Precious metal prices rose for a fourth consecutive day on Friday, propelled by lower-than-expected inflation readings and growing expectations that the Federal Reserve’s most aggressive interest-rate hiking campaign in decades is finally over.
A normal week for markets became something extraordinary after the closely watched Consumer Price and Producer Price Inflation figures gave traders a greenlight to declare that the Federal Reserve’s fight against inflation is done and dusted.
US Producer Price Inflation cooled off in October, reversing a three-month trend that had seen the cost of energy push up prices. The Producer Price Index, which measures the average price changes that businesses pay to suppliers, fell 0.5% on a monthly basis – its largest monthly drop since April 2020.
Earlier in the week, US Consumer Price Inflation also fell more than expected to 3.2% in October – the first decline in four months. The reading was also marginally below expectations of 3.3%.
The Fed held its benchmark interest rate steady at a 22-year high earlier this month. Traders had put the likelihood of another rate hike at 30% just before the PPI and CPI releases, but by Wednesday that had been priced out altogether. Instead, they moved to ratchet up the likelihood of a cut, with the prospect of a cut by March soaring from 23% on Monday to 86% by Wednesday’s close.
Now that there’s a growing consensus that the Federal Reserve is done raising interest rates – the market narrative is rapidly shifting from “higher-for-longer interest rates” to “bigger-than-expected rate cuts in 2024”.
As savvy traders know – “the bigger the rate cut, the bigger the market rally”. This in itself presents, a huge bullish tailwind for Precious metal prices going into the end of the year and into 2024.
According to UBS, the Fed will start cutting rates as soon as March, on the expectation that the U.S economy will slide into recession by the second quarter. This in turn will prompt the central bank to cut rates in the large increments typical of an easing cycle.
UBS forecasts the Federal Reserve will cut interest rates by 275 basis points next year, with the so-called terminal rate plunging to 1.25% by early 2025.
Morgan Stanley also anticipates deeper cuts than what markets are pricing. The Wall Street bank sees rate cuts starting in June 2024, then again in September and every meeting from the fourth quarter onward, each in 25-basis point increments, according to their 2024. That will take the terminal rate down to 2.375% by the end of 2025.
Meanwhile, Goldman Sachs sees the first 25-basis-point reduction in the fourth quarter of 2024, followed by one cut per quarter through mid-2026 – a total of 1.75 basis point with rates settling at a 3.5%-3.75% target range.
Whichever way you look at it, one thing is clear. The case for Precious metals in a well-diversified portfolio has never been more obvious than it is right now!
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