Jerome Powell has spoken and I don’t think we can be too surprised at what has been said but we have had some volatility in markets and interest rate expectations on the back of it.
While another rate hike in the cycle is still far from certain – I’m still of the view they’re done – traders are increasingly accepting that they will likely stay there longer than they’ve expected at any point in the tightening cycle.
That message was clear from Powell’s comments, as was his insistence that if necessary they would hike again. And in referencing the strength of the labor market and the economy, I suspect he currently believes another will be needed.
While this has triggered some volatility in the markets, I don’t think it really deviates from what’s been said previously.
Tentative recovery but growth concerns continue to weigh
Oil prices recovered a little toward the back end of the week after coming under some pressure this month. Supply cuts from OPEC+ continue to support the market but uncertainty over the global economic outlook – sluggish recovery in China, possible recession in the US and Europe – are weighing a little.
Recent economic data has not been encouraging and central banks are maintaining their hawkish positioning which could compound that pressure further going into the end of the year. But with supply cuts continuing to be extended, particularly the voluntary monthly reductions from Saudi Arabia and Russia, the market is being supported, perhaps in a new higher trading range above $80 in Brent.
A tentative agreement between unions and Woodside Energy saw gas prices plunge on Thursday, taking it back to levels seen before the spike on 9 August. They’re edging higher on Friday in Europe but remain almost 25% from their highs on Tuesday.
Gold slipping back toward $1,900
The prospect of higher yields for longer has hit gold over the last month, pushing it back below $1,900 late last week and early this. It’s staged a small recovery this week but it’s tentative at best and unless the narrative changes from the Fed, or we see significant improvements in the inflation data (or deterioration in labor market figures and elsewhere) it may struggle to generate much momentum to the upside.
Comments from Powell have not put traders’ minds at ease and the traders are increasingly being forced to come to terms with rates remaining higher for even longer, strengthening the dollar and weighing on gold again today. It remains above $1,900 currently but only just. The Fed is clearly far from convinced that the job is done.
For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/
Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA
