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  • Weekly Summary: No Interest Rates Hike by the Fed are Seen Despite Powell Hawkish Message

Weekly Summary: No Interest Rates Hike by the Fed are Seen Despite Powell Hawkish Message

The Federal Reserve (Fed) Chair Jerome Powell hugely disappointed investors as he changed its position once again by sending a hawkish message to the markets. His unexpected change could be attributed to the rapid change of the debt market situation. U.S. 10-year Treasuries yields slumped to 4.47% from 4.92% on November 1. This is a dramatic drop of borrowing costs that may push inflation up again.

October headline inflation numbers could be lower than expected. Cooling labor market in the United States together with dovish messages from the Fed could be interpreted as strong signal for borrowing costs to fall. These are huge inflation risks that the Fed has to respond to. Thus, Powell was saying exactly what he has to. He warned investors that the Fed is uncertain about current interest rates level in order to return inflation to the target at 2.0%. Powell also claimed inflation data illusive. So, he may fear that inflation in October went up instead of slowing down. He may also fear that lower inflation may push borrowing costs further down below 4.47% in terms of 10-year debt yields. Falling crude prices in October are in favor of the latter option. 

With all this being said we may suggest that the interest rate hike cycle is over. But the Fed need to mitigate inflation risks. Powell’s verbal maneuver led the 10-year bonds yields to 4.65%. The S&P 500 broad market index lost 0.6% ending its upside streak during the last eight days. The U.S. Dollar returned to the upside territory posting weekly gains of 0.4-0.5%.

The European Central Bank (ECB) President Christine Lagarde is unlikely to add some strong notes that could change the current market sentiment dramatically during her testimony on Friday. Decreasing geopolitical tensions in the Middle East also promise a rather calm weekend. Some worries could be associated with Saudi Arabia energy minister statement when he blamed speculators for oil prices plunge. Last time he did this in May Saudi Arabia announced further oil production cuts pushing oil prices up by 34% in the following five months. This time such a move is unlikely, but the Kingdom may take some actions toward military escalation in the Middle East to support oil prices.

Technically, the S&P 500 index upside effort were unsuccessful, although there is some room for the index to climb towards 4500-4600 points by next Tuesday. Then the upside formation target would be downgraded to 4450-4550 points. 

Oil continues to be the most important indicator of the situation in the Middle East. Lack of the escalation eventually decreases war premium in prices. Brent crude prices dropped below the support at $83.00-85.00 per barrel, and they are ready to perform a retest of this level. If prices continue to fall after a retest they may dive to $75.00 per barrel. In case of a rebound they are likely to recover to $90.00-94.00 per barrel.

Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. Prices unsuccessfully tested the resistance at $2000-2020 per ounce, and they are rolling back now. Without an escalation of the Middle-East conflict, they are likely to go down towards $1910-1930.

The Greenback edged higher removing the oversold tension. The Dollar is seen to continue down towards 1.08500-1.09500 against the Euro. The correction could be extended next Tuesday, when the U.S. inflation data for October will be released. A huge wave of Dollar strengthening to the parity with the single currency may follow.