Gold rises to a 2-week high before Fed minutes- Daily Market Brief, May 25, 2022

After a mixed close on Wall Street, Europe is heading for a modestly stronger start, recouping some of yesterday’s losses, although inflation and growth concerns remain.

·         Stocks rebound after weak data and deteriorating corporate updates hit sentiment

·         German GDP is upwardly revised to 3.8% YoY, and German consumer confidence steadies

·         FOMC minutes are due and come as the market expects 50 basis point hikes over the next 2 meeting

The Nasdaq and the S&P500 finished in negative territory yesterday as fears of a recession or at least a very deep economic slowdown hit stocks. A profit warning from Snap and Abercrombie & Fitch, combined with weaker than expected business activity data, hit risk sentiment hard.

The macroeconomic deterioration is starting to be reflected in corporate earnings, spooking investors. Snap plunged 43%, fuelling fears of contagion across the sector, and the Nasdaq closed 2.3% lower. However, US markets managed to close off the lowest levels, translating into a higher open in Europe today.

European bourses are looking to rebound after weakness following disappointing PMI data, which fuelled concerns over growth. The steep slowdown in UK business activity added to concerns that the UK could fall into a recession later this year. The FTSE, however, only closed 0.4% lower compared to the DAX, which closed -1.8% lower. The weak data was reflected in the pound, which dropped sharply, benefiting the multinationals on the FTSE100.

German GDP data

Today the market mood has improved slightly, helped by an upward revision to German GDP data and a stabilising of German consumer confidence.

The German Q1 GDP was upwardly revised to 3.8% YoY, from 3.7%. On a quarterly basis, growth confirmed the preliminary reading of 0.2% despite the challenging global economic conditions.

Separately GFK consumer morale rose to -26, up from the record low of -26.6 as the Ukraine war and soaring inflation continue to weigh on consumer sentiment.

FOMC minutes

Looking ahead, all eyes will be on the release of the minutes from the latest FOMC meeting, the meeting in which the Federal Reserve raised interest rates by 50 basis points and announced the start of the balance sheet reduction, with $47.5 billion in June, rising to $95 billion a month after three months.

According to the CME Fed Watch tool, the market is currently pricing in an 80% probability of two more 50 basis point rate hikes in the June and July meetings. The Fed’s Powell has said that a 75-basis point rate hike is not an option being considered, which wipes out the prospect of the Fed being more aggressive in the upcoming meetings.

Given the recent and rapid deterioration in the macroeconomic climate, the minutes could already be considered out of date. Instead, the focus could be more centred on the balance sheet reduction plan (QT). If the minutes don’t offer any fresh insight into the Fed’s QT plan, this could be taken as policymakers being reluctant to commit to further policy moves, which would be USD negative but could help to lift Gold higher.

Gold is falling, snapping a five day winning run and after reaching a two-week high of $1870 yesterday.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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