© Reuters
Investing.com – The Federal Reserve favors bond market signals to determine interest paths, and the market gave fresh signals today with fresh lows pointing to an upcoming recession. These signs reinforced the belief that the central bank will cut interest soon.
What is the Fed’s preferred measure?
It is the price difference (spread) for the short-term future, which compares the future return on treasury bills after 18 months now, with the treasury bills return for the current 3 months. This spread is the bond market’s most reliable signal of an economic downturn.
This spread, which has been in negative territory since November, has fallen to new lows this week, reaching nearly 170 basis points on Thursday.
Source: Bloomberg
Fed Chairman Jerome Powell said last year that the 18-month yield curve was the most reliable warning of an upcoming recession.
“The Powell Curve … continues to slide to new century lows,” William O’Donnell and Edward Acton, interest rate strategists at Citigroup, said in a note Thursday to Reuters. Refinitiv data showed that the curve was the most inverted point since at least 2007.
Recession fears have mounted in recent weeks, with investors worried that turmoil in the banking system sparked by the Silicon Valley collapse in March will tighten credit conditions and hurt growth.
Given the inversion of the yield curve in light of recent macroeconomic and money supply data, “it’s not hard to see why markets are thinking about the Fed’s ‘monetary policy error’ with respect to the future lifting cycle.” According to Citigroup (NYSE:) analysts.
Continuing its anti-inflation campaign, the Fed last month raised interest rates by a quarter of a percentage point, though it signaled it was about to pause further increases in borrowing costs after the banking turmoil.
While Fed officials continue to vigorously defend the higher rate, with remarks from St. Louis Fed President James Bullard, the most important of which are:
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The Fed is committed to raising interest rates to bring down inflation
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Inflation, although low, remains well above the Fed’s target
However, the financial markets believe that the Federal Reserve will cut interest rates strongly this year and next year to confront the recession that will affect the economy.
Expectations are for a rate cut of 70 basis points by December 2023.
markets today
It seems to have retreated, correcting its path after the strong rise it achieved at the beginning of this week.
“The spot’s $2025 spot confirms the continuation of the bullish trend that has dominated gold this week, and reminds us that the next stop is at $2040, which is a futures level that has already been breached,” said Sunil Kumar Dixit, Chief Technical Strategist at SKCharting.
“The next leg of the rally at $2060 will bring us closer to a record high that looks more and more certain by the day. But if we fail to hold the levels above $2010, we will push towards the $2000 and $1990 support areas in the spot market,” Dixit added.
Today, data indicated that the borrowing rates through the reduction window that the Fed made available to the distressed banks declined during the past week, to record $69.7 billion in the week ending April 5, compared to $88.2 billion for the week ending March 29.
The Fed’s foreign repo fell to $40 billion on April 5, compared to $55 billion on March 29.
This indicates that the banking crisis is going away somewhat, and this is approved by the Federal Reserve itself. But it has not completely disappeared from the scene.
ANZ Bank analysts predict that gold prices will decline if the banking crisis fades away.
The day advanced slightly without being able to hold onto the gains it made, to close at 101.605.
Major US indices closed with meager gains.
While the strong rally in oil prices that followed OPEC’s decision stopped, to remain hovering near levels of $85 a barrel, after announcing the liberation of 3.7 million barrels from the US Strategic Petroleum Reserve yesterday.
The stillness of oil is one of the reasons for the calmness of the day, as the rise in the price of oil portends stronger inflation – as the energy component is one of the most important components of consumer price indices and the one that controls its direction. Gold is rising on the narrative that inflation will remain high and the Fed will be handcuffed due to the banking crisis.
With the calming of concerns about the banking crisis and the stability of the oil price, gold has stabilized today.
