Investors are looking for clues on rates, growth and prices and we’ll get some answers early July.
Firstly, what will investors learn from the Fed minutes?
The Fed of course refers to the US Central Bank, the US Federal Reserve and it the FOMC (Federal Open Markets Committee) that meets 8 times a year to discuss and decide on monetary policy i.e interest rates. After the meeting the chairman Jay Powell holds a keenly awaited press conference and this makes the release of the FOMC meeting minutes – 3 weeks after the meeting – less important than it used to be. Nonetheless, the detail in the meeting minutes will be closed scrutinised for keys to what the Fed is thinking right now. Those minutes are released on Wednesday 7th July.
The US central bank surprised market participants in mid-June when it signalled a potential policy shift in the face of higher inflationary pressures and strong growth. Its interest rate projections opened the door to two rate increases in 2023, a sharp divergence from the last forecasts in March when the so called “dot plot” indicator of rate setter predictions suggested it would maintain its ultra-accommodative policy of zero short-term interest rates until at least 2024.
The key interest rate is the Fed Funds rate which is effectively zero right now.
Longer term rates i.e the benchmark 10-year US Government bond yield 1.50% yield-to-maturity/annual rate of return. This yield hit a low of 0.50% in 2020 in the depths of the Covid-19 crisis and a recent high, a month or so ago, of 1.78% YTM as investors recent fears around inflation were at their strongest.
Higher interest rates/bond yields are bad for stocks since
-higher interest rates make investing in bonds relatively more attractive versus stocks
-higher interest rates/bond yields raise the cost of corporate borrowing
-higher interest rates result in lower present day stock valuations as analysts discount future earnings using higher interest rates
So, what the FOMC decides on interest rates is crucial for markets and invests and every word uttered by the Fed is scrutinised to hints on interest rate policy.
Markets are generally buoyant right now with global /US stocks at all-time highs / bond yields not a problem for stock investors/inflation a concern but not problematic at present
Will the EU raise growth forecasts?
The brightening prospects for the European economy will also grab attention this week when in Brussels on Wednesday the European Commission looks set to upgrade its growth forecasts for the next two years. It is expected all 27 EU countries will be fully recovered from the Covid-19 crisis by the end of next year.
This after many European countries have eased their lockdown measures in recent months in response to falling coronavirus infections and accelerating vaccinations, with business activity and consumer confidence is bouncing back. European stock markets reflect this outlook.
Will China producer prices continue their rapid rise?
Chinese inflation data on Friday is poised to show a continuing rise in the country’s factory gate prices, which have surged this year on a global commodity rally i.e., higher commodity costs. Economists expect the producer price index to increase 8.7% year-on-year.
Industrial commodities such as nickel, iron ore and copper are at multi-year highs as the global economy powers ahead. Timber prices too (essential for building houses in the US have) seen prices double in 12 months. Oil too, strong at $75 (WTI and Brent) dollars per barrel. There is talk of us entering a ‘commodities super-cycle’ of rising demand/prices.
In contrast, gold prices suffered the biggest monthly drop in four and a half years in June after the Federal Reserve surprised investors with its willingness to control inflationary pressures with an eventual rise in interest rates, denting the appeal of holding the metal. Gold fell 7 per cent in June to $1,779 an ounce. That still left the price within its range for the year so far, but was its worst monthly drop since November 2016. Shares in gold miners have also sunk 16 per cent this month.
Gold has struggled against a stronger dollar and rising bond yields following those remarks from Fed officials last month that indicated an increased likelihood of interest rate rises in 2023. Gold suffers when bond yields rise, because the metal provides no yield to investors.
The overall market global question remains “Is inflation returning?”