- Though it may come as a surprise to some, the Fed funds futures forward curve has shown, and continues to show the market pricing in a September rate cut by the US Fed.
- Meanwhile, gold has extended its long-term uptrend with many pointing to the expected rate cuts and weaker US dollar rather than the reality of increased uncertainty.
- Speaking of the greenback, the sideways trend it has been in during 2024 could be set to change by the end of the year.
My friends at Kitco News posted a piece Thursday, the author talking about how “Hot retail sales and lower CPI (Consumer Price Index) pave the way for September rate cut”. The author obviously has a great appreciation for all things statistical, while I on the other hand prefer to study what markets are saying, viewing statistics through the same whiskey glass as Mark Twain[i], “There are three types of lies: Lies, damned lies, and statistics”. Given that, make yourself a Mark Twain cocktail[ii] and join me in a discussion of what we see on the Fed fund futures forward curve mid-August.
As I talked about on Tuesday, July 30, with the latest Federal Open Market Committee (FOMC, the Fed) meeting getting under way, the Fed fund futures (ZQV24) forward curve (I know I’m repeating myself, it’s just fun to say) indicated there would not be a rate cut the next day, and there wasn’t. However, that same forward curve showed the September futures contract indicating a 25-basis point rate cut was expected at the conclusion of the September meeting (17th and 18th). I find it interesting so many in the BRACE Community[iii] have to connect the dots with statistics rather than use market information available to everyone every day. But as I’ve said before, that’s what give the latter group an investment advantage.
Fast forward to today (August 16) and this same forward curve still shows the FOMC will make a cut in September with another expected at the end of its November meeting (6th and 7th) before holding unchanged in December (17th and 18th). Once the calendar page flips to 2025, the forward curve is showing potential cuts being made by the Fed in January and March. After that, things start to get a bit fuzzy. If we apply Chaos Theory (An unexpected change at a critical point will change the outcome), we understand expectations can be altered by an unforeseen event. While we can’t call the US presidential election this coming November a Chaos event, given it is already scheduled and creating uncertainty, unexpected events put in play to influence the election could be considered Chaos[iv]. This topic is likely to be debated until election day, though again we have some guidance from markets.
In times of global political and economic uncertainty, investors have historically turned to gold. The monthly chart for the cash index (GCY00) shows the market’s long-term uptrend has been extended through the first half of August to a high just short of $2,500 (as of this writing). Technically, the index is overbought, but as the old saying goes, “A market can stay overbought (or oversold) longer than most of us can stay solvent”. In all seriousness, overbought and oversold technical indicators (stochastics, RSI, etc.) are just that: Indicators. They shouldn’t be used as standalone signal generators because they easily be outweighed by other factors, usually on the fundamental side. Not all the fundamentals in gold are directly tied to supply and demand as we also have to consider King Gold’s role as a safe haven market, putting it outside the realm of technical and fundamental analysis in times of uncertainty.
We can also look at the US dollar index ($DXY) as a read on expected Fed moves. However, here we see the long-term monthly chart is not painting a clear picture. From a technical point of view, the index continues to consolidate between its recent high of 107.35 (October 2023) and low of 100.62 (December 2023). This tells us 2024 has generally seen a sideways trend, despite the index posting new 4-month highs and 4-month lows[v] along the way, the latest occurring in August as it took out the previous 4-month low of 103.65 from July. Theoretically, given the expectation of interest cuts over the months ahead, the expectation would be for the US dollar to weaken meaning the index should confirm a downtrend. What would that look like? It’s hard to say. Maybe, like former US Supreme Court Justice Potter Stewart’s view of obscenity, I’ll know it when I see it.
What about the much-discussed inverse relationship between gold and the US dollar index. Inevitably, this idea comes up with the discussion of FOMC rate cuts on the premise of an expected weaker US dollar will lead to a strong rally in gold. My son Ben created a study looking at the correlations between a variety of markets, and the 10-year study shows the USDX and gold at a modest 43%. Is this just another statistic? Yes. But I can change the timeframe and get the same result: There is little to no correlation between the two markets, and what there is leans toward direct rather than inverse. Maybe this will change how the relationship between these two financial markets is talked about, but most likely it won’t.
After all, much of the industry that comments on such things isn’t interested in market realities.
[i] Recall Twain also said, “Too much of anything is bad, but too much good whiskey is barely enough.”
[ii] Scotch whisky, a lemon, crushed sugar, and Angostura bitters.
[iii] BRACE = Broker/Reporter/Analyst/Commentator/Economist
[iv] Then again, if we are expecting unexpected events, is that Chaos? Or is it a case of an Infinity Mirror?
[v] This analysis is an extension of the 4-Week Rule discussed by John J. Murphy in his book, “Technical Analysis of the Futures Markets” (1986 edition).
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
