At least the Fed is half right, it's high time to fix the other half
-
Skilling Writers Team
-
-
- FED
- Trading
Upcoming Event - Wednesday, March 22, 2023: US Federal Reserve (Fed) interest rate decision
Skilling Fed Preview
At least the Fed is half right, it's high time to fix the other half
The Fed looks set to hike another 0.25% on Wednesday. Not an easy decision with bank failures in the background, but then again a few bank failures might help the Fed tame inflation.
| Current Interest Rate | March Forecast |
|---|---|
| 4.75% | 5% |
Remember traders, central banks must:
- Maintain price stability (keep inflation and deflation in check)
- Maximize employment (keep people working)
It's not an easy balancing act.
The current situation:
Inflation is above the Fed’s long term target, and unemployment is near 53 year lows. So, the Fed has it half right.
- Current US annual inflation is at 6% and the Fed’s inflation target is 2%
- US unemployment is at a near 53 year low
The Fed will keep moving at all costs
The Fed achieved its “maximum” employment mandate at the cost of higher inflation. Now the Fed must “fine tune” the economy in order to bring balance between inflation and full employment.
In the meantime, the Fed’s attempts to “cool down” the economy will create winners and losers.
For example, banks are highly sensitive to interest rate moves and those who do not protect themselves from the inverse effects of interest rate adjustments will be exposed to the consequences.
Winners: They saw the data and realized that higher inflation was on the way and took measures to either protect themselves or take advantage of the opportunities.
- Hedgers i.e. financial institutions/investors with exposure to the bond markets who took measures to protect themselves in the face of bonds losing value because of higher interest rates
- Speculators i.e. traders who took trades on assets that could perform during a higher rate cycle
Losers:
- All those bondholders who did not take action to protect themselves
- Speculators who took trades against the rate cycle
Sticky inflation and few signs that higher interest rates will “cool” the economy
What could support the Fed to keep on hiking?
- If nonfarm payrolls (NFP) keep on going in strong
- Consumer prices remain elevated
- Retail sales remain strong
- Wages keep increasing
What could support the Fed to pause the current hiking cycle?
- Decelerating inflation over multiple months
- Financial stress i.e *Collapse of multiple systemically important financial institutions
Note: the recent collapse of a few US specialized investment banks i.e. SVB, although “contained” there remains a risk of contagion across the US financial system
All eyes on the FED
Assets across the world have been affected by rising inflation - Moves in the USD affect global commodity prices
Commodity percentage moves during the last 52 weeks
| Commodity CFD | Last | YTD %Chg | 1M %Chg | 3M %Chg | 52W %Chg |
|---|---|---|---|---|---|
| Sugar #11 | 20.67 | 3.14% | -3.46% | 2.89% | 10.59% |
| Cocoa | 2738 | 5.31% | 0.59% | 10.63% | 9.35% |
| Gold/Euro | 1880.38 | 10.33% | 9.12% | 9.89% | 8.22% |
| Gold | 2005.57 | 10.03% | 9.01% | 10.41% | 4.52% |
| Platinum | 1000 | -6.87% | 8.70% | 0.87% | -2.19% |
| Aluminum | 2232.25 | -8.61% | -5.15% | -8.61% | -8.61% |
| Silver | 22.5555 | -5.79% | 3.47% | -6.52% | -9.39% |
| Soybean | 1463 | -2.60% | -3.18% | 0.00% | -11.01% |
| Coffee | 190.18 | 7.27% | -2.10% | 9.49% | -11.66% |
| Corn | 650.75 | -4.44% | -5.03% | -0.72% | -12.59% |
| Zinc | 2931 | -2.41% | -5.01% | -3.85% | -23.51% |
| Crude Oil Brent | 72.69 | -15.39% | -12.53% | -8.31% | -32.01% |
| Wheat | 700.5 | -9.85% | -9.67% | -5.15% | -32.04% |
| Crude Oil WTI | 66.74 | -16.85% | -12.58% | -10.16% | -35.19% |
| Cotton #2 | 76.83 | -8.94% | -5.15% | -7.34% | -37.47% |
| Nickel | 23147 | -22.55% | -9.48% | -17.72% | -45.08% |
| Natural Gas | 2.338 | -47.75% | 2.77% | -64.58% | -53.15% |
European Stock Indices delivered strong returns over the last 52 weeks
Despite the uncertainty european indices remain top global index performers
| CFD Indices | Last | YTD %Chg | 1M %Chg | 3M %Chg | 52W %Chg |
|---|---|---|---|---|---|
| VXX Volatility Index | 27.3 | 28.47% | 39.06% | 29.61% | 16.63% |
| FRA40 Index | 6925.4 | 6.98% | -5.75% | 7.33% | 4.73% |
| EU Stocks 50 Index | 4064.99 | 7.15% | -4.91% | 6.86% | 4.62% |
| ESP35 Index | 8719.3 | 5.96% | -6.58% | 7.48% | 3.65% |
| DAX Stock Index | 14768.2 | 6.07% | -4.61% | 6.30% | 2.64% |
| Nikkei 225 Index | 27333.79 | 4.75% | -0.65% | -0.70% | 2.55% |
| FTSE 100 | 7460 | -0.08% | -6.33% | 1.77% | 1.97% |
| SGX CNX Nifty Index | 17100.05 | -5.55% | -4.70% | -6.40% | -1.08% |
| ASX 200 Index | 6994.8 | -0.62% | -4.79% | -2.15% | -3.53% |
| Norway OBX Index | 1049.15 | -3.75% | -6.01% | -2.92% | -5.07% |
| US30 Industrials Average | 31861.98 | -3.88% | -5.81% | -3.22% | -7.59% |
| Hang Seng Index | 19518.59 | -1.33% | -5.80% | 0.35% | -9.22% |
| SPX500 Index | 3916.64 | 2.01% | -3.98% | 1.67% | -11.22% |
| Brazil Bovespa Index | 101982 | -7.07% | -6.59% | -0.85% | -9.81% |
| US 100 Index | 12519.88 | 14.44% | 1.31% | 11.35% | -11.32% |
| Swiss Market Index | 10613.55 | -1.08% | -5.71% | -1.46% | -12.01% |
Key points to consider on Wednesday:
- Since the USD is considered to be important to global trade, this Wednesday's US interest rate decision is expected to affect not only US assets
- US core inflation was slightly higher in February and could support the Fed to remain higher for longer
- However, the situation across the banking system has become increasingly unstable and the Fed will have to consider if higher for longer is appropriate
Bottom line: The March Fed decision could be one of the most important announcements in the Fed’s history, and as always, there will be winners and losers.
Trade safe.
Not investment advice. Past performance does not guarantee or predict future performance.
