The IMF has reduced its global growth forecast to 2.9%, but increased its inflation projection for next year from 5.2% to 5.8%. The IMF has warned global central banks to maintain tight monetary policies in order to control inflation. Investors were not pleased with this news. However, the market reaction to the IMF’s inflation forecast was largely indifferent. The US 2-year yield remained steady at around 5% due to the dovish tone of the Federal Reserve and the 10-year yield stayed within the 4.60/4.65% range.
Today, the FOMC minutes will serve as a reminder to investors that interest rates will remain high if inflation continues to exceed the target. Expectations are for a softening of both producer and consumer inflation. Despite rising crude oil prices, US gasoline prices have been falling since mid-August due to a decline in refiner margins. This decline may temper September spending, which is typically strong. However, it remains to be seen how long gasoline prices will continue to fall. Despite dovish talk from the Fed and safe haven inflows into US treasuries amid increasing tensions in the Middle East, the risks in US yields remain biased towards the upside. The US 2-year yield is still 50bp above the upper range of the Fed’s policy target.
Regardless of the direction of the risks, lower yields are positive for equity investors. The S&P500 continued its rebound for the third consecutive session, and the Nasdaq broke through its 50-day moving average resistance and closed above this level. On the other hand, Chinese equities rallied after the IMF advised Beijing to take assertive measures to address its real estate issues and on news that China is considering additional stimulus measures to boost growth. However, it remains to be seen if these actions will have a lasting impact. I am skeptical.
In the foreign exchange market, the US dollar is weakening globally. The EURUSD has gained ground above the 1.06 level, and Cable is preparing to test the offers at 1.23.
The price of American crude oil has strong support near the 50-day moving average ($85.50 per barrel). Mounting tensions in the Middle East pose a threat to the bearish trend. Taking a short position in oil is risky beyond a corrective move. The good news is that OPEC now has enough spare capacity to stabilize global oil prices, thanks to their strategy of cutting production to raise prices. The bad news is that OPEC wants to see oil prices surge. In the current geopolitical context, crude oil could rise further towards the $90 – $100 per barrel range, but a rise above $100 is unlikely given the gloomy global economic outlook. On the downside, it is highly unlikely that prices will fall below $80 per barrel.
