Yesterday's Fed's decision, together with the macroeconomic projections and the press conference, should please investors, but they seem to want more cheap money, and the expected faster improvement in the economy spoils this attitude.
Since the financial crisis more than a decade ago, we have been less and less surprised by the attitude of the markets on the principle - the worse the real economy is, the better for investors because the more cheap money would flow from the Federal Reserve to the markets. The better the economy, the worse for the markets, because it means that the central bank may not increase the scale of its operations, which the markets get used to very quickly and want more and more.
Yesterday, the Federal Reserve showed much better macroeconomic projections than in June, which assume that the slowdown in 2020 will not reach -6.5 percent, but only -3.7%. The unemployment rate is expected to fall to 7.6% from the June forecast of 9.3%, while inflation is expected to rise from 0.8% in the June forecast to 1.2%, while interest rates are expected to remain at the current level of 0.00-0.25% at least until 2024, and probably even longer due to the average inflation targeting.
It would seem that a smaller recession, lower unemployment and higher negative real interest rates could be very good news for the stock market. However, the market reacted with a decline, showing that it is very dependent on further relief programs coming from the Fed. The Fed, meanwhile, points to the important role of politicians in this whole puzzle and is right.
Central banks have been trying to save economic growth and raise inflation for years. Now it seems that the time has come for governments, including the US Congress, whose role will be to rebuild the country's economy after the epidemic crisis. Here, however, comes the US elections in early November, which increases uncertainty among investors, and the stock market seems to fear it too.
Nevertheless, in the long run, the lack of rate rises along with rising inflation may favour markets such as gold and disturb the US dollar. The lower the real interest rate on American assets, the less attractive the US dollar and the more attractive gold and other alternatives to paper money, such as cryptocurrencies, seem to be.
It seems that the central banks have already done much or in some cases, everything they could and are now passing on the duty to save the economy and jobs to politicians. This, in turn, may not appeal to the markets, because it increases uncertainty.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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