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Financial Markets’ Weekly Recap:
A couple of events were the most important in global financial markets last week; the FOMC Minutes last July and the statements of the Fed Chairman Jerome Powell at the Jackson Hole Symposium. Both were in favor of risk appetite after they tipped the scales towards starting to cut interest rates at the Federal Open Market Committee meeting next September, which had a huge impact on the US dollar.
FOMC Minutes
The FOMC Minutes, released on Wednesday, indicated that there is a possibility for the central bank to start cutting interest rates at the September meeting. FOMC Minutes confirmed that “the vast majority of participants in the meeting held on July 30 and 31 believed that if data continued to show consistency with market expectations, it may be appropriate for the central bank to begin the transition to easing monetary policy at the next meeting,” according to the minutes of the July meeting of the Federal Open Market Committee.
This comes as markets expect a rate cut next September, which would be the first cut since the Fed began raising rates in response to the huge increases in US inflation during the pandemic.
While all attendees at the meeting voted to keep the federal funds rate unchanged, a clear inclination emerged among participants to start cutting rates at the July meeting, a tendency that appeared in the speech of an unspecified number of members of the Federal Open Market Committee, instead of waiting until September.
US Dollar, Jerome Powell
Jerome Powell’s speech at the Jackson Hole Symposium last Friday included the strongest signal to cut rates at the next meeting of the Federal Open Market Committee, based on the significant decline in US inflation readings and the deterioration in US labor market conditions.
Powell said: “The risk of rising inflation has completely disappeared, coinciding with the increased risk of further deterioration in labor market conditions,” while speaking at the Jackson Hole Symposium, which brings together top policymakers on monetary, fiscal, and economic policies around the world.
The central bank chairman added, in the clearest indication of a shift in monetary policy towards easing: “It is time to redirect monetary policy, and the course of the journey has become clear.”
These statements paved the way for the central bank to move towards the first rate cut after a long journey during which it continued to raise rates to combat sharp increases in inflation rates in the United States.
The US personal consumption expenditures index, the most credible and reliable inflation indicator for the Fed, recorded its highest increases in more than 40 years in 2022 at 7.1%, a rate that declined to 2.5% last July, making it not far from the central bank’s target of 2.00%.
The dollar index, which measures the performance of the US currency against a basket of major currencies, recorded weekly losses in the period ending on August 23, falling to 100.57 points last Friday compared to the previous week’s close at 101.88 points. The index reached a high of 101.98 points against a low of 100.56 points.
The Week Ahead
Markets are focusing next week on the busy calendar of earnings reports for a large number of companies listed on the New York Stock Exchange, most notably Nvidia, Dell, and Salesforce.
These reports are of great importance at the present time, as they shed light on the performance of one of the sub-sectors in the technology sector; artificial intelligence. They also shed light on the conditions and rates of consumption in the United States.
There are also banking and financial institutions scheduled to issue their earnings reports next week, most notably Scotia Bank. There are also companies in high-consumption sectors whose financial performance is likely to shed light on consumption rates and thus may contribute to shedding light on the future path of inflation. A series of indicators is issued, which is the most important and most credible and reliable for the Fed among inflation indicators; these are personal consumption expenditures indicators.
The importance of this batch of inflation data lies in the fact that it comes after the FOMC Minutes, which showed a strong tendency among members of the Federal Open Market Committee to start cutting interest rates at the next meeting. It also comes after Jerome Powell, chairman of the Board of Governors of the Fed, issued the strongest and clearest signal to cut rates in September.
Gold Price Performance:
In a highly awaited speech at the Jackson Hole Central Bank Symposium, Federal Reserve Chair Jerome Powell indicated that it’s time to adjust monetary policy. He highlighted reduced inflation risks and growing concerns about the labor market. As a result, the gold market experienced significant buying, with December gold futures trading at $2,551.60 per ounce—a more than 1% increase for the day. At the time of writing, the precious metal is trading at $2512 per ounce.
Powell’s comments were described as “undoubtedly” dovish by analysts. While addressing the factors behind the 2022 inflation surge, he expressed optimism that the central bank could manage inflation while supporting economic growth and employment. Market expectations remain high, with a 32% chance of a 50-basis point rate cut in September. However, Powell emphasized that the Fed won’t rush the easing cycle. As markets price in potential rate cuts, the gold market may experience volatility.
Further weakness in the U.S. labour market could prompt a 50 bp rate cut at the September policy meeting. The dovish tone indicates ongoing adjustments in monetary policy. The dollar and US Treasury bond yields dived following dovish remarks by Chair Jerome Powell, who signaled that he’s confident that inflation is edging towards the 2% goal and that rates should be cut.
Oil Price Action
Oil prices saw a modest increase on Friday, extending gains from the previous day and snapping a losing streak for the week. However, the rebound could be short-lived as concerns over demand and a potential supply surplus loom large.
OPEC finds itself in a challenging position. Adhering to their previous production cut commitments could bolster their credibility, but reversing course could undermine their influence over oil prices. The cartel’s decision will significantly impact the market’s outlook.
The US Dollar Index (DXY) is also facing a crucial moment. The annual Jackson Hole Symposium, featuring a speech by Federal Reserve Chairman Jerome Powell, is expected to have a significant impact on market sentiment and potential policy changes.
Oil news and market movers:
Analysts warned that the oil market may struggle to absorb additional OPEC barrels once production cuts are lifted. Morgan Stanley lowered its Brent Crude forecast to $80 per barrel, citing weaker global demand growth and sluggish Chinese consumption. The Baker Hughes Oil rig count is due for release later today. Fed Chair Powell’s speech at the Jackson Hole Symposium is highly anticipated.
