Weekly Summary: The Fed is Changing Tides

The S&P 500 broad market index is ending the week up by 0.5% at around 4242 points, copper prices are up by 1.8% to $8270 per ton, while Brent crude prices are recovering to $75.20 per barrel. The U.S. Dollar is losing 0.3%.

The reason behind these market moves is the fact that the technical default saga is finally over as both the House and the Senate have approved the bipartisan debt ceiling debt agreement. U.S. President Joe Biden may sign the bill on Friday. The other reason is rather unexpected, as Federal Reserve (Fed) officials were extremely dovish this week. Federal Reserve Bank of Philadelphia President, Patrick Harker, bombarded the market with the news that the Fed should take a pause in its interest rate hike cycle at least during its meeting in June. His view was supported by Fed Governor, Philip Jefferson, and Fed’s Saint Louise President, James Bullard, who is well known for his hawkish stance. The latter wrote in his essay in a very sophisticated manner that current interest rates are “at the low end of what is arguably sufficiently restrictive given current macroeconomic conditions.”

The majority of the investing crowd believe the Fed will leave interest rates unchanged in June. Only about 24% of investors bet on the Fed raising interest rates by 0.25 percentage points this month compared to 50-60% last week. So, what has happened over the week for them to change their tune? The increase of the debt ceiling means the Ministry of Finance could now resume borrowing to raise money that has very much been needed since January 2023, when the U.S. Administration technically reached the ceiling, but used some accounting tricks to issue more debt. These new borrowings are estimated to be at $1 trillion considering delayed demand. Therefore, the U.S. Administration will join the Fed in monetary tightening to take this huge amount of money away from the markets. Literally, that will mean $200-300 billion withdrawn from the market on top of $90 billion cash that the Fed is taking away every month. With such huge amount of money being withdrawn from the markets every month, the Fed should increase money supply and avoid raising rates. It also means that the Fed could just sit and do nothing over the coming months with monetary conditions being tightened by the U.S. Administration itself. So, the Fed may indeed put the rates on hold and look at it as a chance to make an omelet without breaking any eggs, but monetary conditions will become worse as liquidity will be pumped out of the markets. The point is, when will investors finally understand how the trick is performed.

The labour market may provide some clue. Strong Non-Farm Payrolls with continuous dovish rhetoric from Fed officials will justify this idea. This may lead to a sudden drop in stocks and commodities, and an irrationally stronger Greenback.

Technically, the S&P 500 index has an upside formation with moderate targets at 4230-4330 points, that have already been met. The upside potential is very limited, while there is plenty of room for the downside. The nearest downside targets are at 4130-4150 points.

The oil market is struggling to avoid prices plummeting towards $70 per barrel of Brent crude. However, the chances of a recession are high in the oil market as Brent crude prices continue to tumble towards $40-60 per barrel, which is the recession target. Although prices did see some recovery to $75.5 per barrel at the end of the week. The market is waiting for the Organisation of the Petroleum Exporting Countries and its allies, known as OPEC+, to make some efforts to stabilise prices when meets this weekend.

Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. But the situation has changed dramatically as the important support level of $1980-2000 per ounce was smashed and bullion prices dropped to $1940. Short positions were opened after prices tested the $1970-1980 former support level with targets at $1880-1900 per ounce.

The Greenback has renewed its highs of 2023 and went into strong correction. Short trades for EURUSD opened at 1.06700-1.07200 were finally closed after hitting the 1.06000-1.06500 area.