Market Reacts to FOMC Minutes and Economic Reports | Daily Market Analysis

Key events:

• UK - Autumn Forecast Statement
• USA - Core Durable Goods Orders (MoM) (Oct)
• USA - Initial Jobless Claims
• USA - Crude Oil Inventories
• USA - Michigan Consumer Sentiment (Nov)

Tuesday witnessed a retreat in the US stock markets as investors anxiously anticipated the release of the Federal Open Market Committee (FOMC) Minutes, hoping for clarity on the central bank's monetary policy direction. This cautious outlook was intensified by a discouraging Existing Home Sales report, unveiling a decline that exceeded expectations by a significant margin.

The S&P 500 Index experienced a contraction, stabilizing around the 4530 level. This decline reflects investor wariness and is seen as a potential adjustment following the recent upward trajectory in the market. Simultaneously, the tech-centric NASDAQ Composite Index dipped to approximately 15,900 points.

Amid the broader market retreat, Tesla Inc. (NASDAQ: TSLA) defied the trend, registering a 2.5% increase in its share price. This suggests investor confidence in the individual prospects of the electric vehicle maker amid market volatility.

The Dow Jones Industrial Average exhibited a downward trend, approaching a crucial level of 35,000 points. Particularly noteworthy within this index was Intel Corp. (NASDAQ: INTC), which marked a notable decline of 2.5%. This decline aligns with the prevailing bearish sentiment fueled by macroeconomic apprehensions and the anticipation of additional signals from the imminent release of the FOMC Minutes.

During the monetary policy report hearing, the Bank of England once again resisted market expectations for rate cuts in the coming year. The comments reiterated sentiments previously conveyed by the central bank, emphasizing that the task is incomplete, risks lean towards the upside for various reasons, and rates should be maintained for an extended period. In a more assertive stance, some policymakers even suggested the possibility of raising rates.

The actuality of another rate hike remains to be seen, especially considering that inflation recently dropped more rapidly than anticipated in BoE forecasts. However, it is evident that the market's pricing, with expectations of near-zero rates and a potential cut in the second quarter, has unsettled some members of the committee.

Gold prices inched higher in Asian trading on Wednesday, briefly reaching significant highs as the expectation of no further rate hikes by the Federal Reserve led to sustained inflows into the precious metal.

However, the rally in gold prices seemed to have tempered following the release of the minutes from the Fed's late-October meeting on Tuesday. The minutes revealed the central bank's commitment to its higher-for-longer stance on interest rates.

In recent sessions, gold experienced a series of robust gains fueled by weak US labor and inflation data, fostering speculation that the Fed had concluded its interest rate hikes. Nevertheless, the outlook for gold remained uncertain, particularly in light of the Fed's intention to keep rates elevated for an extended period. The central bank has indicated that rates will stay above 5% until at least the end of 2024.

The anticipation of prolonged elevated rates poses challenges for gold, as higher rates increase the opportunity cost of investing in the precious metal. This concept has adversely affected gold over the past year during one of the Fed's most aggressive rate hike cycles.

Expectations of sustained higher rates are likely to restrain gold's gains in the coming months, at least until the Fed communicates a clear plan to ease its policy. On Wednesday, the dollar halted its recent losing streak and rebounded slightly from nearly three-month lows, adding additional pressure on gold prices.

Nevertheless, the precious metal has gained nearly 10% so far in 2023, supported by safe-haven demand amid worsening global economic conditions.

The Australian Dollar appears to be extending its losses, retracing from a three-month high as a corrective move by the US Dollar gained momentum following the release of the Federal Open Market Committee meeting minutes on Tuesday.

Australia's dollar initially received upward support after remarks by Reserve Bank of Australia Governor Michele Bullock and the relatively hawkish RBA meeting minutes from November. Governor Bullock expressed confidence in Australia's labor market, stating that it is performing well and indicating the potential for the positive job trend to continue.

The US Dollar Index is now undergoing a retracement of its recent gains, while US rates have maintained a steady but bearish tone. Investors are eagerly awaiting data from the United States scheduled for release on Wednesday, which includes the weekly jobless claims report and the University of Michigan Consumer Sentiment survey.