Market players are still digesting the message from the Federal Reserve, which sent the US markets lower again yesterday. The markets finely expected the decision of an interest rate hike by 75 basis points, and there was no element of surprise. However, Jerome Powell’s speech brought large whipsaws to the US equity markets. The Fed made it clear again that they are determined to do whatever it takes to control inflation. Market players should not make any mistake in thinking that future interest rate hikes will not be of the same magnitude, especially in November. It is pretty much a done deal that the Fed will increase the rate by another 75 basis points in November and 50 basis points in December.
The reason that US stock is under pressure is that traders believe that the possibility of a recession taking place in the US is firmly on the cards. Many believe that the Fed is looking for a recession, given how aggressive they are with their monetary policy. However, the Fed did say last night that the economic numbers very much determine their monetary policy. But at the same time, they have already covered their back by adding that they expect some weakness crawling back in the labour market. In simple terms, the message was that the next month’s data and the number after that may show that the US labour is slowing down. This particular factor isn’t going to change their strategy as they will not only continue to increase rates, but they will likely stay there for a while.
What was also quite interesting to note in the Fed’s speech last was that the Fed wants to see some correction in the housing market. It believes that the current growth in the housing market is overdone and needs a correction. This leads many to think that the US housing market is in for a rough winter and possibly longer. As most parts of the US have an interest rate above 5%, the US housing market will likely see a sharp decline in its numbers.
BOE
All eyes will be on the BOE today as the bank will announce its monetary policy decision. The interest rate range, which traders expect, is between 50 to 75 basis points. An interest rate hike of 50 basis points will be considered a dovish interest rate hike, and an interest rate hike of 75 basis points will be deemed a hawkish interest rate hike.
W think the bank will press a button today, which it hasn’t done since 1989, an interest hike of 75 basis points. The reason is that the BOE has minimal options regarding what it can do. By delaying their monetary policy decision by another week due to the death of Queen Elizabeth II, the bank had the opportunity to fathom completely the monetary policy decision of the Fed, which is influencing the dollar index.
In addition to increasing the interest rate, the bank is also expected to confirm plans to sell more of the £895 billion of bond holdings—in simple terms reversing further elements of dovish monetary policy.
Gold
Regarding gold prices, traders are more focused on what is going on with the dollar index. The fact is that the index is on fire, taking the shine away from the precious metal. We saw the prices moving lower last night, which is likely to be the trend for gold prices today as well. But at the same, the sell-off hasn’t been that intense for gold prices, and the reason for that is that many speculators have been preparing themselves for an interest rate hike of a full percentage point by the Fed, which didn’t materialize last night.
For now, the path of the least resistance for gold prices is highly skewed to the downside. The upcoming Weekly jobless numbers will likely bring higher volatility for gold prices. But no mistakes, the Fed has already indicated the US labour market will experience weakness, but that isn’t going to deter the Fed’s current monetary policy stance.