From the US, the FED is determined to get inflation back down to 2%, and this involves raising rates, even when banking crisis such as the closure of Silicon Valley Bank draws attention and concern from the market about restrictive policies. From a consumer perspective, certain bond yields and the decreased value of holding assets have also hindered traders from placing their funds into the banks.
Amidst this complex chain of events, gold remains high in value as it is a hedge against inflation and a safe store of wealth.
In either case, Inflation strikes, and interest rates rise - but what does that mean for investors? Here are 4 things you need to know about FED’s next move and how it affects the market.
1. Gold Value has risen
In the month of April 2020, London gold rose 2% to close at $2007.9 per ounce. The yield on 10-year US Treasury bonds fell to 3.39%, while inflation expectations dropped to 2.26%, resulting in a real interest rate of 1.13%. The US dollar index fell 0.4% to 102.1, and the S&P 500 edged down 0.1%. Offshore RMB slightly fell, while Shanghai gold maintained a premium.
Poor US economic data boosted the price of gold. Coupled with the release of mixed expectations on the March non-farm payrolls report, the market's pessimistic expectations for the US economy and interest rate cuts have remained the main concern. For the short term, traders will have to pay attention to the risks of sharp changes in prices.
On May 4, 2023, it is reported by Reuters that gold firms after FED’s decision to raise rates by another 25bps, and some traders anticipate gold to be well positioned to push toward record highs.
2. Labour and Manufacturing PMI
In March, both the US ISM manufacturing and services PMI fell to 46.3 and 51.2, respectively, below expectations and prior values. The manufacturing PMI hit its lowest level since May 2020 due to continued declines in new orders and demand cooling. Although the service sector also saw a decline in demand, it is still expanding.
Labour
Given that the rise in interest rates reflects a volatile economy, the labour market is weakening marginally, but it is showing some resilience.
In February, the number of job vacancies unexpectedly fell to 9.93 million, indicating a cooling demand for hiring. In March, ADP new job additions were 145,000, below expectations, while non-farm payrolls added 236,000 jobs, slightly below expectations but revised upward from the previous value of 326,000.
Most of the new jobs were concentrated in leisure and hospitality, professional and business services, education and healthcare, and the government sector.
As demand for jobs cooled, the average new non-farm job additions began to slow. Additionally, the slowing down of the labour market also demonstrates some resilience. This is reflected in the fact that there are still new manpower and labour forces returning to the job market, in total, labour participation rate has increased to 62.6%, while the unemployment rate has dropped to 3.5%.
Meanwhile, wage pressures have eased slightly due to the high base effect. The month-on-month growth rate is still 0.3%. The market's overly dovish expectations for the March non-farm payrolls cooled, and expectations for a 25bp rate hike in the May rate meeting have increased, indicating that the market's loose trading logic will face adjustments.
Additionally, China's central bank continued to increase its gold reserves in March, marking five consecutive months of increases. ETF holdings slightly increased, and gold is still in a bull market environment.
3. Upcoming FED plans
From NYTimes, it is reported that the FED forecasts economic growth to be slightly slower this year and inflation to be slightly higher… they also forecast interest rates to be 5.1 percent by the end of 2023. Subsequently, the S&P 500 index tumbled to a loss while the two-year treasury yield fell in March.
Updated as of 4 May 2023*. The committee meeting held in early May has led to the unanimous decision to increase rates from 5% to 5.25%, a quarter of a percentage point.
From Forbes, estimates were higher as markets expect that the FED Funds rate reaches 5.25% to 5.50% in 2023.
From the Federal Open Market Committee (FOMC) Meeting, the summary of Economic Projections (SEPD) for the federal funds rate at the end of 2023 and 2024 is expected to shift 25 basis points higher.
Regarding the rise of interest rates and the markets, broad equity prices rose somewhat after the closures of Silicon Valley Bank and Signature Bank … spreads on corporate bonds, municipal bonds, and leveraged loans rose, with speculative-grade corporate bond spreads registering the largest moves. Following the rating goal of 2023, the following is the rate hike timeline.
Source: https://www.forbes.com/advisor/investing/fed-funds-rate-history/
4. Market News
While inflation remains to be tackled by interest rates, APnews also reports that though job vacancies fell In January, the figure remained at a historically high level. FED watches data on job vacancies as companies may sharply raise wages to attract workers, but the cost may be passed on to the customers in the form of higher prices, which will worsen the high inflation.
For the forecasts of the job and labour market, Financial Times details that it is projected to rise to 4.1 percent by year-end, up from its current 3.6 percent level. It will eventually peak between 4.5 percent and 5.5 percent; 61 percent of economists reckon.
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