The Federal Reserve's Beige Book says the economy is stable and interest rate cut expectations are slowing

(Liang Yonghui is the deputy general manager of Zhaojin Refining Co., Ltd.)

I. Priority Cases

1. [Fed Governor Waller said that the inflation target is "close", but interest rates should not be cut sharply and quickly]

In a speech at the Brookings Institution, Governor Waller, one of the 12 voting members of the Federal Reserve, reiterated what Chairman Powell said at his December press conference. His remarks refuted the overly optimistic expectations of many market participants. These market participants said that while interest rates may be cut this year, the Fed may be unhurried in easing monetary policy.

"As long as inflation does not rebound and remains elevated, I believe the Federal Open Market Committee (FOMC) will be able to lower the target range for the federal funds rate this year. Noting that in previous cycles, the FOMC cut rates at a rapid pace, often by large margins, adding: "I see no reason to act as quickly as we have in the past." "When the time is ripe to start cutting rates, I think they can and should be cut methodically and cautiously. ”

2. [The Federal Reserve's Beige Book: The prospect of falling interest rates is a source of optimism]

On January 18, the Federal Reserve's Beige Book said that most of the reports from the 12 regional central banks said that economic activity has barely changed since the last Beige Book was released. Consumers in most regions increased their spending during the holiday season, with three regions spending more than expected. Several regions mentioned the growth of leisure tourism. Almost all regions reported a decline in manufacturing activity. Regions continue to point out that high interest rates are restricting car sales and real estate transactions. However, many contacts in various regions see the prospect of lower interest rates as a source of optimism. Overall, most regions indicated that their business expectations for future growth were positive, improved, or both.

3. [The United States and Britain attacked Yemen and caused retaliation, and the ships of the two countries may be kicked out of the insurance coverage]

Some ship insurers have begun to avoid taking war risks to American and British merchant ships sailing the southern Red Sea, in another negative reaction since the two countries' earlier air strikes on Yemen. Recently, Yemen's Houthi rebels have stepped up their attacks on merchant ships in response to U.S. and British airstrikes on Yemen. Marcus Baker, global head of insurance broker Marsh, said the result was that insurers were seeking to exclude vessels linked to the United States, Britain and Israel when issuing insurance for ships passing through the region. This means that they will not provide insurance. "Underwriters are adding clauses that prohibit the United States, the United Kingdom or Israel from participating," he said. ”

Follow-up market focus

The current gold price is affected by the monetary policy adjustment of major central banks, geopolitics and inflation. In terms of monetary policy, the Fed's Beige Book showed little change in economic activity, somewhat slowing interest rate cut expectations. Recently, Fed officials have made hawkish speeches, although they are expected to cut interest rates this year, but the timing of the rate cut may be delayed. According to the speeches of Fed officials, the future monetary policy still needs to pay attention to whether inflation continues to decline, and the recent crisis in the Red Sea region has caused sharp fluctuations in shipping rates. The impact on global inflation remains to be seen as the impact of insurance on US, UK and Israeli vessels in the wake of the US-UK crackdown on the Houthis, and insurance companies are seeking to exclude or drive up inflation in these countries when issuing insurance for ships passing through the region. In the later stage, the precious metals market needs to pay attention to the impact of factors such as the monetary policy adjustment of major central banks and changes in the international geopolitical situation.

3. Summary of investment bank views

1. Commodity analysts at TD Securities pointed out that the economic data did not provide any clear signs, which increased the volatility and uncertainty in the market.

"As Fed funds futures sold off and doubts about the early timing and magnitude of the upcoming policy rate cuts, investors reduced their long positions," analysts said in a recent note. A strong labor market is linked to persistent inflationary pressures. With core CPI well above the 2% target, the market has concluded that the Fed will not ease policy prematurely. "But with recent lower-than-expected production prices, the market is long again as it expects an early end to restrictive policies. With gold trending towards our Q2 target of $2,200, data-driven volatility is likely. ”

2. Bob Moriarty, founder and analyst of a precious metals financial website, outlined his investment layout plan for 2024, emphasizing that the precious metals market has shown negative sentiment in the past three weeks. He called on investors to be cautious about the prospect of gold prices doubling and soaring, stressing that they will only be cheap if there is drama in the financial system. Bob agrees with the prevailing view of many in the market that the US domestic economy could fall into recession in 2024.

3. Deutsche Bank said on January 11 that the dollar is still expected to have a bullish year despite the Fed's expectation of interest rate cuts.

The bank's head of foreign exchange research said the dollar's strength would stem from the Fed's belated dovish stance. With the least urgency for the US to ease monetary policy, higher interest rates over the long term will provide further support to the US dollar. He explained that the other G10 economies will pivot faster due to more frightening growth mixed with inflation. "Given the high starting point for interest rates, the Fed is priced as the most dovish central bank over the next two years, but there are reasonable doubts that this will materialize as soon as it is priced," it wrote. He added that once the Fed cuts interest rates, it does not necessarily pull the dollar down, noting that the previous six easing cycles have often been accompanied by a stronger currency. Conversely, if the US falls into recession, the dollar may only weaken, which most economists believe is unlikely. Further support for the US dollar will come from geopolitical turmoil and global uncertainty caused by the US election. The dollar's safe-haven reputation means it tends to be boosted during periods of international turmoil, and investors are likely to continue to hold on to the dollar as the conflict in the Middle East escalates. At the same time, markets will begin to digest expectations for the US presidential election around March, when the names of the two candidates should be revealed. "As U.S. domestic policy remains uncertain ahead of congressional election results, markets are most likely to focus on Trump's foreign policy and trade priorities, which include a 10% tariff across the board," it wrote. "Such a policy could have a substantial positive impact on the dollar. ”

The views expressed in this article are solely those of the author.