Important economic data has just been released that shows the health of the US economy and determines the path of the Federal Reserve’s monetary policy. Following the release of the data, gold prices rose globally, while the US dollar index declined.
The preliminary reading of the University of Michigan Consumer Confidence Index showed a reading of 69 in September, exceeding economists’ expectations of 68.3, and the previous month’s reading of 67.9. The Michigan Inflation Expectations Index in September recorded 2.7%, below expectations of 2.8%, and the previous reading. Also, inflation expectations over the next five years recorded 3.1%, exceeding expectations of 3%. The Michigan Consumer Expectations Index recorded 73 points in the preliminary reading for September, above expectations of 71, and the previous reading of 72.1. The Michigan Current Conditions Index also recorded 62.9 points, exceeding expectations of 61.5 points.
Gold futures are currently up 1%, reaching $2,606 per ounce. While spot gold futures rose 0.75% to $2,578 per ounce. In contrast, the dollar index fell to 100.93 points, down 0.4%.
Traders returned to boosting their expectations for a large interest rate cut from the US Federal Reserve, which lifted government bond prices and increased uncertainty about next week’s decision. After previously ruling out the possibility, market expectations for a 50 basis point cut rose to around 44%. This change came after a report from the Wall Street Journal, which indicated that the Fed was not sure about a decision to cut by a quarter point or half a percentage point. The debate over the size of the first cut in this cycle has attracted the attention of markets for weeks. Despite the support of inflation data and the stable labor market, speculation of a larger move has not disappeared, which could lead to volatility before the September 18 meeting.
US consumer sentiment data release
Analysts from Deutsche Bank noted that “this meeting could be the first in years to witness uncertainty about the rate decision.” The yield on the two-year note fell five basis points to 3.59%, and the yield on the 10-year note fell three basis points to 3.65%. The dollar also weakened, supporting major currencies. The case for a rate cut has been building as inflation has eased to the central bank’s 2% target from above 7% two years ago.
Disappointing US data, such as an unexpected drop in jobs, has also bolstered calls for monetary policy easing. Investors are looking ahead to preliminary US consumer sentiment data later today for clues on the outlook for interest rates. The Fed could justify a big 50 basis point cut because current rates are above neutral expectations, said the chief rate strategist. Others, however, say a half-point cut may be overkill, and that the economy does not need urgent monetary policy easing. The Fed could start with a gradual 25 basis point cut, he said, as the economy looks healthy. With stock valuations soaring in 2024, many investors are feeling uneasy about putting more money into stocks.
Sure, there are always opportunities in the stock market — but finding them seems harder now than it was a year ago. Interest rate decisions are made by the Federal Reserve at its regular meetings. Members of the Federal Open Market Committee (FOMC) meet eight times a year to set the short-term interest rate. Committee members vote on the rate, and the bank then publishes a statement explaining the decision and commenting on the economic conditions that influenced their decision.
The key interest rate in the United States
These meetings determine the key interest rate in the United States, which is a major tool of monetary policy. This rate is influenced by many economic factors such as inflation and economic growth. The interest rate decision focuses on inflation, as the central bank seeks to stabilize the US dollar. When inflation rises above 2%, the bank raises interest rates in an attempt to lower prices. Traders closely monitor interest rate changes, as short-term interest rates affect the valuation of the currency. A higher than expected rate is considered positive for the US dollar, while a lower than expected rate is considered negative. Interest rates affect currency, stock, and bond markets, and higher interest rates attract foreigners looking for good returns, which increases demand for US dollar. Forget the recession in the United States; currently, the recession in China is affecting oil prices, global bond yields, and the dollar price.
Weak Chinese demand for oil has led OPEC to reduce its forecast for global demand. This change has pushed Brent crude prices to fall below $70 per barrel, recording their lowest levels since December 2021. We also begin by analyzing the current dividend yield and the average yield over the past five years for each stock. Next, we determine how much change in the stock price is needed to bring the current yield into line with the five-year average yield.
The yield may change based on whether company increases or decreases its dividend. The first set of analyses helps us compare the current yield to the history of yields on an absolute basis. We move on to a relative dividend yield analysis, where we compare the current yield to the yield on a 10-year bond (“the spread to the bond yield”). We also calculate the average spread between the dividend.
