Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Head of Commodity Strategy
Summary: Gold and silver turned sharply lower yesterday after Fed Chair Powell delivered a hammer-blow to sentiment across markets as he managed to both pull off the idea of the Fed may indeed soon pivot to a slower pace of rate hikes, but that any talk of a pause is “very premature”. With the dollar and yields surging higher both metals are at risk of resuming their downtrends with gold traders in particularly keeping a close eye on the $1615 area.
Saxo's Daily Financial Markets Quick Take
Podcast: The FOMC pulls off a hawkish pivot
Gold and silver turned sharply lower yesterday after Fed Chair Powell delivered a hammer-blow to sentiment across markets as he managed to both pull off the idea of the Fed may indeed soon pivot to a slower pace of rate hikes, but that any talk of a pause is “very premature”. His comments followed an initial misinterpretation of the statement that accompanied the expected 75 basis point rate, the fourth consecutive hike of this magnitude in this cycle, after it raised the prospect of the FOMC pausing to assess the “cumulative tightening” impact.
In our daily Financial Markets Quick Take, our Head of FX strategy John Hardy wrote: In the press conference, however, Fed Chair Powell was far more hawkish, saying there is a “ways to go”, and spelling out that the incoming data means that the “ultimate level” that the Fed funds reaches is likely to move to higher levels than was though at the September meeting. This had Fed expectations for the spring of next year edging back toward the cycle highs of 5.00% and then closing the day a full 10 basis points higher near 5.10%.
While Powell did say it may be possible that the Fed steps down to smaller hikes as soon as the December meeting, the FOMC felt that the speed of hikes Is becoming “less important” (leaving market to infer that the Fed just keeps hiking at more meetings if incoming data supports doing so. As well, we must remember that the Fed has cranked up the pace of quantitative tightening in the background, which provides its own tightening pressure on markets and arguably equates with several hundred basis points of rate tightening over the course of a year.
The dollar, one of the most important drivers for precious metals, was first weak yesterday, thereby supporting sentiment ahead of the meeting before the Powell presser lit a fire under the greenback with the US dollar ripping back to the strong side, generating compelling reversal patterns for USD bulls almost across the board, not least against the euro where the important 0.9876-0.9850 area fell while USDJPY moved north of 147.00 after holding support at 145.00.
In the short-term gold is likely to be challenged with speculators jumping back into short position on expectations US treasury yields and dollar will move higher. However, several sources of support exist, not least the risk that economic data may start to turn softer given the time lag between rate hikes and the economic impact, and the yield curve moving towards its most inverted for the cycle below -50 basis points for the 2-10 year spread, thereby highlighting the risk of a central bank policy mistake leading to weaker growth without successfully managing to get inflation under control.
At Saxo, we maintain a long-held view that inflation in the 4% to 5% range over the next decade is not outrageous. Driven by a new geopolitical situation where the world is splitting into two parts with everything evolving around deglobalization driven by the need for self-reliance and re-arming. Together with the energy transition we are facing a decade that will be commodity and capital intensive and where scarcity of raw materials and labor will keep inflation elevated for longer, and higher than the 3% level currently being shown through the swaps market.