Daniel Acker / Bloomberg News
Financial Assets
The S&P 500 was down for the week, opening Monday at 3,382.39 and closing Friday at 3,319.47, a decline of -1.86%, marking its third consecutive week of losses. The Nasdaq also ended the week lower, opening at 11,048.17 and ending the week at 10,793.28, a decline of -2.31%. This shows the impact the slide in tech shares had on the broader S&P 500 index.
The US 10-year Treasury yield saw choppy trading throughout the week but remained around the 68-basis-point-range. It did fall on Thursday as markets digested the latest Fed announcement (more on this below), driving the yield down as low as 0.648%, but it later bounced back and ended the week at 0.697%. Bond prices fall as yields rise (they are inversely related).
The Fed
On Wednesday the Fed pledged to support the economic recovery by setting a higher bar to raise interest rates and by signaling it expected to hold rates near zero for at least three more years. This was their first meeting since last month’s announcement that it would change how it managed its interest rate policy. Before, the Fed would track a number of indicators to determine what direction to take rates- higher, lower, or keep them unchanged. They would essentially try to anticipate whether inflation would occur, and adjust rates accordingly ahead of time. Now, however, they’ve indicated that not only will they wait until labor market conditions tighten, meaning unemployment falls to pre-pandemic levels of about 3.5%, but that they are also willing to let inflation not only reach 2%, but let it stay there or run hotter until it becomes clear it will remain at this level for an extended period of time. Only then will they consider raising rates.
This new policy is unprecedented, but from my perspective it appears they’re doing this to instill confidence in businesses and individuals to continue investment and consumption spending by ensuring rates will stay low for the foreseeable future, i.e., possibly for the next three years at the very least.
Commodities
Crude oil saw a rally last week- WTI opened at $37.54 and ended the week at $41.23 (per barrel), an increase of 9.8%. This came after a report that supplies fell more than anticipated, and separately, after Saudi Arabia issued a warning to OPEC+ members and speculators that have been overproducing to abide by the previously-agreed-upon production limits. Prices have also been boosted by the slowly-recovering American economy- a significant driver of demand for the commodity.
As for precious metals, particularly gold and silver, they are poised to benefit from perceived future inflation. They are both seen as hedges against fiat currency devaluations and both have gained year-to-date. Gold began the year at $1,520.95 per troy ounce and at the time of this writing, is trading at about $1,958.00, a gain of 28.7%. Silver, meanwhile, began the year at $17.938 and is currently trading at $26.94, a gain of 50.2%. Speculators haves estimated that within a couple of years they would reach $10,000 and $150, respectively. Time will tell, but with the Fed basically saying they are diligently pursuing inflation over 2%, and the current environment consisting of overvalued equities, increasing uncertainty caused by the ongoing pandemic and as well as the upcoming election- all the ingredients necessary to push precious metals higher are present and all that needs to happen is some sort of catalyst to occur- a “first domino to fall”- for prices to push up still higher.
Economics News in the Upcoming Week
Monday - Q2 Household debt
Tuesday - August Existing home sales
Wednesday - September Markit manufacturing PMI
Thursday - Sept. 19 Initial Jobless Claims & Continuing jobless claims; August New home sales
Friday - August Durable and Core capital goods orders