Midweek Update: Key Developments and Market Insights [16th October 2024]

 Mixed Signals from US Data Keep Fed’s Policy Easing in Question 

The US dollar has gained over 2% since the beginning of October as market participants reduce their bets on how much the Federal Reserve will cut interest rates going forward. Markets are debating whether there will be pauses in the Fed's policy easing due to mixed signals from recent US data and divergent views among Fed officials. 

Following the strong job growth reflected in September’s employment data, risk perception in the labor market has eased. However, hurricanes and worker strikes in the US are expected to cause fluctuations in the data. Fed Governor Christopher Waller estimates that this could reduce October figures by over 100,000. 

On the other hand, sticky service prices have stalled the decline in core inflation. Market observers note that strong wage growth continues to support resilient consumer spending, which could slow progress on inflation. 

According to forecasts released yesterday by the National Retail Federation (NRF), holiday sales in the US are expected to grow at a slower pace this year compared to last year. Sales in November and December are projected to increase between 2.5% and 3.5%, falling short of last year's 5.3% growth. However, NRF President Matt Shay stated that the unusually high spending during the pandemic years has slowed down but remains strong. 

American consumers, who maintained spending habits by dipping into pandemic savings, are now continuing to spend by taking on debt as savings dwindle. As household debt rises, more households are facing the risk of missing debt payments. According to a recent survey by the New York Fed, the likelihood of missing minimum debt payments over the next three months has risen to 14.2%. This marks the fourth consecutive monthly increase, reaching the highest level since April 2020. While some US households remain in good financial standing, more consumers report being in a worse financial position than a year ago. Consumers are also anticipating improved credit access as interest rates decline. 

The recent easing in inflation primarily reflected falling energy prices. However, ongoing geopolitical tensions in the Middle East raise concerns that energy prices could surge, fueling inflation worries. Additionally, with the upcoming US presidential elections, there are growing concerns about inflationary policies, regardless of the winner. In a survey conducted between October 7-10 involving 29 economists, inflation is expected to exceed the Fed’s long-term inflation targets over the next four years, regardless of which candidate takes office. 

Higher inflation figures in the U.S. over the long term could slow the pace of the Fed’s policy easing. In recent days, a handful of Fed officials have confirmed these expectations, stressing that rate cuts could be paused if progress on inflation stalls. 

Markets continue to monitor U.S. data for further clues on the next steps. Tomorrow, the weekly labor figures and the Retail Sales report, which could be critical for inflation expectations, are awaited. 

Gold Prices Forecast to Reach $2,917 by Next October, Says LBMA Survey 

Although gold has lost momentum as bets on the pace of Fed rate cuts decrease, it continues to maintain a strong performance. The Fed's entry into a policy easing cycle, albeit at a slower pace, ongoing geopolitical tensions, uncertainty surrounding the U.S. elections, and strong central bank demand continue to serve as tailwinds for gold prices. 

At the London Bullion Market Association event, delegates reported that they expect gold prices to rise to $2,917.40 per ounce by the end of October next year. This figure reflects the average forecast from a survey involving traders, refiners, and miners.  

Additionally, the survey also predicted an increase of over 40% for silver, with expectations that it could reach $45 per ounce next year. 

Netanyahu's Stance on Iran Raises Questions Amid Oil Market Volatility 

Oil has extended its losses since the start of the week as concerns over tensions in the Middle East eased. A report by The Washington Post stated that Israeli Prime Minister Benjamin Netanyahu informed the Biden administration that he was willing to target military facilities in Iran rather than oil or nuclear facilities. Oil prices had risen sharply since the beginning of the month amid fears that a potential attack on Iran’s oil facilities could lead to significant supply losses. 

However, a statement from Netanyahu’s office yesterday did not fully confirm this report. Israel stated that while they are listening to the U.S.’s views, they make final decisions freely based on national interests. As a result, Israel’s response to Iran continues to be awaited with tension. 

On the other hand, while geopolitical risks are putting upward pressure on oil prices, ongoing concerns over global demand, particularly from China, remain a factor limiting upward momentum. The International Energy Agency and many other market observers predict that conditions for a decline in prices next year are still in place, although developments in the Middle East pose a risk of altering the current outlook, keeping markets on alert.