Global markets will remain jittery after the US Fed unexpectedly signalled it could begin tapering its massive stimulus sooner than expected, suggesting potential interest rate hikes by the end of 2023. But the opposition to rate hikes will remain strong as ‘doves’ believe that the inflation pressure is transitory, which is why the views expressed by the voting Fed members in coming months will be keenly watched.
All opposing 7 out of 18 members have a valid argument as they think it’s too early to discuss the hike until employment conditions get better. Right now ‘hawks’ may be in majority as 11 of them see two back-to-back hikes of 25 basis points, by the end of next year. But as of now if we compare previous employment data with the latest numbers, it is learnt that presently as many as 7 million people are still without jobs. In February, 9 million people were looking for employment opportunities. This means if interest rates are hiked, costly borrowing could cause a setback to job market prospects to attain the pre-pandemic levels.
In the last quarter of 2021, the market will have a clearer picture about employment because the stimulus package ends in September.
More importantly, the market will be watching the pace of inflation keenly, as the Fed has raised its interest rate projection from 2.4% to 3.4% that should keep dollar’s tone firm unless inflationary pressures slow down – a situation that could induce global players, as ever, to rush to buy assets.
The Fed has provided a record amount of funding in trillions of dollars to support more than 20 million people that were out of jobs about a year ago and now they are worried about the rise in inflation. Last week’s statement has confused the market as Fed’s idea of rate hike has always been to cool down overheating. Earlier, the Fed consensus said that there will be no interest rate hike until December 2024.
Until recently, the Fed kept on pumping money, increasing the size of stimulus. They kept on flowing the credit as businesses were in dire need of loans.
Hence, for the next few months, moves in the financial market will remain choppy and confused. Investors could struggle to determine a firm direction. The estimated size of the bond buying programme or tapering is USD 120 billion a month. But the key to decision making will be employment and price stability. The minutes of the meeting will be released next month on July 7 that may provide more details. It is yet to be seen if the Fed’s hawkish overtone are there to stay or will fizzle out sooner than expected.
A strong dollar could hurt the emerging market economies that mostly borrow dollar. A strong dollar could hurt emerging market economies’ debt servicing ability. It could hurt the stock market and currencies as well. Euro @ 1.1865 – in short-term may struggle to gain strength beyond 1.2080 and could slip down towards 1.1620-50 zones. In medium- to long-term, Euro has a strong support around 1.1350-80 zones; it could gather momentum to test 1.2220.
Pound Sterling @ 1.3810 that too was enjoying a stronger tone plunged to six-week low could bounce back next week after losing another big figure and it could correct itself by the weekend, as the Bank of England (BoE) is meeting on Thursday.
In medium- to long-term Cable has support around 1.3460-80 zones; its likely break: 1.4150 for 1.4280;
Gold @ 1764. It lost nearly 4.5% of its value looks set for more losses if it fails to move beyond $ 1880, a possible break of $ 1680 will see a move towards $ 1600 or below, but likely to hold above $ 1470 in the medium- to long-term. It could retest $ 1980; a break will encourage it for a move towards $ 2080.
(The writer is former Country Treasurer of Chase Manhattan Bank. The views expressed in this article are not necessarily those of the newspaper)
He tweets @asadcmka
Copyright Business Recorder, 2021