As the global economy continues its downtrend, financial markets are prone to volatility. The Federal Reserve Board meeting will decide how much it will raise interest rates this Wednesday. Currently, investors are pricing the markets at another 0.75% hike. On the other hand, it is the recipe for volatility. If the Fed does anything else than a 0.75% hike, then the markets will jump… or slump.
Nobody seems to be taking into consideration a 1% increase. This would be unexpected, but it is a real possibility. Here are a few reasons for it: The jobs market continues to show strong data, which doesn’t make any sense. The US GDP's 2.6% growth in the Q3 after two contracting quarters makes even less sense.
The technical definition of a recession is two consecutive negative quarters of GDP. The Fed most likely will respond if a deep recession sets in. The positive GDP data might trigger the Fed to do the unthinkable. These are the main reasons to keep the markets on edge.
The forex market is sending a totally different signal. The US dollar has been falling against many major currencies in the last 10 days. The weakness in the USD has encouraged the rally of the stock market and crypto market.
Another important factor to be alert to is the November 8th midterm elections in the United States. It’s safe to assume there’s going to be lots of volatility related to this event. The uncertainty of the outcome is a real concern.
The energy crisis is another contributor to the global economy's downtrend. Let's take a look at the numbers. OPEC recently decided to cut oil production by 2 million barrels a day. And if China will end its zero-covid policy, then additional demand will increase by 2-4 million barrels of oil per day.
In addition, the price caps that have been discussed by the western superpowers countries could be a reason for disrupting the production of 10 million barrels of oil being produced by Russia each day. The refusal by China and India to participate in this scheme actually may improve the situation, as the US administration realizes that a price cap will be impossible to enforce.
The bottom line is, around 90 million oil barrels are being produced daily. The demand and actual global consumption currently around 95 million barrels of oil per day. We are short by approximately 10 million barrels of oil per day. It is just a matter of time before oil prices will skyrocket.
As you can see, there is no reason for the Fed to bring the rate down.
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