The minutes from the Fed’s last meeting are due on Wednesday, and on paper, there’s not much reason to expect any major dovish surprises. The statement, the dot plot, and policymakers’ comments all pointed to inflation still being a concern, and another rate hike remained very much on the table. On top of that, Kevin Warsh mentioned that the Fed shouldn’t let its guard down too soon.
The good news is that a lot has changed since that meeting: geopolitical tensions have eased, oil prices have pulled back, gasoline prices are falling, and inflation expectations have started moving in the right direction, with consumers seeing inflation averaging 4.6% over the next year, down from 4.8% in May, while five-year expectations have fallen from 3.9% to 3.3%. Last but not least, the June jobs report came in weak, with just 57,000 jobs added, far below expectations.
Yet money markets are still pricing in a 25-basis-point hike by December, and the 10-year Treasury yield rose last Thursday from 4.37% to 4.49%, suggesting the market isn’t expecting a quick shift in Fed rhetoric.
But let’s imagine the next few weeks play out in the Fed’s favor: the situation in the Middle East remains relatively calm, with the Strait of Hormuz half-open but still operating, oil continues to drift lower, and inflation comes in softer than expected, increasing the chances of a shift toward a more dovish stance. Who stands to benefit the most?
Bonds would likely be first in line. If markets become convinced the hiking cycle is over, Treasury yields should fall, pushing bond prices higher. Gold (XAUUSD) and other precious metals, including silver (XAGUSD), would likely follow. Then there’s Big Tech, as lower discount rates tend to boost the value of future earnings.
But of course, for that to happen the data shouldn’t disappoint, but even with gasoline prices coming down, the impact won’t be immediate.
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