Markets are holding their ground despite higher borrowing costs and we're also looking at global economies managing AI disruption fears as well as rotation. And not surprisingly we are seeing volatility in commodities while crude and Brent have hit their highest levels since July this week. Precious metals have also been pulling back from multi-month highs. This does come as the debasement trade pauses and the US dollar has been regaining some strength. Joining me to break down all these factors is Katie Kaminski, Chief Research Strategist for Alpha Simplex. Katie, good morning. Thank you so much for joining us. So we are looking at Treasury yields remaining elevated, not just here in the US, but also across the globe. And I understand you say that equity markets remain constructive. So given what we're seeing in the bond market as well as equity, how do you see this dynamic actually playing out?
This is actually an interesting week because I feel like equity markets have not been as concerned about yields. But as we start to move in into a period with multiple central bank decisions it becomes a little bit more real. And so I think that what you're seeing now is that the equity markets took a pause from focusing only on A.I. and starting to think about hey, is inflation important enough that it's going to cause us to have higher rates? And is this also going to have an impact on growth? Should we be pricing this in? And that's sort of how this week feels right now for equity markets.
Yeah, and Katie, as you mentioned, all of us are counting down to the September Fed meeting and rate hike odds have been climbing ever since Fetcher, Kevin Warsh's Jackson Hole speech. But we've been watching crude oil prices, both WTI as well as Brennan. This week we saw crude oil cross that $90 a barrel mark. So Given the fact that we're looking at higher energy prices, we know that this does raise inflation expectations. Give us your take on your outlook as we move forward, not just for the energy market, but also for the Federal Reserve as well as the fixed income market here.
So this is actually a really important point. If you look at commodity markets, they have been sort of the indicator for the potential for higher inflation. And that has generally been directly a mechanism to increase bond yields. So basically, you know, sort of inflation uncertainty has made people nervous about holding long term bonds. Now, earlier this month, and even last month, we saw people kind of thinking that things looked good enough as geopolitical tensions started to subside, that we would have enough room for the Fed to stay on hold. As geopolitical tensions continue to resurge, you start to see that higher energy prices, as well as sticky inflation prints, may put the Fed in a situation where they need to actually react to kind of remain credible in the narrative that they do care about inflation. And so as a result, you see that probabilities that the Fed will hike has gone up quite a bit. And I think that's something to really watch and think about, because I think equities are finally paying attention and needing to reprice that potential. And they had largely ignored some of it a little earlier this summer.
Yeah. And Katie, I really appreciate you breaking all of this down, because when it comes to the conflict in the Middle East, we know that there is plenty of uncertainty left. And also, this does weigh on the energy outlook as well as the global inflation picture. So that brings me to my next question regarding the currency markets here, in particular, the U.S. currency. So right now we're looking at the U.S. dollar index hovering right below that 100 level. But What is your outlook for the U.S. currency and how do rate differentials actually play a factor here?
So the U.S. dollar has been an interesting one to watch. I know that there's been a lot of themes towards the basement of the dollar, weakening of the dollar. But more recently, if you look at sort of some of the tailwinds for the dollar, of course, if monetary policy is possibly going to tighten, if You could see higher rates, that's very pro-US dollar. We've seen strong growth, that's also pro-US dollar. So some of these negative and weaker themes on the dollar have actually sort of dissipated and come a little bit in the background. So the dollar has, in fact, been increasing a little bit in its strength. The one thing I will point out is that it is a little tricky. The reason it's tricky right now is that you have several different rate decisions all around the same time. And sort of how do you differentiate the relative impact of that on the U.S. dollar? In isolation, if the U.S. was hiking rates, that would be positive for the dollar. But if all central banks hike rates a little bit together, you know, where does that equilibrium come out after that? So I'd say, you know, it is tricky, but there are some positive, you know, respite for the U.S. dollar And it has been increasing recently.
And finally, Katie, before I let you go, I do want to get your perspective on the yellow medal, and that is gold. So what is your outlook for gold as we head into your end?
So it's interesting, gold had really sort of started to get some positive momentum. And I think the challenge that has come in is real rates. And if you think that, you know, we might be having some hikes or you think there's a higher potential for hikes, you have seen some potential for recent selloff of gold. But gold had been in a pretty long downtrend after a very strong year last year. It seemed to be kind of on the way up, so we'll see how it wavers the upcoming Fed decision. But otherwise, the general trend has been sort of trying to become a long theme again this year for gold.
Well, Katie, appreciate your time. Thank you so much for joining us this morning. And as always, appreciate your outlook on so many asset classes. Have a great day.
