Zulauf: Fed Rate Hike Will Cause Major Market Decline

Days after the U.S. Federal Reserve has made its intentions clear to raise interest rates before a major U.S. presidential election, Felix Zulauf, out with research Friday, says the commodity rally is over and a correction has begun.

Zulauf: Fed rate hike will create counter trends that will have varying degrees of force behind the momentum

The Fed has clearly made known its intention to normalize interest rates, first in the recently released Fed minutes and later with Fed member comments calling for a rate hike soon.

The notion that the Federal Open Market Committee is sending a message that U.S. interest rates will run counter trend to that of other major trading partners is a major wave that will be felt around the world in various markets.

At issue is headline CPI inflation which previewed its largest monthly gain in April, and year-over-year CPI is now up to 1.1%. Core inflation, which rose 0.2% to 2.1%, up for the last 12 months, is now in its 6th straight month above the Fed’s target level, the report noted.

The question is not if the Fed will raise rates, but when. That when might not be June, as the much heralded Brexit vote is on June 23. Given this, Zulauf has his sights set on the July 26/27 meeting. Separate analysis indicates they might have a non-scheduled press conference in its future. Zulauf thinks markets have already started to discount the notion of rate hikes to various degrees.

When interest rates are changing, it creates triggers in other market valuation formulas. Bond prices drop in value as interest rates rise is the most obvious direct correlation. Perhaps among the more immediate reactions occurs in the currency markets. The U.S. dollar is likely to continue its firming trend against “virtually all other currencies.” This is important on several levels, not the least of which is the U.S. dollar’s role as the world reserve currency of choice used to trade commodities.