Just one more cut to come from the Fed

It’s possible. On Wednesday the Fed took a marked shift in tone from the December meeting. The Fed hiked by 25bps as expected, but it was always going to be the forward guidance that mattered with this decision. Would the Fed push back against STIR markets which saw a terminal rate sub 5% and two cuts into the end of the year? In the event the Fed took a step towards STIR market pricing and away from the Dot Plot hawkishness from December.

The inflation battle is being won, but not over.

This was the message from Powell in the press conference. Powell said, ‘Can say for the first time that disinflationary process has begun, and see it in the goods sector’. This is good news. Furthermore, Powell took some hope over the possibility of a soft landing as disinflation has taken place with US labour market data still strong. Excellent news for bulls.
However, there was caution from Powell too. He said that, ‘reducing inflation is likely to require below trend growth and some softening in labour market and that history cautions against prematurely loosening policy’. So, two way comments from Powell. The fact that they were two way though is the message. Powell is seeing a world where inflation is beaten back and the Fed can stop hiking.

What does this mean?

Simply, it means that US labour data is now crucial. With all else being equal a big miss in US NFP on Friday will probably see STIR markets price in just one more rate hike from the Fed. A big miss and watch for more upside in gold and silver to close the week.
If US labour data shows a big beat on Friday then expect gold to find sellers, but probably buyers on any dips as focus shifts to the when, and not if, US labour markets soften.