US and European stock futures are trading lower, and traders are picking up momentum where they left off yesterday. Banking fear is back, and traders are worried that there may be more casualties to come as the banking index recorded another steep drop yesterday. In addition, traders are also worried about the Fed’s next monetary policy move, and it is widely anticipated that the Fed will increase the interest rate by at least 25 basis points. Traders have been hoping for some time that the Fed will stop hiking interest rates any further, but the Fed is in a tight spot due to the sticky nature of inflation. It appears that the inflation rate in the US is still very stubborn, which means that there is more work required by the Fed.
The question that matters the most for traders and investors is what the Fed will do beyond this monetary policy decision, and this is something that has more importance for traders. There is no doubt that many believe that the Fed will begin to slash interest rates towards the end of the year, but will we see any hints of this in the Fed’s commentary today? In addition, traders would also like to see what the Fed has to say about the on-going banking crisis and if it is willing to take any blame for it—after all, the banking crisis only started due to aggressive monetary policy.
US ADP Data
In terms of the economic docket, it is mainly going to be all about the US ADP data, which is expected to come in at 13:15 BST. Now, we know that some weakness has started to creep into the US labour market—the part of the US economy that has so far shown strong resilience. Today, traders are expecting a continuation of this trend, and they believe that the data set is going to print a weak economic number. The forecast for the data is slightly better than the previous; the previous was 145K, while the forecast is for 148K—but we believe that the actual reading could be near 130K as the main message that has come to light during this earnings season is further layoffs from US corporations. Having said this, if the economic data does continue to beat the pessimistic forecast, this would give the Fed more ammunition to continue to increase the interest rate without any major worry.
Gold prices have started to pick up momentum once again, and they have crossed above the critical level of 2000K. The main reason behind this move is not necessarily the movement in the dollar index, as the Fed is still expected to keep its aggressive monetary policy on the table. The reason that we have seen interest come back in gold is mainly because traders believe that there is more crisis to come for the US banking system and that the idiosyncratic events are going to turn into Armageddon. Basically, so far, it does seem that the crisis is contained to a certain level, but warning signs have started to emerge that another major crisis is strongly on the cards if no solution is put in place. Basically, the war chest that is currently being used has its limitations, and traders think that we are nearing the bottom of them.
Oil prices have started to slide as traders are concerned that the biggest economy in the world is going to face recession. We saw crude oil prices sliding below the 72 handle, and the current price action suggests that there are strong chances that we will see the price moving below the $70 mark. The fact is that if there is less demand, there is only so much that the supplier can do to control the price.
The Fed’s upcoming decision about its interest rate is expected to slow down economic growth in the US, which means lower demand for oil.