It's Powell's Turn: Will the Fed "Pivot"?
Keith D. Smith III
Financial Literacy Advocate | Banking & Payments | Financial Markets
Welcome back to another week of the Common Observer. If you tuned in last week, you were definitely prepared to see Rishi Sunak become the United Kingdom’s new Prime Minister. You were hopefully also looking out for the policy interest rate decisions from the Bank of Canada (BOC) and the European Central Bank (ECB). Thanks for joining us again as this week will be critical to determining the near future of the global economic environment as the Federal Reserve releases its interest rate decision this week.
This week we’re looking at the Federal Reserve’s interest rate decision, the global energy crisis, and Russia’s exit of a major grain deal that could send the price of wheat higher.
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1. Federal Reserve Open Market Committee (FOMC) Interest Rate Decision This Week
The FOMC is releasing its decision about the Federal Funds rate this week on Wednesday, November 2nd, at 2:00 pm ET, and the talk of the town is that the Fed is going to begin a “pivot” in policy decisions. Let’s take a step back to talk about what this “pivot” means and what others are actually expecting.
We also have the interest rate decision from the Royal Bank of Australia (RBA) coming out late Monday night and a decision from the Bank of England (BOE) on Thursday.
There have been whispers that the FOMC will begin to slow the rate at which it is hiking interest rates or will at least indicate that it will begin doing so in the next interest rate decision meeting. That does not mean that the Fed is going to stop raising interest rates or that they are planning to reverse its decisions and begin to cut rates.
In fact, the last time Jerome Powell spoke on the topic, he did his best to make it very clear that based on economic data releases, the Fed is not slowing down any time soon. There have been hotter-than-expected CPI reports since then.
Analysts are expecting that the interest will rise by 75bps this week and that would mark the 4th meeting in a row that they have stuck to that rate of hikes.
I’m highlighting this because the term “pivot” may be a bit misleading and may also be playing into the psychology of how investors and traders are participating in the market leading up to this decision.
For the past two weeks, we’ve seen large indices like the DJI rally up even with some big tech names (ie. META, AMZN) having even worse-than-expected earnings reports. To be clear, this is a rally being seen off of lows that take us back to prices last seen in late 2020.
Regardless of what the FOMC decides, I am expecting some extreme volatility for equities (DJI, SPX, NDQ) and the bond market (TLT) this week, so stay tuned.
What did other central banks do last week?
The BOC has let off of the gas just a bit by raising its interest rate by only 50 bps compared to 75bps in its previous interest rate decision meeting. This decision came as a bit of a surprise to analysts as they expected the bank to continue its rate hikes at 75bps.
The ECB has maintained its position on attempting to reign in inflation by continuing its rate hikes at 75bps last week. This puts the central bank at two 75 bps hikes in a row.
Christine Lagarde says that she’s raising rates because they are fighting to bring inflation down. She also said that she’s fighting inflation that has come from nowhere. Hear it in her words in the tweet below.
The Bank of Japan (BOJ) kept its interest rates low by maintaining its guidance. This is contrary to what most other banks are doing around the world as they try to stomp out inflation by tightening policy. The bank is buying bonds to support the market and plans to increase the frequency of its bond-buying in the next month. This will be a situation to watch closely as the central bank uses other means to support its market in potential times of stress.
2. European Energy Crisis is Looming
You’ve surely heard about it by now, but Europe is heading for a cold winter with a shortage of energy supplies to support households.
European gas prices are becoming less of a concern as gas storage is nearly full in the form of liquified natural gas (LNG). Prices have fallen from above 340 euros per megawatt hour to 108.5 euros per megawatt hour since August.
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This is a dramatic decrease in prices and they are expected to fall even further in the coming weeks due to an oversupply of LNG.
Analysts are still concerned about the European energy situation as stocks have not yet been in use due to a warmer-than-average beginning of winter. The fear is that as it begins to get colder, stocks of LNG will go down and prices will then begin to rise.
Meanwhile, American energy companies such as Exxon Mobil (XOM) and Chevron (CVX) are shooting up to all-time high stock prices.
This week could get interesting for the energy sector holistically.
We won’t go into it today, but let’s keep an eye out for diesel as well.
3. Russia Exits From Deal on Grain
In July wheat futures were calmed down by a pact brokered by the United Nations (UN) and Turkey. The pact allowed Ukraine to restart its Black Sea grain and fertilizer exports which had stalled when Russia invaded the country. The deal was set to last for 120 days.
Russia is deciding not to continue with this deal which is likely to send the price of wheat futures much higher as early as Sunday night (October 30th). By the time you’re reading this, wheat futures will have already begun to see the effects of this.
Russia’s exit from this pact may lead to food shortages around the world. We’re going to be monitoring this situation closely.
That’s it for this week’s version of The Common Observer. Remember to subscribe to stay up to date with the biggest events in global markets!
This article is for entertainment purposes only and is not intended to serve as financial or investment advice.
Dirty Deeds:
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