The messaging from the Federal Reserve over the last month couldbe described as fluid rather than concrete, given the shift in tone from theFed Chairman regarding the size and scope of rate cuts in 2024. Jerome Powell wentfrom not thinking about rate cuts to thinking about rate cuts in quick fashion,and this shift in sentiment has put financial markets in a jubilant mood eversince.
Though there seems to be a realisation from Fed officialsthat a buoyant and perhaps overly confident financial market landscape could beproblem down the road in the fight against inflation. Hence why we have seen achorus of Fed officials stepping up over the last week to try and counter theovertly dovish expectations from investors regarding the extent of easing hopedfor in 2024.
Federal Reserve Presidents from New York, Chicago andAtlanta have all tried to remind markets that outlooks for up to six rate cutsnext year are not necessarily aligned with the intent of the Fed. However, financialmarkets are exhibiting a case of selective hearing when it comes to rhetoricfrom Fed officials, with Powell’s dovish tone the only one resonating with investorsso far.
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Looking ahead this week, the US Core PCE Price Index data onFriday is known to be a closely watched gauge of inflation by the FOMC, so wecould be in for some higher volatility one way or the other when the data isreleased. A softer number here would justify the market’s current optimism,however any indications of inflation ticking higher would likely be an obstacleto further market gains. Let’s see what transpires on Friday.
The 10-year bond yield remains pinned below the 4% levelwhich is enabling gold to shine. The spot gold price has been edging higherthis week on lower US yields and a subdued greenback. During Asian tradinghours on Wednesday, the spot gold price was trading around the $2040 level withthe precious metal eyeing a potential run to $2050 and above should the USD andbond yields take a further turn lower. Though any signs of a recovery in theUSD could leave gold susceptible to a pullback. It will likely depend on how USmacro data shapes up between now and the end of the week.
Supply side concerns have placed upward pressure on the oilprice this week. With a conflict happening in the Middle East and on thedoorstep of some of the world’s biggest oil producing nations, it is not toosurprising that events in the Red Sea have caused a re-think about how oil willbe transported in the immediate future. While some risk-premium has been addedback into the price of oil, the unknown factor is just how long it will staythere. Financial markets tend to eventually shrug off geopolitical events ortension escalations. However, with investors already anticipating loosermonetary conditions being present in 2024, this could be a boon for oil from agrowth and therefore demand perspective.
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In FX, the Yen slid against the USD after the BOJ decided tosit on their hands for the time being regarding ultra loose monetary policy. Withinflation easing in Japan as evidenced by the latest Tokyo CPI numbers, thereis no sense of urgency for the BOJ to depart from negative interest rates rightnow, especially with the Yen having already strengthened considerably againstthe USD over the past month (with the USDJPY rate going from 152 to 144). Movesof any significance from the BOJ on the policy front will likely be reservedfor around the end of Q1 or Q2 next year.
The USD gained ground against the Yen but fell against manyother currencies with markets still anticipating steep rate cuts by the FOMC in2024. The DXY (Dollar Index) is clinging onto the 102 level, but if thegreenback is to make a recovery it will likely need to be predicated on astrong run of US macro data which would shift the current dovish narrativepertaining to the FOMC. Whether that scenario happens or not remains to beseen. Watch this space, or more specifically, watch the Core PCE Price Index data.
