Russell 2000 leads markets towards eighth winning week, but is the Fed saying too much?

The rate-sensitive Russell 2000 index led markets higher this morning, pointing to an eighth week of successive market gains as Fed officials continued to quell hope of rate cuts as soon as next March, arguing that policy is not fixed and will be data-driven. We consider the real impact of Fed jawboning on the economy and financial markets. The Bank of Japan held interest rates below zero yesterday, giving no clues as to when it might exit negative levels.

TODAY’S MAJOR NEWS

Does the Fed’s jawboning have a real economic impact?

Arlan Suderman, StoneX chief commodities economist, thinks that the sport of Fed watching, in which traders parse every word of every speech by every Fed official, has become an important economic factor, and perhaps not a good thing. Recent talk of the Fed’s ‘pivot’ to lower rates has boosted asset prices, and might have real economic impact – in turn, requiring the Fed to slow rate cuts. In his words, this is Sudermans’ view:

 “Ben Bernanke’s obsession with transparency made the Federal Reserve the single largest focus on Wall Street over time. Stocks rise and fall based on expectations of the direction of monetary policy, with traders parsing every word in every statement released, along with the tone inflection of every statement made at press conferences by Fed Chair Jerome Powell and other members of the Federal Open Market Committee. Speaking engagements for those members increased dramatically. I recall the days when traders didn’t know when the Fed changed policy until they saw the effects of that change unfold. That kept traders focused on fundamental reports emerging from various aspects of the economy, rather than anticipating the Fed’s next move.

“Jerome Powell and his team stated repeatedly that their primary objective was not to repeat the mistake of 1980 when the central bank pivoted too quickly. That resulted in a resurgence of economic activity that entrenched inflation pressures even more deeply, requiring even more drastic steps by Paul Volker’s team to get it under control. As such, Powell stated that this Fed would prefer to error on the side of “too high for too long” rather than to pivot too soon.

“To be sure, the Fed hasn’t pivoted yet. But its focus on transparency had it make statements that were interpreted as a pivot, and it’s done little to change that perception to this point. Those expectations of a pivot dropped the VIX to pre-pandemic lows as stocks pushed to new highs and $25 came off the price of a barrel of crude oil, dropping gasoline prices to two-year lows. The combination boosted consumer sentiment, and likely boosted national gross domestic product as much as 1.5% for the coming quarters. Housing starts jumped again as buyers took advantage of lower interest rates, boosting shelter costs that have been one of the stickiest sources of inflation in our economy.

“In the end, this will likely force the Fed to flip back hawkish again at some point, particularly in light of the surge in debt certificates coming onto the market in 2024 due to runaway government deficit spending.”

Oil price buoyed by geopolitical premium

The Hamas Israel conflict has raised the risk profile for oil markets in October with a ‘geopolitical premium’ to some extent offsetting downward pressure on the oil pressure reports StoneX energy analyst Harry Altham. The crude oil price rose 2.1% today as an Allied Coalition declares a number of warships are headed to the Red Sea to protect marine traffic from Houthi Attacks. Maersk, the world’s second largest container freight firm, raised concerns after two near misses on its vessels near Yemen and BP announced it would redirect all tanker traffic via the Cape of Good Hope until further notice. Elsewhere, recent storms in Russia have contributed to a Government decision to cut total crude exports by 50,000 barrels per day (bbd) for December, on top of the existing 300,000 bbd voluntary cut from May / June exports already in place.

The large-scale rerouting of oil cargoes will impact arrival times, and this is likely to cause some regional oil price pressure in the short-term, most acutely in Mediterranean cargo prices. Altham adds that in the long-term, oil deliveries will not be impacted.” Ultimately, production and trade facilities have been unaffected; this is purely a matter of journey times and there is sufficient fleet capacity to deal with the extended journey time problem. We do not believe the Red Sea attacks will cause a rise in prices because there are viable rerouting options.” The major risk now is the impact of Western warships will have on oil deliveries via the Suez Canal, still the major route for oil shipments.

TODAY’S MAJOR MARKETS

Russell 2000 leads market rise

• The Russell 2000 was up 1.4% in morning trade, with the S&P 500, Nasdaq and Dow Jones all lagging with a 0.4% increase
• The Nikkei 225 rallied 1.4 after the BoJ held interest rates unchanged, while the Dax and FTSE 100 were up 0.6% and 0.3% respectively
• The VIX, Wall Street’s fear index, was unchanged at 12.4

Bonds yields fall, Dollar weakens

• 10-year TIPS index-linked yields held at 1.71% yield
• 2- and 10-year yields fell marginally, at 4.43% and 3.90% yields, respectively
• The dollar index was down 0.5% at 102.1
• Versus the dollar, Sterling and the Euro were up 0.8% and 0.5%, while the Yen was off 0.6% on disappoint about the BoJ’s inaction

Oil and gold prices rally

• Oil prices rallied rose 1.6% on fears for more strikes on tankers passing through the Gulf, and fears of escalation with action by the US, UK, and France to send ships to the region
• Gold prices rose almost 1% to $2,059 per ounce, while Silver prices rose 1.3% to $24.4 per ounce
• The grain and oilseed sector were mixed
• Soybean prices are selling off on improved rain chances for dry areas of Brazil, while wheat prices are bouncing amid rising global logistical risks

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@stonex.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com