In the same timeframe, after repeatedly insisting that rapidly rising inflation was transient from late 2021, Fed Chairman Jerome Powell and colleagues shifted from an extremely accommodative zero-rate policy to expectations of an interest rate. Fed Funds above 4.5% by year end. This abrupt change in monetary policy causes the US dollar to trade at its 20-year high in a parabolic fashion, keeping the price of gold in the world reserve currency under great pressure.
The extreme volatility entered the market in the middle of the week after Russian President Vladimir Putin ordered a partial mobilization of reservists to bolster his forces in Ukraine, followed by the Federal Open Market Committee (FOMC) which voted to raise interest rates. interest of 75 basis points. The Fed has also set a higher-than-expected terminal rate of 4.6% in 2023, although inflation is not at its 2% target.
At the press conference following the FOMC meeting, Fed Chairman Jerome Powell warned that consumer economic pain is on the horizon as the central bank focuses on reducing inflation. “Reducing inflation is likely to require an extended period of below-trend growth,” Powell said Wednesday.
If the Fed’s forecasts are correct, 4.6% means another 1.3 million unemployed. Asked by a reporter if this was acceptable, Powell said, “We need to raise inflation. I wish there was a painless way to do it. There isn’t.”
The rapid rise in rates caused the possible US Treasury yield curves to turn 62% between 3 months and 30 years. Any reading above 55% has historically led to a recession and Powell hinted at this during Wednesday’s press conference. The central bank said it sees US GDP grow only 0.2% in 2022 and only 1.8% over the long term. “Nobody knows if this process will lead to a recession or, if so, how significant that recession will be,” the Fed chairman said.
Not only did the US central bank raise rates by three-quarters of a percentage point for the third consecutive time on Wednesday, but British, Swiss and Norwegian central banks also posted large increases on Thursday. In fact, the central banks of the 10 major developed economies have raised rates by 1,965 basis points combined in this cycle to date, with Japan the “dove” holding on Thursday with its decades-long ultra-low rate policy that has destroyed its bond market.
However, the persistence of inflation which continues to support an aggressive effort by several large central banks this week, in contrast to the lack of peacemakers in positions of power around the world, has kept gold futures from December traded above the critical support at $ 1675.
With the price of gold deeply oversold, the plethora of stops below this carefully monitored level has been absorbed by safe-haven purchases as the stock market begins to price in recession. Gold hit new weekly lows, then weekly highs, following Powell’s press conference in just 45 minutes, creating even more uncertainty around this critical support zone.
The bullish case sees the purchase of gold to hedge the crisis creating a low in the Gold / S&P ratio when the stock market reached an all-time high in early 2022. The weekly chart also shows this ratio in the process of forming the stock market. right shoulder of a reverse head and shoulders bottom pattern.
However, time could technically run out for gold bulls if December futures fail to close above $ 1705 on a quarterly basis next Friday. Otherwise, the $ 1550 region would come into play, which is the 50% Fibonacci retracement after the price of gold doubled from $ 1045 at the end of 2015 to $ 2090 by mid-2020.
While the Fed is determined to destroy demand and cause more “pain” to a market burdened with ever-higher debt payments after each huge rate hike, the S&P 500 nearly sold down to its June low as per the technical manual as I write this. missive.
After testing the declining 200-day moving average in mid-August, which coincided with a downtrend line from the January peak, the world’s most followed index has returned to the downside and is moving sharply towards the low of June to 3636.
Because the rise in interest rates has been so rapid that the market is likely only starting to see the economic consequences of the initial rate hikes, if the S&P 500 moves below this level it could initiate a margin-induced selloff. call.
In a potential panic move below its 200-week rising moving average at 3600, I expect the Fed to consider spinning faster than current market expectations. During an election year where markets are falling as the global economy is plunging into recession, look for the Fed’s language to start to turn dovish if the S&P 500 plummets to a critical support at 3200 during “crash season” .
Meanwhile, the US dollar continues to be the preferred safe haven, while the gold complex could suffer further pain if the market creates a wave of margin call sell-offs in the crash season. But the good news is that, contrary to the mining complex being extremely overbought ahead of the 2008 financial crisis and the 2020 pandemic market crash, gold stocks have already been sold at deeply depressed and opportunistic levels as the stock market appears to be in the process of another leg down.
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