The sharp sell-off in the equity and commodities market and gains in the US dollar after the Federal Reserve's projection of two rate hikes by 2023 have fuelled concerns that volatile days lie ahead.
However, the week following the bombshell announcements has been rather dull with no major movement across asset classes.
Gold continues to trade in a narrow range below $1,800 a troy ounce. Industrial metals have recovered from the lows but are struggling to build on the gains. Crude oil continues to remain firm and set fresh October 2018 highs.
Market players reacted sharply to the Fed's projection showing the possibility of an early rate hike. However, the reaction subsided amid uncertainty as to how soon the central bank may start to tighten monetary policy.
Market players were waiting for the economic data and the Fed’s comments to gauge the path ahead. Mixed economic data, however, added to the uncertainty.
The US manufacturing sector showed continued improvement, while housing data remained weak and the decline in jobless claims slowed down. Mixed data highlights uneven recovery, making a case for the Fed to continue with stimulus measures.
The Fed’s comments were also mixed. Chairman Jerome Powell said the US central bank would not raise interest rates too quickly based only on the fear of coming inflation.
Atlanta Fed president Raphael Bostic said he had moved forward his expectations of a central bank rate rise to the next year and that the time was coming soon for the Fed to pare its bond-buying stimulus efforts.
Other major central banks held monetary policy unchanged, unfazed by the change in Fed's stance. The Bank of England kept interest rate and bond purchases unchanged as it played down inflation risks. The European Central Bank and the Bank of Japan held the monetary policy steady.
Commodities, too, paused as market players tried to assess if China's measures to curb rising raw material prices would result in a sharp correction.
China has moved in to check speculative activity and is also considering the release of a part of the reserves but with prices already off the highs, it may slow down additional measures.
We may continue to see the market react to US economic numbers and the central bank’s comments unless there is more clarity as to how soon the Fed will act.
The next key indicator will be the US non-farm payrolls data. Any sustained recovery in the labour market may add to market expectations that the Fed may start to withdraw stimulus soon which might support the dollar and build pressure on commodities.
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