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A debatable recession

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By Craig Erlam

It’s been quite the 24 hours in financial markets, one I feel many will be trying to work out for many weeks to come.

The Fed on Wednesday raised rates by 75 basis points, as expected, before leaving as many doors open as possible for September. Chair Jerome Powell and his colleagues went for a cocktail of hawkish data dependency with a dovish twist. It doesn’t take a genius to work out which part investors lapped up.

It’s not surprising that it adopted a more data-dependent approach to upcoming meetings, given the scale at which it’s hiked rates in recent months.

It’s been unusually explicit this year and that was never likely to persist. And the fact that it clearly anticipated the incoming GDP data won’t have made that decision any harder.

Investors are happy as they no longer have to fear such an aggressive tightening cycle that may tip the economy into recession, as it’s already in a technical recession (not to be confused with a real recession, obviously).

And the threat to the economy is already such that the Fed will be able to take a less severe approach. Phew, bullet dodged.

Of course, while the economy did contract in the first two quarters of the year, driven largely by inventories and in the first quarter also trade, the broader economy is not behaving like one in recession.

There are areas of weakness like the property market and a slowdown does seem inevitable, but the labour market and spending remain strong for now. Of course, the pace of tightening will take a toll on both and a “real recession” over the next year still looks likely.

Oil turns lower on recession risk

Oil has turned lower since the open, in line with the moves we’ve seen in equity markets. It would appear the economic reality isn’t being lost everywhere and the big downside risk for oil in recent weeks – recession – is weighing on the price once more.

Still, while WTI has slipped back below $97, Brent continues to hover above $100, so the tightness in the market continues to support it.

Interestingly, a US administration official suggested on Thursday that they are optimistic that some positive news may come from the next OPEC meeting.

Whether this is just an inkling or a view based on assurances made to President Biden isn’t clear, but it certainly makes the gathering next week all the more interesting.

Buoyed by the Fed and US data

Gold is having a lovely time in light of the Fed meeting and the US GDP release.

What could be better for the yellow metal than slower tightening, markets pricing in a reversal early next year and a technical recession?

It’s been a torrid time for gold but moments like these call for a safe haven inflation hedge and it is seemingly stepping up.

A relief rally or something more?

Bitcoin is also performing quite well after enjoying a post-Fed relief rally.

It’s been hammered by aggressive tightening, weak sentiment and a slew of negative headlines. The first two have improved over the last 24 hours, the question is whether the third can complete the set over the coming months and turn this relief rally into something more substantial.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.