The Fed Has Given the Market Time to Breathe

Good news. The Fed is finally slowing down.

In December, interest rates could go up by 0.5 percentage points. Investors who used to see 0.75pp hikes are breathing a sigh of relief.

The path from here to the “terminal” rate, or the rate at which the hikes will stop, will be more gradual.

The recent employment numbers won’t get in the way.

In the past, the market looked at what passed as fundamentally good news, such as low unemployment and positive payroll surprises, as though it was bad.

If the economy is strong, the Fed will keep hiking until the US dips into a recession, the logic goes. Then inflation will drop.

But it’s wrong. The Fed doesn’t have the mandate to dip the economy into a recession. It has the mandate to stop inflation.

And it’s done plenty by this point to finally start looking at what the total effect of what has been accomplished so far is going to be.

(It takes time for higher interest rates to trickle all the way throughout the economy. Some of the effects have a lag of 12 to 18 months.)

In other words, the Fed is looking at what’s already done as much as what it needs to do in the future.

That’s why “good news” for the economy isn’t going to turn into “bad news” for the markets as it did throughout the last year or so.

That’s why the Fed isn’t going to aggressively hike just because the payroll numbers are good.

We’re most likely looking at a 50-basis-point (0.5 percentage point) increase in December.

But the market isn’t completely convinced. So, when it happens, it’ll be surprised… and, for once, in a positive way.

China’s Government Is Cornered, and That’s Good News

The world’s second-largest economy is in crisis.

Its zero-Covid policy, which was hailed as an immense success at the beginning of the pandemic, is failing spectacularly.

It may help the government contain the virus, but it is delivering a blow to the economy.

Nationwide protests began. They were relatively small, from dozens to hundreds of people.

“Shadow protests,” however, when people refuse to stay in sealed apartment blocks, are more common, the Financial Times reports.

As a result of these protests, China’s government has started going easier on the restrictions.

It would never admit that they were the reason for such a change of heart, of course. That would mean admitting that the draconian “zero-Covid” policies were a mistake.

But the reality is that the Chinese economy needs to take a breather. And its government needs to start doing what worked for other countries that dealt with the pandemic more successfully.

In any case, the era of draconian zero-Covid measures in China seems to be over. That’s a challenge for the ruling party but good news for the country’s economy and the rest of the world.

It’s also good for the commodities sector. The day China started loosening restrictions, the price of iron ore jumped by 2% in a day.

The prices of copper, nickel, and aluminum, as well as oil and even soybeans, have also risen.

If the country continues re-opening, the impact on the commodity market will be strong and lasting. China is responsible for about one-half of the world’s base metals demand. It’s also the world’s biggest refiner of metals.

Because of China’s gradual re-opening and the ongoing “energy transition” megatrend, commodities could potentially be one of the best places to invest in next year.

Thank you for your loyal readership,

The Financial Star team