(Kitco News) – While the Federal Reserve is likely to maintain its hawkish tone, the market’s rate hike expectations are too high given the data, while gold and silver prices will probably remain rangebound with a downward bias, according to market strategists at StoneX.
“In our view the markets are overstating the significance of the weak CPI number for June,” wrote Rhona O'Connell, Head of Market Analysis for EMEA & Asia on Wednesday morning. “[A]s we argued last week, over 90% of the fall was due to the tumble in energy prices. Despite the easing over the weekend, WTI is still 10% higher than at the start of July and we are expecting a strong CPI reading for July.”
O'Connell said she sees growing support among market commentators for a July hike, but she still sees this as unlikely.
“[G]iven the volatility in energy prices and the lingering uncertainty over the outlook for the Gulf hostilities, we would expect the FOMC to keep rates on hold, but to adopt a comparatively hawkish stance,” she said. “It will, of course, be interesting to see how the Statement (and in three weeks’ time the Minutes) are framed, and Kevin Warsh’s Press conference will be illuminating, if only as it throws light on how much he is prepared to say.”
Turning to precious metals, O'Connell said gold and silver still face headwinds, and she sees prices remaining in their recent channels with a bearish bias.
“We maintain our view on gold and silver, in that narrow ranges remain the order of the day and we continue to believe that the downside is marginally more likely than sustained rallies,” she said. “Meanwhile the 10 -year yield has eased over the weekend with the fall in oil, but it is nonetheless higher than at end February, currently standing at 4.3%. This still provides a headwind for gold and, with its industrial bias, for silver.”
StoneX Chief Strategist Kathryn Rooney Vera and Special Advisor Jon Hilsenrath think the market’s current expectations of the Fed rate path exaggerate the chances of hikes through 2026.
“Futures markets assign a 36% probability to an interest rate hike by the Federal Reserve this week, a 91% probability of at least one hike by year end, and near 60% probability of more than one hike,” they wrote. “We think these numbers are too high. The market is right directionally, and we too expect a hike by December, but traders have been too certain about the timing, the speed, and the number of moves under new central bank leadership.”
“Would Warsh want his first move as chairman to be a hawkish surprise in July, at a time when Treasury debt markets appear fragile? We don’t think so,” they added. “Fed officials [project] modest progress on inflation during the second half of the year, along with steady growth and unemployment, and under those conditions a close call on whether to raise rates at all this year.”
“For market expectations to be realized, inflation data will effectively need to show no more improvement before year-end or worsen.”
