this year as it will not risk the economy going into a deep recession.
The minutes said “participants generally observed that maintaining a restrictive policy stance for a sustained period until inflation is clearly on a path toward 2 percent is appropriate from a risk-management perspective.” They also stated, “a number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee’s resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path”.
So, now one thing which is pretty much crystal from the event last night is that it will be wrong to think that the Fed will begin the process of interest rate cuts this year. More importantly, the risk of a policy mistake taking place is once again sky-high as the Fed is once again stubborn with its approach and not much concerned about the economy. Their monetary policy is bound to slow down the US economy and the slowdown is highly likely to be a significant one which the Fed doesn’t believe.
Gold
Gold prices have retraced from their recent highs for two reasons. Firstly, it is the strength of the dollar index which is pushing the price of the shining metal lower. Secondly, after the massive run in prices, it is absolutely normal for traders to book some profit off the table.
Going forward, it will be the US ADP data that is likely to bring higher volatility for the metal. If the number comes in strong, it is more than possible that the gold price may move lower as the dollar index could strengthen further. This is because the data will confirm the Fed’s stance that the US economy is on solid footing. If the number comes in weak, we could see strength coming back for the gold price and the current retracement in prices could look like an opportunity to bag bargains.