Stock investors sure didn’t like what they were hearing on Friday. The broad market S&P 500 declined by nearly 2.5 percent, while the Dow Jones Industrial Average was hammered for a loss of over 390 points. Friday’s losses were the worst seen since June 24th in the immediate aftermath of the Brexit vote.
While there is certainly a combination of factors at play, hawkish commentary from Fed officials is not doing the stock or bond markets any favors.
On Friday, Boston Fed President Eric Rosengren (who is a voter on this year’s interest rate setting board) said the central bank could resume gradual rate increases as economic risks are more in balance.
His comments drove buying in the dollar, while the yield on the benchmark 10-year Treasury note jumped to pre-Brexit levels. Crude oil got hammered while gold and silver declined as well-albeit only modestly.
It would seem pretty clear that the Fed is perhaps sending a shot across the bow, and that investors should ready themselves for another rate hike. Judging by market action on Friday, stock investors do not appear too pleased with the idea of higher rates.
Markets are still only pricing in a small chance of a September rate hike, with Fed Funds futures currently showing about a 24 percent chance of a hike this month. December Fed Funds futures, on the other hand, are pricing in about a 58 percent chance of a hike.
All of this could potentially change, however, based on the data stream and other factors. For now, however, the central bank appears to be pretty intent on tightening before the end of the year.
Interestingly, gold and silver did not see the aggressive type of selling seen in equities on Friday. In fact, one might argue that these markets have already discounted another hike by the Fed.
Although some might consider rising rates a roadblock to higher gold prices, we believe gold could rise substantially from current levels even with incremental rate increases. There are two primary reasons behind this view:
- Rates are not likely to rise substantially anytime soon.
- The Fed could potentially raise rates only to cut them again later.
This week may bring with it more clues about the timing of the next hike, and investors as well as the Fed will have some key pieces of data to scrutinize. Retail sales and manufacturing data could potentially influence the central bank, while weekly jobless claims may also play a role.
The Fed may, however, focus on the jobs data for September before making a decision. The non-farm payrolls data for August was not a disaster but not exactly stellar either, and the Fed could prefer to see another strong number before tightening again.
Stocks, bonds and precious metals may start the week off on the defensive, and any strong economic data or hawkish rhetoric may exacerbate selling in these asset classes. On the other hand, any dovish commentary or significant misses on data could potentially alleviate some rate hike fears.
Several Fed officials are speaking Monday, and their commentary could potentially set the tone for the week.