US Close- Expectations of Fed tightening ease amid uncertain outlook; Oil still oversupplied, Gold and Bitcoin rally

Fed Chair Powell, in an attempt to not let all the unprecedented amount of stimulus thrown at markets and the economy go to waste, signaled they will continue to provide support.  The Fed statement gave an all-clear signal for risky assets, however Powell’s press conference highlighted the possible need for more fiscal support and high concerns over a second wave of the coronavirus.        

The somewhat dovish Fed statement noted that the coronavirus pandemic will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.  The Fed is pleased with their policy response throughout the pandemic so far as they acknowledged that financial conditions have improved. 

The Fed’s dot plot show they are keeping rates near zero through 2022.  For 2020, they see GDP dropping 6.5%, then recovering 5.0% in 2021.  PCE inflation this year will fall to 0.8% and then climb back to 1.6% next year. 

Powell’s press conference downplayed the May nonfarm payroll report, focused on the path of the coronavirus, how hard it is to move inflation higher, and drove home the point that the uncertainty of these times mean the Fed will remain accommodative for a while longer.   

Now that the FOMC decision is behind us, Wall Street will be fixated on a combination of risks to the outlook: Going forward, financial markets can focus on the trajectory of the economic recovery and the China risk.  Sino-U.S. relations are in free fall with the countries, already at odds over trade, quarreling the COVID-19 pandemic and China’s proposed national security law for Hong Kong.  The economic recovery is not pricing in a substantial increase in both coronavirus cases and hospitalizations.  It was expected cases would rise a little once American’s returned to pre-pandemic behavior, but right now a world of uncertainty around the virus could start to weigh on the economic recovery. 

FX/Treasuries

The dollar decline was choppy as the initial risk-on rally was faded. The dollar days should be numbered, but the risks to the outlook should prevent that from happening anytime soon. The 10-year Treasury yield declined 8.4 basis points to 0.741%. The Fed’s commitment to buying bonds kept Treasury yields in check. It will be a long time before we see another attempt at the 1% level for the 10-year yield.

Oil

Oil prices are shrugging off oversupply concerns as crude demand continues to improve.  The weekly EIA crude oil inventory report showed a surprisingly large build of 8 million in crude stockpiles, as US exports tumbled to the lowest level since November.  Jet fuel demand is improving but nothing to get excited over as inventories fall to a five-week low.  Gasoline demand climbed to the highest level since April and expectations are high it will continue to improve as the average American will

Some of the recent optimism with oil prices stemmed from China’s improved demand but a lot of that was filling up their reserves.  Now it is starting to look like global storage level concerns could quickly be returning.

WTI crude initially rode the Fed’s risk-on rally and almost made another attempt at the $40 level. The Fed’s lingering risks to the outlook suggest that energy traders should not be as optimistic with a V-shaped recovery for crude demand. Crude prices will struggle for further gains as record high inventories will continue to keep oversupply concerns in place.

Gold

Gold prices surged after the Fed signaled interest rates will be stuck near zero through at least 2022 and that the pace of QE will stay at the current pace.  Gold seems it could be living in the best of both worlds: rallying alongside risky assets and ready to be the favorite safe-haven when the China risk can’t be ignored.   

Bitcoin

Bitcoin traders are thanking the Fed today.  Bitcoin is surging after the Fed signaled policy will be loose for years.  The investment thesis for many cryptocurrency traders is to seek alternatives to fiat currencies as central banks continue to print money.  Today’s Fed policy decision gave Bitcoin the greenlight to make another run at the $10,000 level, but that was stubbornly defended. Cryptocurrencies should not still be grappling with these major technical levels, so if Bitcoin does not breakout higher over the next couple of days, hedge funds might take the path of least resistance.

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