We return to Fed Fund Futures, as the market has been repricing interest rate cut expectations. At the beginning of the year, there were 150bps of cuts expected by the market on the premise of a weaker economy, falling inflation, and a softer labor market. However, none of these expectations have materialized. The market has settled into a middle ground ahead of the Fed’s interest rate projections next week.
What comes next?
As we can see, the front and deferred month (December) Fed Fund Futures currently reflect a price of -0.635, equivalent to 63 ½ basis points, indicating that the market is currently pricing in 63 ½ basis points worth of cuts. This is very interesting, as the market is currently pricing in “fewer cuts” than what the Fed guided in its previous interest rate projections.
It is important to highlight that the current Fed only cuts or raises in increments of 25 basis points, so we can see a near-perfect balance between 75 basis points and 50 basis points (62 ½ would be the midpoint). This indicates that the bond market lacks confidence that the Fed will maintain 75 basis points worth of cuts in 2024.
Technical Analysis:
When observing momentum of the chart, along with the strength of the labor market, and hotter-than-expected inflation numbers, it seems we are headed toward a potential Fed projection of 50 basis points worth of cuts in 2024.
Silver has been trading within a wedge for about four years. As we approach the upper end of the resistance range, many traders are wondering if this can be the breakout that we have been waiting for.
What is behind this move?
There are a few potential catalysts that can explain the recent price action observed in March. Silver, similar to Gold, and BTC have seen a “decoupling” of fundamentals. Typically, all of these risk assets are very sensitive to the interest rate environment and macroeconomic momentum. Inflation in the U.S., as observed through CPI and PPI, has recently come in hotter than expected, interest rate cut expectations have been reduced, and the 10-year yield is higher. However, silver prices are also higher.
This could be attributed to an “underpositioning” in commodities. Investment advisors and portfolio managers have begun to add commodities into portfolios, increasing the weighting of real assets. This could also be due to ETF inflows picking up for these metals in March.
China smelters collectively came together and decided to cut production output of copper. Since silver and copper are both used in many industrial applications, this production cut in copper has also boosted silver prices.
Despite recent increases in CPI and PPI, we have observed some softening in the labor market. The uptick in the Unemployment Rate, weaker Average Hourly Earnings, and the massive downward revision to Nonfarm payrolls may be aiding this rally, despite higher yields.
Technicals:
From a technical perspective, if silver can manage to break and close above 25.75, we could see a new bull cycle in the precious and industrial metal.