Article Summary
- Federal Reserve Chair James Bullard has said that he believes more rate hikes will be needed to address persistent inflation, despite concerns about such moves doing more damage to the US banking sector.
- Speaking after the May policy meeting, Bullard said that he believes Wall Street is too focused on the idea that inflation is transitory.
- The Fed has already made ten hikes that have added 500 basis points to rates, taking them to 25 bp, but Bullard believes that the bank still has more work to do with rates.
Following the May policy meeting, some Federal Open Market Committee (FOMC) members, broke the blackout period to express their views on rate hikes. James Bullard, known for his hawkish stance, downplayed concerns about rate hikes damaging the U.S. banking sector. He emphasized the need for the Fed to continue raising rates to address persistent inflation.
New York-traded West Texas Intermediate (WTI) crude for June delivery, showed a final post-settlement price of $71.32 on Friday. For the week, the U.S. crude benchmark was down around 7%, adding to prior losses of 1.2% and 5.8%, respectively, for the weeks ended April 28 and April 21. London-traded Brent for July delivery showed a final post-settlement price of $75.37 on Friday.
For the week though, the global crude benchmark was down 5.3%, adding to prior weekly losses of 2.6% and 4.9%.
The spot price of gold, which reflects physical trades in bullion and is more closely followed than futures by some traders, officially settled at $2,017.56. during the week, it broke below the $2,000 support, touching an intraday low of $1,999.66. However, on Thursday, spot gold hit a record high of $2,080.72.
What You Should Know
Fed chair James Bullard of the St. Louis Fed played down concerns that more rate hikes would do more damage to the U.S. banking sector despite the popular opinion that the Fed’s undue tightening almost single-handedly triggered the banking contagion that has swallowed at least three regional banks and is threatening more.
Bullard also said Wall Street appeared “glued” to the transitory-inflation story and wasn’t prepared for the dynamics of persistent inflation. As such, his simple argument was the Fed had more work to do with rates.
After ten hikes that added 500 basis points to rates that previously stood at just 25 bp, Bullard opined that the Fed policy was still at the “low end” of the restrictive path, and it’s not yet clear if that’s restrictive enough for a downward inflation path.
Crude prices rose on Friday, snapping four days of losses in a row for U.S. crude and three for global benchmark Brent, despite the higher-than-expected non-farm payrolls report for April and its likely advocacy by pro-rate hike policymakers such as Bullard.
The gains weren’t enough though to erase the ferocity of the selloff sparked earlier in the week by the U.S. banking contagion and economic concerns. The effect of that still left crude prices down for a third week in a row.
Analysts say Friday’s rebound in oil was technical, with crude benchmarks having hit key lows that warranted a pullback. Others tied to oil’s better performance to the performance of the labour market itself in April.
It is important to remember that strong job growth is often a plus for oil, whose consumption depends on peoples’ mobility and economic vibrancy. In the case of the U.S. economy, however, strong job numbers have also been a problem, as they’ve been adding to inflation since the end of the coronavirus pandemic.
The employment expansion in the U.S. for April was 73,000 above forecast, moving the jobless rate a notch lower to 3.4% from a previous 3.5% and making it harder, at least in theory, for the Fed to stop raising interest rates.
All said, it has been a dramatic fall from grace for oil in just a month after the much-glorified OPEC+ production manoeuvre that added almost $15 to a barrel in early April, after another round of selloffs then sent crude prices to 15-month lows. OPEC+, which groups the 13-member Saudi-led Organization of the Petroleum Exporting Countries with 10 independent oil producers, including Russia, announced in early April that it will cut a further 1.7 million barrels from its daily output, adding to an earlier pledge from November to take off 2.0 million barrels per day.
OPEC+, however, has a history of over-promising and under-delivering on production cuts. While the group achieved over-compliance on promised cuts in the aftermath of the 2020 coronavirus breakout, experts say that was more a result of battered demand that led to minimal production, rather than a will to cut barrels as pledged.
In gold’s case, the yellow metal tumbled from the record highs seen earlier in the week on signs that the Fed might hike again in June. Gold’s decline in the event of higher rates is more easily understood.
Rate hikes tend to lift the dollar (though that wasn’t the case this week) and the dollar alongside the accompanying Treasury yields, is regarded as the “nemesis-in-chief,” of gold. But like oil, gold also has extenuating circumstances.
As cited earlier, aside from inflation, markets are also nervous about this week’s resurfacing of the U.S. banking crisis that broke in March. Adding to that were concerns about a potential U.S. debt default, the first-ever, and more weak readings on factory orders and durable goods. As a safe haven, gold is a hedge against those concerns.
Oil Outlook
To continue Friday’s rebound, WTI will need to hold above $68 and clear through the next resistance of $74, followed by the 50-day Exponential Moving Average, or EMA, of $76, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
He stated, “Formations that break below the swing low, followed by a sharp rebound like Friday’s, often surface when markets are looking for liquidity and react strongly when major order blocks are triggered.”
As such, a sustained break above $77, with a weekly closing above the zone, will eventually extend WTI’s rebound towards an initial target of $81. Dixit, however, pointed out that WTI’s broader structure on a monthly time frame remained bearish.
He stated, “Bears are likely to reposition their shorts from the $76 zone, with the 100-Month Simple Moving Average, or SMA, of $60 being their major downside target.”
Gold Outlook
The spot price of gold needs to reclaim the $2,028-$2,032 zone in order to resume the uptrend, which will target $2,050 and $2,080, said Dixit of SKCharting. He stated, “The initial resistance on the upside would be $2,098.”
On the flip side though, a sustained break below the 50-day EMA of $1,998 and further below the $1,993 mark will extend spot gold’s downside to $1,977 and $1,968.
