This week will see a couple of key events which could fundamentally move the markets. These are the midterm elections today, which are widely expected to see the Democrats losing control of the Senate and possibly of the House of Representatives too, thus potentially relegating the Biden administration to ‘lame-duck’ status in its ability to force through its legislative programs for the remaining two years of its term.
The second major event will be the release on Thursday of the latest Consumer Price Index (CPI) data which will give a guide as to whether the Fed’s aggressive interest rate raising program is yet having an impact on the inflation rate. Once again it will be the month-on-month core inflation performance which should be of most interest here and this will be taken as the next guide to the likely Fed rate setting policy at the December FOMC meeting. Thursday will also see the release of some employment jobless claims data which could also have an impact.
At the moment the Chicago Mercantile Exchange’s Fedwatch Tool is predicting a 50 basis point interest rate increase be imposed at the December FOMC meeting, but only by a narrow 52:48 ratio over a 75 basis point rise. This would bring the year end Federal Funds rate to a historically high 4.25-4.5% which, even at that level, should have a dampening effect on corporate profits. Given the meeting is still 36 days away and some key data and geopolitical events will be forthcoming between now and then, these odds could well change one way or the other in the meantime though.
There is continuing hope, already being expressed in the slightly lower Fedwatch rate expectation for December, that the Fed will follow Canada’s central bank and start to bring down its rate increase amounts. Fed chair Powell did hint at this at his post meeting statement, but he was also somewhat ambivalent on this suggesting that eventual rate increases could also be higher than originally anticipated.
Midterm elections are generally seen as positive for equities, as probably would be a swing to the Republican party. A weakening of the Biden administration could be negative for the dollar, and thereby positive for gold and silver. Thus by the end of the week, if results and data go the way many expect, we could well see a further surge in gold and silver prices and possibly another pick-up in equities, although the latter could be shortlived as most other signs are pointing to an economy dipping into recession, and perhaps a return to a fall in GDP in the final quarter of the year.
If the economy is looking vulnerable, that of Europe, still reeling from the adverse economic effects of Russia’s invasion of Ukraine and the disruption to Russian energy supplies which had been dominant for most European nations, is probably even worse. If anything, inflation is running higher than in the USA and the prospect of serious recession is even greater. The potential global impact of the world’s two biggest marketplaces in recession simultaneously is enormous and will make for a huge hit on the economies of those nations which have heretofore relied on exports primarily to North America and Europe, for their growth. Countries which rely on metal commodity exports, for example, may also find markets diminish as their recipients need to pare production to meet reduced demand. What we are seeing is very much a global economic problem with perhaps the only beneficiaries at the moment being the arms suppliers being called upon to keep the warring factions in Ukraine supplied with modern weaponry.
With most other asset classes vulnerable, gold investment – and perhaps silver riding on gold’s coattails - could again come into its own as the ultimate safe haven when all else is collapsing. It should certainly hold its own countering declines in other investment sectors. Gold stocks too should outperform other equities as the better gold producers – make sure you do your due diligence – will remain decently profitable at current gold prices, while many general equities could well see major price collapses in the light of sharply reduced demand.
The above article is an edited version of one which first appeared on the www.sharpspixley.com website in the UK.