Perhaps the US GDP print is a little bit too good? The strong result has helped erase any lingering ‘hard landing’ scenarios, however equally the solid growth numbers could prolong the period of high interest rates.
In this respect, the GDP result has thrown a spanner in the works when it comes to risk sentiment. This comes after the FOMC decision and statement released the day prior. The Fed statement was vague by design and therefore very much open to interpretation.
For me, the key takeaway was that the central bank no longer sees a recession happening, which may have gotten a little bit lost amid the noise surrounding the interest rate outlook. So where does that leave us now?
The good news is that the economy is ticking along nicely, and a recession should be avoided. However, the bad news is that in response to this economic growth, interest rates probably won’t be heading south anytime soon. And it is this latter point which sapped some risk appetite from financial markets. Hence the red numbers seen across global equity bourses.
US yields were quick to shoot higher in reaction to the GDP print on the prospect that higher interest rates will be hanging around for longer. The sharp ascent in treasury yields put paid to the gold price which sank in response. Gold had been trading above US$1975 before sinking to the low US$1940’s.
During Asian trading hours today, gold has staged a recovery of sorts by progressing back to the US$1950 level, but a stronger USD is capping the upside for now. Whether or not gold can move back towards the upper end of its recent trading range will depend on how long the USD and treasury yields maintain the impetus following the strong GDP print.
Crude oil continues its good run
It wasn’t all bad news in the commodity space though. Crude oil continues its good run of form, with a healthy US economic outlook likely to sure-up things on the demand side. This, combined with the shackles placed on the supply side courtesy of OPEC+ has driven the oil price to new heights which have not been reached since April.
The WTI contract is hovering around the US$80 level. But there remains a question over how long the oil price can remain elevated in the absence of any new and meaningful stimulus from China.
In FX, the ECB hiked as expected though doubts about where rates go from here as well as renewed greenback strength saw the single currency retreat. The stronger USD also saw the AUD take a backseat, while today’s Australian retail sales and PPI data both missed the mark, which increases the chance of an RBA ‘hold’ in August.
Attention now turns to the US Core PCE price index. Any surprise to the upside here could further dampen the mood, given the sensitivity around interest rates potentially having an extended stay at heightened levels.
Market commentary and analysis from Tim Waterer, chief market analyst at KCM Trade
