Paul Walton

Gold continues to glitter thanks to sharply declining bond yields, notably a major downward move in the real rate on 10-year TIPS. Other than for a 2% rally in the Russell 2,000, US equities were unchanged. The dollar lost another 1% today, making a 10% decline from its late 2022 high point.

Gold is consolidating, but it took as positive news the Fed's presumed pivot to no further interest rate increases and possible interest rate reductions. The Fed's interest rate projections, the so-called 'dot plot,' displaying the interest rate projections of individual Federal Open Market Committee (FOMC) members, are now much more closely grouped than they were in September. The technical position looks mixed, but that reflects the hefty drop from a fortnight ago. Any change in the Big Figure around two thousand is bound to attract attention and technical support for gold stands between $1,975 and $2,002 per ounce. Silver's speculative overhang position has been reduced.

Bullish factors Statements from Federal Reserve officials may want to realign expectations of an interest rate cut by the American central bank after Powell's comments this week triggered a sharp global rally for risky assets, strengthening the American currency. Minutes of the COPOM and Quarterly Inflation Report (RTI, an acronym in Portuguese) should show a more benign external scenario for the Central Bank, maintaining expectations of cuts to the basic interest rate (SELIC), which in turn reduces the attractiveness of Brazilian assets and weakens the real. Bearish factors PCE index should maintain a trend of gradual price moderation in the US and suggest that the Fed has room for monetary easing, increasing bets on interest rate cuts by investors and weakening the American currency. The possibility of advancing important economic agendas for the government in the National Congress can ratchet down the perception of fiscal jeopardy for Brazilian assets and contribute to strengthening the BRL. Due to Christmas and the New Year, the Weekly Exchange Overview will not be published on December 22 and 29, returning on January 5, 2024. Happy Holidays!!!

The rate-sensitive Russell 2000 index led markets higher this morning, pointing to an eighth week of successive market gains as Fed officials continued to quell hope of rate cuts as soon as next March, arguing that policy is not fixed and will be data-driven. We consider the real impact of Fed jawboning on the economy and financial markets. The Bank of Japan held interest rates below zero yesterday, giving no clues as to when it might exit negative levels.

US equity markets bounced back in morning trade, again led by the Russell 2000, after yesterday's worries about the pace of rate cuts, as traders ignored anything but a rosy rate cutting in 2024. Oil prices slipped, down 1.3%, despite various indications that oil output will be cut next year by Saudi Arabia and Russia, the world's top two producers.

Equity, bond, and gold investors are pricing in large rate cuts in 2024, starting in March, but this week's jobs data could spoil the fun. A bullish December for stocks might have pulled forward the typical January rally, spurred by the belief that the Fed is about to pivot. US Treasuries sold off in morning trade, with worries about the appetite to digest the major volume of new issues. There is some risk of disappointment in the interest rate outlook, notably with commodity prices indicating persistent inflation so there is less chance of a rate-cutting bonanza.

Oil prices appear to have found support at $70 per barrel, with news of US stock building, further OPEC+ production cuts and Middle East tensions spurring buying action. The Fed's December meeting minutes were cagey on the outlook for interest rates in 2024. JOLTS labor market data pointed to further weakness, good news for inflation.

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