The equity rally in the US didn’t pick up momentum after the Federal Reserve (Fed) released its latest meeting minutes, which sounded more hawkish-than-expected, or more hawkish-than-what-was-needed-to-give-another-boost to the US stock markets.
The biggest take was that the Fed will continue tightening its policy until it sees that inflation is ‘firmly on path back to 2%’. With inflation elevated and expected to remain so over the near term, some participants emphasized that the real Fed Funds rate would likely still be below shorter-run neutral levels after the July meeting policy rate hike.
The dovish point was that some Fed members feared that the tightening conditions could have a larger than anticipated effect on the economy, and slow the economy more than expected, and more than needed – which probably gave an early boost to the stock markets right after the Fed minutes were released.
But investors quickly realized that there was no mention of cutting the rates in the foreseeable future. If anything, the Fed would continue lifting the rates, and keep them steady for a while.
The S&P 500 fell 0.72% as Nasdaq gave back 1.21%, although the jump in the US 2-year yield was relatively soft, and the Fed Funds futures scaled back the expectation of a 75 bps hike in the next meeting. Investors increased their bet that the Fed could announce a softer 50 bp hike instead in September.
One important thing that we should keep from these minutes is that the Fed doesn’t want to rely on slowing energy prices to declare victory over inflation, as they are well aware that energy prices are very volatile, and they could rebound as fast as they fell.
Stronger case for oil price rebound
Crude price completed an ABCD pattern, and it is more likely than not we see the price rebound to the $100 level in the medium run.
Factors that push oil prices higher remain in play, except for the demand prospects. The war in Ukraine is still on, Russian oil and gas supplies dry out, and the European nat gas prices are going through the roof to a point that countries are moving into alternative energy sources. And when I say alternative, I don’t necessarily mean solar and wind energy! Many governments, including Switzerland, revive methods to produce energy using oil and coal. Coal prices are going through the roof as well.
The IEA warned last week that the switch from gas to oil is also pressuring the oil demand higher, while supply remains fairly tight, and many OPEC countries are believed to produce at their maximum capacity.
And China, which helps oil markets to take a breather with its ambitious zero-COVID policy, boosts monetary support to boost growth.
Therefore, there is a stronger case for a rebound in oil prices, than the contrary.
Sterling sold despite hawkish BoE call
The hawkish Bank of England (BoE) expectations went ballistic yesterday after the latest data revealed that inflation in the UK rose above the 10% mark in July.
Andrew Sentence, who is a former policymaker, came up with the idea that the BoE should double its policy rate to 3% or 4% to tame inflation in the UK.
Alas, even the BoE hawks couldn’t give a boost to the sterling yesterday. Cable fell, on the contrary, as traders knew that with Liz Truss leading in the polls, inflation may not be the BoE’s target anymore. Therefore, even with spiking inflation, we could see Cable slip below 1.20, and extend weakness toward the 1.15 mark.