By John McDonald
When Federal Reserve chairman Jerome Powell commented in early June that the Fed would “act as appropriate to sustain the expansion” in the face of a potentially weakening U.S. economy, the markets soared skyward in response. Investor confidence surged. Visions of lower interest rates, more borrowing power, and general economic and market stability had many investors piling into an already volatile market, sending values toward record highs in mid-June for what many analysts described as no apparent reason whatsoever.
In the midst of the party, however, some analysts held back. Top bankers at UBS and Goldman Sachs warned that cuts might not only not be imminent; they might not manifest at all. UBS chairman Axel Weber put it bluntly, saying, “I think the market has overpriced the amount of rate cuts that the Fed is likely to do…there is no imminent rate cut.” He added, “There is a likelihood if further weakness in the data evolves over the second half of the year that they might consider corrective action.”
Goldman Sachs president and COO John Waldron agreed, warning that the surging markets were perhaps erroneously “pricing in a fairly substantial set of moves by the Fed.” He described the markets as “too optimistic about how much and how soon the Fed will move.” General consensus appeared to indicate that the Fed is positioned and willing to make a move if it appears it will, as Powell put it, to begin with, be both “appropriate and sustain the expansion,” but the Fed is, Waldron said, unlikely to be particularly reliant on “short-term sentiment.”
Still Some Room for Optimism
Although Waldron and Weber both sound as if their outlooks on the coming months for Wall Street investors are relatively bleak, Weber, in particular, emphasized during a recent appearance there is “some room for optimism.”
He said, “Should these tariffs not escalate, there is a lot of room for complete repricing in the markets and some upside related to that.”
In the interim, manufacturers like Nintendo are moving some of their production lines out of China and into other parts of southeast Asia in anticipation of U.S. tariffs on Chinese-made products. While the companies may not want to move all of their production out of China, they may try to hedge their bets by producing what Nintendo supply chain analysts called “enough units to sell to the U.S.” when new products come to market without having to deal with the issue of those units being made in China. This type of preemptive move could force the parties back into negotiations from a standoff and also might calm market fears about rising electronics prices.
Rate Cut Expectations are Good for Gold
While analysts and bankers have good cause for concern about investors’ potential expectations for the Fed, gold and precious metals investors are enjoying a surge of upward momentum in their market sector. Three-quarters of participants in a recent Wall Street survey conducted by Kitco News called for gold to continue rising toward the end of June, and about two-thirds of online respondents in a parallel survey said the same. Only about one in five said they expect gold to fall among the online investors, and no analysts predicted a decline in prices.
Those analysts credit the weak jobs report for the boom in precious-metals confidence. Senior commodities broker Bob Haberkorn explained, “A weaker-than-expected jobs report adds ammunition for a rate cut to come sooner rather than later.” Of course, Haberkorn’s expectations are precisely the type Weber and Waldron warned about. Other analysts predicted slightly longer timelines for the rate cut, saying that if the Fed cuts rates by September it could put a solid base under gold prices and give the market stronger legs as well.