*Market players are increasingly confused about the Fed monetary policy
*Weakness in the US economy is tricking down in personal spending
*The US NFP could be the game changer
The mother of all data, the US NFP will be released on Friday. All eyes will be set on this number and investors aren’t going to take any bigger bets ahead of this data. Once the number is released, it could bring some enormous moves. The recent FOMC minutes and the interest rate decision have left the markets somewhat confused. The reason that I am saying this is because the Fed has cut the interest rate but their tone wasn’t clear with respect to the future path of their monetary policy.
In other words, the Fed isn’t fully comfortable to make their next decision. They have doubts if they should pause the process of interest rate or if they should continue.
Big Spanner
A big spanner in the midst of everything was thrown by the headline that Chinese officials have started to doubt the possibility of a trade deal. Remember yesterday, the Fed saw the trade deal issue-resolving, but now, things have changed once again. China doubting the possibility of a trade deal has changed the landscape and this has pushed the gold price higher.
Two Factors That Matters
The Fed’s future monetary policy decision hinges on two important factors:
- A resolution of a trade deal between the US and China
- The economic data
The Landscape
This week we had US GDP data and one thing was clear from the data that it is consumers who are saving the economy. But the numbers released on Thursday have painted a bearish outlook—the personal spending data was rotten. It confirmed that the weakness in the economy is trickling into personal spending. The consumer confidence data—which was released on Tuesday—was also weak. So, apart from the US ADP number—something which sets the tone for the US NFP data—every other important economic data was pretty weak.
The Game
If tomorrow’s number gives us another weak reading, then it is highly likely that the Fed may get some noise for another rate cut. A weaker number could push the Fed in a corner and they may not have any other choice but to give in. The impact on the dollar could be a sharp move to the downside and the net beneficiary of this would be gold.
However, if the data comes with strong reading then it means the Fed is going to be more confident about the economy—it is in a good place. Market participants are going to push the dollar index higher on the back of that number. For the equity markets, it may not be that good because investors are going to see good news as bad news—meaning the fed will be pulling their support.
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