It’s been a relatively slow start to trading on Wednesday which isn’t surprising considering what’s to come later in the day.
On another day, earnings from Alphabet and Microsoft may have dictated sentiment in the broader markets but as it is, investors are more focused on events in Washington, so tech aside markets are relatively flat.
There’s a very good reason why this is the case. Stock markets have been driven by two things over the last year, the explosion of AI and its seemingly endless possibilities and interest rate prospects. The latter is more important for most companies and the economy this year.
Markets have priced rate cuts extremely aggressively over the last couple of months but have pared these back slightly as we’ve got closer to today’s decision. At times, March was viewed as a banker for a rate cut and now it looks more of a coin toss, while in recent weeks 175 basis points were almost fully priced in this year; now it’s closer to 125.
Whether that remains the case will partly depend on the Fed’s messaging today. Remember, it was the December dot plot that triggered such a flurry of optimism into year-end. Will the Fed further fuel that or push back?
I expect Powell and his colleagues may opt for language that leaves the door open to a rate cut in March without giving the impression that it’s likely. Flexibility is key at this stage and there’s a lot of important data over the next six weeks that could fully justify beginning the easing cycle and policymakers will be very aware of that.
The ADP employment number was lower than markets expected but I don’t think it changes anything for a couple of reasons. The most obvious is that it’s been a terrible indicator for the official payroll number so, barring an enormous miss, it should probably be ignored. The other is that employment is no longer as important to the Fed achieving its inflation goal, wages are the more important element of the jobs report.
Middle East tensions and stronger growth boost Oil
Oil prices have pulled back over the last few sessions after surging higher since the start of the year. Middle East tensions and disruptions in the Red Sea appear to be among the driving factors here but there is also the fact that countries continue to resiliently cope with high interest rates, which may soon fall.
The US is at the forefront of this, potentially on course for the fairytale outcome of a strong and growing economy, low inflation, and falling rates. This could boost demand for crude this year more than anticipated and by extension the price.
Will the Fed deliver another boost to Gold prices?
Gold appears stuck between $2,000 and $2,050 at the moment, torn between the prospect of multiple rate cuts this year and those expectations being pared back in recent weeks. There remains a plenty of optimism that rates could fall a lot this year which has enabled the yellow metal to remain above $2,000. But the data needs to deliver and some dovish messaging from the Fed today wouldn’t do the price any harm either.
Onwards and upwards for Bitcoin?
Bitcoin has recovered strongly over the last couple of weeks following the post-ETF sell-off. Whether driven by Grayscale outflows or the fact being sold, or a combination of the two, the worst appears to be behind it. That’s not to say it’s onwards and upwards from here but there’ll be some relief that the more than 20% plunge in 12 days is over.
The halving event may provide the next distraction over the next few months but to what extent we can expect it to boost prices is hard to say. Other factors could be supportive though such as an improved risk environment and falling interest rates.