A Pause To The Pausing

The past week has brought a significant shift in the likelihood of a fed funds rate cut as soon as March. Recent economic data as well as comments from Fed Chair Powell have been a cold slap in the face to those who, just a month ago, were expecting as many as seven rate cuts in 2024.

None of this should come as a surprise to those of you who read these columns each week. In fact, our annual forecast, written in early January, was actually titled "Waiting For Jerome"! The point being that the markets had gotten far too optimistic in terms of rate cut projections and that the first few months of 2024 were bound to be challenging as rate cut expectations inevitably came back to earth. 

If you missed our annual "macrocast" and would like to read it now, here's the link.

Anyway, back to the task at hand...

As you can see below on the rate cut expectation chart from January 2, the year began with the markets assuming an 83% likelihood of an initial fed funds rate cut at the FOMC in March.  Further down the chart, the odds of a rate cut by May stood at 100%. 

However, as January progressed, most U.S. economic data came in "stronger than expected" and the markets began to have their doubts regarding a rate cut as soon as March. By the end of January, the chance of a rate cut in March had fallen to just 47% and the odds for May had fallen back from the 100% certainty level to a still-too-optimistic 89%.

And now consider the events of just the past few days:

•             Powell and his FOMC were deemed hawkish as Powell states that "rate cuts are not the base case for March".

•             The U.S. manufacturing sector PMIs for January come in stronger than expected.

•             The latest U.S. employment report exceeds expectations by nearly 100% with reported total "new jobs" at 333,000.

•             Powell explains on U.S. television that he and his FOMC expect just three rate cuts in 2024 but that the number is subject to change.

•             The latest U.S. service sector PMIs for January come in stronger than expected.

All of this is a toxic stew for rate cut hopes and, again, a cold slap in the face to anyone who, just a month ago, was clinging to the idea that the Fed would cut rates six or seven times this year.

As such, look at the latest rate cut expectations chart as of Monday, February 5. The odds of a fed funds cut at the March FOMC meeting have fallen to just 14% with the odds of the first cut coming in May—which stood at 100% just a month ago—now at a more reasonable 63%.

All of this signals that gold investors are going to have to wait longer for that price breakout we've been anticipating. The breakout is coming—of that you can be certain. However, as discussed in this year's macrocast, the delay should temper some of the uber-bullish price expectations, at least for this year. 

That's not to say that it's all a fait accompli, however. Those rate cut odds could come flying right back due to unforeseen events that even the all-knowing demigods at the Fed can't predict. What's lurking out there that could impact the Fed's schedule? Of the myriad possibilities, let's just pick three:

1.           The Chinese stock market is crashing. If this continues, will a "contagion" spread to other global equity markets? 

2.   The dire situation of the U.S. commercial real estate market is finally beginning to impact the regional banks. In March 2023, the Fed created a new facility to provide liquidity to banks and help them maintain the illusion of solvency. However, in late January, the Fed stated that this facility would close on schedule in March of 2024. What happens then? I guess we'll know soon enough. See the link and chart below.

3.   And geopolitics can rear an ugly head, too, as a wider and more regional war in the Middle East could break out at seemingly any time. The U.S. and Iran are currently engaged in a proxy war. What if this becomes a direct conflict? What if the Israel-Hamas war extends north into Lebanon? The unknown unknowns and fog of war can make monetary policy very difficult to predict.

In summary, the year has begun about as we expected when we wrote our annual forecast last month. As rate cut expectations have eased backward, the U.S. dollar index has moved higher, and that combination has placed selling pressure upon the COMEX precious metals. While you shouldn't expect the current price trend to continue all year, you should probably expect it to continue through February, at a minimum, as we await Jerome and his policy easing, now slated for later in 2024.