#Risk Sentiment Sours on #FOMC Minutes;#Natural Gas Hits Record High;#UK #Inflation Exceeds 10% (18 AUGUST 2022)
The FOMC meeting minutes shows members had considerable fears over negatively impacting growth by continuing rate hikes but must press on to combat inflation.
- Yesterday’s release of the minutes of the most recent FOMC meeting show that several members are concerned about the potential impact of the continuing rate hikes on growth, but there is a clear consensus that the hikes must continue until inflation falls considerably lower. The S&P 500 Index and the NASDAQ 100 Index have both traded lower since this release. Major Asian indices such as the Japanese Nikkei 225 Index have also traded lower over the Asian session.
- US Natural Gas futures traded at a multi-year high yesterday above $9.50. Trend traders may be interested in going long here.
- In the Forex market, the Japanese Yen is the weakest major currency, while the US Dollar is the strongest. The Australian and New Zealand Dollars are also weak.
- British CPI (inflation) data yesterday showed inflation still coming in higher than expected, unlike recent data releases in the USA and Canada. Annualized UK inflation has reached 10.3%, the highest of any G7 nation, sending the GBP/USD currency pair lower and the EUR/GBP currency cross higher. However, the Pound gained against the Japanese Yen.
- US Retail Sales data came in very slightly lower but Core Retail Sales showed a healthy advance of 0.4%, showing there is considerable life in the consumer economy.
- The Australian unemployment rate fell unexpectedly to 0.4%, but fewer net new jobs had been created than expected.
- Daily new coronavirus cases globally dropped last week for the fourth consecutive week.
- It is estimated that 67.4% of the world’s population has received at least one dose of a coronavirus vaccination, while approximately 7.6% of the global population is confirmed to have contracted the virus at some time, although the true number is highly likely to be much larger.
- Total confirmed new coronavirus cases worldwide stand at over 598.2 million with an average case fatality rate of 1.08%.
- The rate of new coronavirus infections appears to now be most significantly increasing in Chile, South Korea, The Marshall Islands, Moldova, and Tonga.
Fed Minutes Showed Continued Commitment to Bringing Inflation Back to Target
The minutes from the July 26-27, 2022 Federal Open Market Committee (FOMC) meeting showed that curtailing inflation remains of paramount importance to the Fed.
On the progression of the economy, the Committee members noted that “recent indicators of spending and production had softened. Nonetheless, job gains had been robust in recent months, and the unemployment rate had remained low. Inflation remained elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”
The Committee also stated that “inflation remained unacceptably high and was well above the Committee’s longer run goal of 2 percent.” Additionally, participants noted that increases in inflation were broad based and that they have seen little evidence that inflation has begun to abate.
Members of the Committee stated that “the war and related events were creating additional upward pressure on inflation and were weighing on global economic activity.”
Committee members anticipated that “ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee’s objectives.” Nevertheless, the pace and extent of future policy tightening would depend on the prevailing macroeconomic backdrop.
For the first time FOMC members acknowledged that “the constantly changing nature of the economic environment and the existence of long and variable lags in monetary policy’s effect on the economy, there was also a risk that the Committee could tighten the stance of policy by more than necessary to restore price stability.”
Key Implications
The minutes confirmed that re-establishing price stability remains the principal objective of the Fed. The uncertainty surrounding the Russia-Ukraine conflict will only add to the upside risk. Additionally, the labor market has continued to strengthen, with employment having surpassed pre-pandemic levels and the unemployment rate on par with its February 2020 level. The Fed also acknowledged that their task is highly uncertain, and there is a risk that it could tighten rates by “more than necessary”.
Markets have been worried about exactly that risk. Recession fears have continued to mount, with some surveys showing that the probability of a recession within the next 12-months has increased to 50%. These fears have also been reflected in the spread between the U.S. 10-year and 2-year treasury yields, which remains in negative territory. We expect the Fed will continue to raise rates this year, before taking a pause to monitor the impacts of its actions on economic activity and inflation.
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