Commodity Insight : Fed on the `Loose` - Motilal Oswal Wealth Management
Gold marked all time on COMEX marking ~25% YTD gains, similarly Silver has posted YTD gains of ~30%. There have been several factors supporting this rally on higher side for both metals like Geopolitical tensions, rally in industrial metals, speculative buying, mixed economic data points and a few others. However, one of the most important factor especially this year which has triggered volatility in safe haven assets is the expectations of rate cut by the Fed. Expectations for an early rate cut is being priced into markets since the beginning of the year, while Fed policymakers have been easing those concerns, keeping market participants on the edge.
The central bank raised rates 11 times starting in early 2022 in a bid to curb sky high inflation. Now the Fed cut rates for the first time in four years i.e. after pandemic. The effect of rate cuts shows even before they start. This is evident in the yield on the 10-year Treasury, which has fallen to ~3.65%. This puts it a full percentage point below where it was in April’24 and well below the 5% in hit last October. Dollar Index has also witnessed higher swings in the past few months on the back of mixed economic data and change in interest rate cut expectations.
Outlook:
In conclusion, recent Federal Reserve rate cut marks a pivotal shift in monetary policy, influenced by a complex interplay of economic indicators. With inflation showing signs of easing and the labor market also showing signs of concerns, market participants seems to pricing in more accommodative stance from the Fed ahead. The decision to cut rates, the first in over four years, reflects a strategic response to maintain a balance between inflation and growth in the US economy. Governor Powell’s remarks put slight cold water on these rate cut announcements, as he toned expectations of further rate cuts and also no announcement regarding Quantitative easing. This nuanced approach indicates the Fed's intent to foster a resilient economy while navigating emerging challenges. We continue to maintain buy on dips strategy for both Gold and Silver, as we believe there could be a delayed reaction on this rate cut. As per last quarterly reports, we maintain the targets of Rs. 76000 on domestic front and $2650 on COMEX.
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