If there is any truth to the statement that central banks can move financial markets, then we can expect a lot from the second half of June. In a matter of merely three days, between June 13 and June 15, our monetary knights in the US, the Eurozone and Japan will meet and discuss monetary policy. A few days later, their British peers will follow suit.
With regard to the Federal Reserve, the market is currently expecting that the Fed will raise the headline rate by 25 basis points and shine more light on the question how many rate hikes are to be expected for the rest of the year. Investors are certainly expecting another rate hike after this one, and the odds of a third rate hike have been edging up significantly as of lately. Moreover, markets expect the Fed to raise rates at least another three times in 2019.
The ECB will keep rates unchanged, but markets are awaiting, on the one hand, the latest forecasts for inflation and economic growth for this year, 2019 and 2020, and on the other hand more clarity regarding the tapering of the ECB’s large-scale asset purchases (specifically, government and corporate bonds) which is expected to begin in September. The first Eurozone rate hike will, at its earliest, become a possibility in the summer of 2019 or, more likely, in the autumn of that same year.
For various reasons, I would not be surprised if the Fed would only raise rates once more this year and only twice in 2019. With regard to the ECB, I would not be surprised if the central bank decides to continue its asset purchases for a longer period than until December this year.
In the first place, because there are strong signals that point at the fact that economic growth, especially in the Eurozone, has peaked. There exists a strong possibility that growth will slow down in the remainder of this year and in 2019. Not that this necessarily spells disaster, growth will still remain positive, but the (dominating) forces within the ECB could use a slowdown in growth as an excuse to continue its asset purchase program longer than expected and postpone rate hikes. Therefore, it would not come as a surprise if the ECB would not provide any further information on the fate of its asset purchase program this month, but rather in July.
In the second place, because of the fact that inflation has been slowing down again in recent months. Inflation was, especially in the Eurozone, already somewhat subdued, and the recent drop certainly caused a few headaches among ECB board members. The question remains whether the latest forecasts will reveal an uptick of inflation in 2020 compared to the earlier forecasts of last March, even though oil prices have risen and the euro has weakened ever since.
Looking at the US, I also see some risk factors looming on the horizon, especially now the US and North Korea suddenly are no longer friends and the negotiations between the US and China to avoid a full-blown trade war no longer seem to progress as much as they appeared earlier.
In addition, I have received a few signals that there is currently a conflict within the Fed that threatens to divide the Fed. Whereas one, smaller, group wants to raise rates, there are quite a few board members who would prefer to take it a bit slower. Moreover, midterm (House of Representatives) elections are approaching fast in the US, which will take place in November this year. The midterm elections could result in a renewed political deadlock in Washington. It seems as if the Democrats will gain majorities in both the House of Representatives (lower chamber) andthe Senate (upper chamber). At the moment, the Republicans who side with President Trump are controlling both chambers. If the Democrats would establish control over both chambers, then it becomes virtually impossible to make important decisions. The White House could block every bill, whereas the Democrats even if they would win are unable to gain a majority to undo Trump’s vetoes. Vice versa, it seems as if the odds are quite high that every bill that is sent from the White House to the Senate will find its way right back to Trump’s desk. Those are not quite the circumstances the Fed is happy with to raise rates at a faster pace than what the market currently expects and has priced in.
For the time being, the market is particularly focused on the upcoming rate hike by the Fed, the question whether the Fed will raise rates twice more this year, and if the ECB will make its monetary policy less loose. Add to this the fact that the dollar is strengthening, and it becomes increasingly more likely that precious metals prices will remain under pressure for the foreseeable future. Trump’s unexpected cancelling of the meeting with the leaders of North and South Korea will, I fear, not be enough to move precious metals prices higher.
Despite all of the above, there is another overarching problem for both the ECB and the Fed and their monetary policy for the near future. More about that and the likely positiveconsequences for precious metals prices that this implies next week.