After Federal Reserve Chairman Jerome Powell's speech to the U.S. Congress yesterday, U.S. Treasury bond yields fell to 1.31 percent, as did the probability of a U.S. interest rate hike (47 percent chance of a hike in November 2022 – according to federal funds rate futures quotes).
During Wednesday's speech, the Federal Reserve chairman said that inflation, which is rising sharply (5.4 percent in June), is likely to remain elevated in the coming months. Jerome Powell reasoned that it is temporarily bolstered by the base effect, and that once this is over, inflation will subsequently weaken.
At the same time, the Fed chief signaled no imminent changes in keeping the central bank's interest rates very low. He added that it will still be a long time before the US labor market fully recovers from the impact of the pandemic. This could mean that talks on scaling back the quantitative easing (QE) asset purchase program will be pushed back.
A weakening of the US currency could be seen in reaction to Powell's speech yesterday. The EUR/USD exchange rate rose to the region of 1.1850 after the last downward impulse. Gold reacted more strongly. The price of gold bullion rose above USD 1830.
Gold quotations may be positively influenced not only by a slightly weaker dollar, but also by the growing negative real interest rates. Inflation in the USA has recently increased to 5.4 per cent, and the yield on 10-year bonds dropped to the mentioned 1.31 per cent. Thus, the difference between the interest rate on bonds and inflation dropped in the USA to the lowest level since the 80s of the last century.
Among the world's major economies, the United States is becoming the world leader in terms of the scale of negative real interest rates. This, in turn, may cause Americans to take on even more investment risk and invest capital outside of safe financial instruments that yield negative returns in real terms.
U.S. stock index futures hit all-time highs on Wednesday and are also near historic highs on Thursday morning. Nasdaq futures are up less than 0.4 percent, while S&P 500 and Dow Jones futures are slightly retreating 0.08 and 0.3 percent, respectively.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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