The Fed has cut interest rates for the first time since the beginning of the pandemic in March 2020, ending its tightening cycle and lowering its benchmark interest rate by half a point. The Fed has lowered its policy rate by 50 basis points to a range of 4.75%-5%.
Federal Open Market Committee (FOMC) member Michelle Bowman voted in favor of a 25 basis point cut, becoming the first Fed member to diverge on an interest rate decision since 2005. The Fed's half-point above-expectation cut shows that the US Federal Reserve wants to preempt any weakening in the US economy and labor market.
Fed Chair Jay Powell said at a press conference, "The US economy is in good shape and our decision was made to protect it." Powell also emphasized that the pace of interest rate cuts could slow if inflation remains sticky. According to the Fed's latest projections, the policy rate is expected to fall to a range of 4.25% to 4.5% by the end of 2024. This suggests that there could be two quarter-point (25 basis points) cuts or one large half-point (50 basis points) cut during the year. The Fed’s high-band cut will cause markets to be more sensitive to data on economic activity from now on. The Fed’s sensitivity to labor force data is behind the 50-basis-point cut.
Speaking in Jackson Hole last month, Powell said, “We will do everything we can to support a strong labor force as we move toward price stability.” In the process ahead, labor force data, retail sales, and core inflation, which indicates the main trend in inflation; will be the first places to look for a recession.
Israel announced yesterday that it killed Ibrahim Aqeel, the group’s special operations commander, and at least 10 senior commanders of Hezbollah’s elite unit, the Ridwan Force, in an airstrike on a Hezbollah stronghold in southern Beirut. The attack is considered a serious blow to Hezbollah and raises concerns of a full-scale war.
The death of Ibrahim Akil is seen as one of the most severe blows that Israel has dealt to Hezbollah since the early 1980s. The Ridvan Force carries out operations on the Israeli border and assumes the task of defending southern Lebanon. Israel has long been carrying out attacks to weaken this force. The attack is also considered a major blow to Iran. Iran sees Hezbollah as its strongest ally and proxy force in the region, but has avoided direct intervention.
At least 37 people were killed and more than 2,700 were injured when pagers used by Hezbollah members exploded in Lebanon earlier this week. Hezbollah blamed Israel for the explosions and vowed retaliation.
Let's look at the commodities side a little. There was significant news this week, especially on the agricultural commodity side. The insistence of chocolate producers on finding high-quality cocoa is causing prices in London and New York to diverge. The accumulation of old and low-quality cocoa stocks in warehouses in London has caused prices in London to remain low. Cocoa futures traded in New York rose above $10,000 last week, but London prices fell, falling below $6,400 earlier this month.
More than a quarter of the cocoa beans held in London warehouses are more than three years old. What’s more, nearly 80 percent of this older stock consists of beans grown in Cameroon, which is considered lower quality for chocolate making. Commercial players are turning to New York to find higher-quality cocoa. Hedge funds have recently been shorting New York contracts in the hope that excess supply will push chocolate prices down. But rising demand for higher-quality cocoa has led funds to close their positions, pushing prices higher.
Arabica coffee prices have reached a 13-year high. Coffee futures hit $2,718 a pound for the first time since April 2011. Robusta coffee futures also rose more than 3 percent to $5,429 a pound. Arabica coffee prices have risen by almost 40% since the start of the year, as supply shortages in robusta have led coffee chains to turn to Arabica.
Weather forecasts from Brazil are also weighing on production outlooks. Supply chains have been hit by attacks on ships in the Red Sea. Ships have been forced to use the much longer Cape of Good Hope route instead of the Suez Canal for almost a year since November 2023.
Giuseppe Lavazza, chairman of the Lavazza Group, told the FT that further price increases were likely. Illycaffè CEO Cristina Scocchia issued a similar warning. (1 pound = 0.45 grams)
Unlike chocolate and coffee, normalisation is underway in other agricultural commodities. The decline in oil prices is behind the normalisation.
The 7.2% decrease in the barrel price of Brent oil in the week of September 2 draws attention as the sharpest loss recorded since October 2023; prices fell to $68.5 last week, testing the lowest level in the last 3 years. Falling energy costs also have an impact on food prices. Increasing production estimates and price pressures, especially in corn and grain, are striking. On the grain side, there is news that exports are increasing in the Black Sea Region and production is high in the US and Argentina.
The information, comments and recommendations contained herein are not within the scope of investment consultancy. Investment consultancy services are provided within the framework of the investment consultancy agreement to be signed between brokerage firms, portfolio management companies, banks that do not accept deposits and customers. The comments in this article are only my personal comments and these comments may not be appropriate for your financial situation and risk return. For this reason, investments should not be made based on the information and comments in my articles.
