Wall Street is largely anticipating what is described as ‘a hawkish pause’ in rate policy, as the Federal Open Market Committee starts two days of meetings tomorrow, with the tech-heavy Nasdaq 100 leading the way. The dollar was largely unchanged and commodities weakened, notably oil prices. The VIX, Wall Street’s fear index, rose after weeks in decline. Few expect a rate rise, and that is the major risk.
TODAY’S MAJOR NEWS
Fed will watch inflation data ahead of rate decision
Key data releases out this week will play an important role in the Fed’s rate decision, with consumer and producer price data out on Tuesday and Wednesday. The general thinking is that the headline month-on-month Consumer Price Index (CPI) data is expected to be stuck at 0.2%, month-on-month, while core CPI is higher around 0.45%. That would put the year-on-year CPI near 4.1%, and the core CPI number remains near 5.3%. Both too high for the Fed.
The Fed has repeatedly stated its commitment to its 2% inflation mandate, but this is a tough ask absent pressure in the labor market taming wage inflation. The Fed has also worked hard to communicate that it would rather error on the side of “too high too long” with its rate policy, to avoid making the same mistake that it made in 1980 when it pivoted too soon.
Recent data shows job openings increasing and job creations rising, so it’s difficult to see a pathway to the Fed’s 2% mandate without the central bank inflicting more pain on the economy. It could hit it if it had the tools to bring the 5.5 million people identified in the last monthly jobs report who said they wanted a job, but had not looked for a job, back into the job market. But the Fed has limited tools for doing that. The tools that it does have in its toolbox for balancing workers with job openings is to reduce the number of job openings by inflicting pain on the economy.
Gold reserves rising at Central Banks
Recent data suggests that central banks are moving from their US Dollars to gold, implying a stronger gold price in the medium-term. “Our 2023 survey revealed that 24% of central banks intend to increase their holding reserves in the next 12 months, according to survey by the World Gold Council (WGC) in May this year. Central banks’ US dollar holdings were forecast to decline, in the same survey: “Half of central banks surveyed believe the percentage of reserves in USD in five years will be between 40-50%, while just over a quarter believe it will remain unchanged.” According to the IMF, the percentage of US Dollars in FX reserves was around 60% in 2022.
Our Gold analysts Rhona O’Connell estimate that the proportion of gold in Official Sector foreign exchange reserves, if we combines gold and FX reserves, was around 15% at the end of 2022 (using a $2,000/ounce gold price). Arguably this is skewed towards high gold holdings by a few nations as legacy of the gold standard, and because the US can’t hold US dollars in its forex reserves. If we strip out legacy gold holdings, average central bank holdings are around 7%. O’Connell concludes that this in the middle of the range recommended for portfolio holdings by quants, but with room for some central banks like the People’s Bank of China – which holds just 4% of its gold and FX reserves in gold – to raise their holdings.
China’s diminishing marriages another threat to economic recovery
A low marriage rate translates into a low birth rate, dimming economic recovery hopes in China. Only 6.83 million couples were married last year, nearly half the rate of 13.46 million couples married in 2013. Marriages have been in decline for nine consecutive years, producing the lowest number of marriages on record since the data started being reported in 1986. China’s population went into decline last year a decade before projected by UN analysts.
Bottom line – risk-on
Financial markets are tending towards risk-on ahead of this week’s Fed meeting, but with little or no risk of a rate rise priced in this could be problematic if rates are increased.
TODAY’S MAJOR MARKETS
- The Nasdaq 100 again markets this morning, up 1.3%, with the S&P 500 and more broadly based Russell 2000 up 0.7% and 0.5%, respectively
- In Europe, the DAX and the FTSE 100 indexes rose 1.0% and 0.1%, respectively
- The VIX, Wall Street’s fear index, saw a 7% rise to 14.8 after a long period of declines
Currencies and Bonds
- The dollar index was unchanged this morning at 103.6
- Euro and sterling x-rates versus the dollar were flat and up 0.6%, respectively
- Yields on 2- and 10-year Treasuries were unchanged at 4.59% and 3.77%, respectively
- Gold prices fell back 0.4% to $1,969 per ounce
- Crude oil prices continued their recent reversal, off 4.8% to $66.8 per barrel
- Grain and oilseed prices were mostly firmer, with corn prices led the way higher on disappointing weekend Midwest rain totals
Analysis by Arlan Suderman, Chief Commodities Economic. Arlan.Suderman@StoneX.com.
Market outlook by Paul Walton, Financial Writer. Paul.Walton@Stonex.com.