Week in Review (Video) – August 26, 2016

Posted in USAGOLD TV |

Timing of Fed Interest Rate Increase Still in Question

26-Aug (WSJ) — Federal Reserve officials signaled clearly Friday they see an interest rate rise in the economy’s future. What they didn’t have much to say about was when it might happen.

The policy makers spoke in television interviews Friday, and by way of a hotly anticipated speech by central bank Chairwoman Janet Yellen. The Fed leader told attendees at the Kansas City Fed’s annual research conference in Jackson Hole, Wyo., that, “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal-funds rate has strengthened in recent months.”

Her comments capped a barrage of television appearances by regional Fed officials who essentially tilled the same soil. St. Louis Fed leader James Bullard, who holds the most dovish rate outlook of all central bankers, said he’s “agnostic” about when he would like to see the single rate rise he favors happen.

Cleveland Fed President Loretta Mester told CNBC that every Fed meeting is “live” while cautioning “timing isn’t the real thing” worth focusing on. She instead cautioned observers to focus on the “gradual” upward path of rates she thinks will be appropriate.

Meanwhile, Atlanta Fed chief Dennis Lockhart, whose views are often seen as a good proxy for what the rate-setting Federal Open Market Committee believes, said Fed policy is “cautious and gradual and there is no gun to our head” forcing aggressive increases in short-term rates in a Bloomberg TV interview. He said there will likely be “at least one” rate rise this year and perhaps two given that there are three more FOMC meetings planned for 2016.

Missing in all of this was timing.


Posted in Central Banks, Monetary Policy |

The Daily Market Report: Gold Turns Choppy As Yellen Confuses

26-Aug (USAGOLD) — Gold is trading in a choppy manner as markets in general struggle to decipher Janet Yellen’s message from Jackson Hole. The yellow metal dropped lower initially, rose to set new highs for the day and then slipped back to near unchanged on the day, resulting in an intraday range in excess of $20.

Gold reacted initially to Yellen’s statement in the fifth paragraph of her speach, that she believes “the case for an increase in the federal funds rate has strengthened in recent months.” The market seemed to disregard the very next qualifying sentance: “Of course, our decisions always depend on the degree to which incoming data continues to confirm the Committee’s outlook.”

So, we’re getting closer to another rate hike, but we still need to see confirmation in the data. This is the same basic message the Fed has been delivering for the past 5-years.

When talking about policy during the financial crisis in 2008, Yellen notes that “a variety of policy benchmarks would, at least in hindsight, have called for pushing the federal funds rate well below zero during the economic downturn.” The footnoted formula “would have prescribed lowering the federal funds rate to minus 9 percent at the depths of the recession.”

8. R(t) = R* + p(t) + 0.5[p(t)-p*]-2.0[U(t)-U*], where R is the federal funds rate, R* is the longer-run normal value of the federal funds rate adjusted for inflation, p is the four-quarter moving average of core PCE inflation, p* is the FOMC’s target for inflation (2 percent), U is the unemployment rate, and U* is the longer-run normal rate of unemployment. Based on the medians of FOMC participants’ latest longer-run projections, R* is approximately 1 percent and U* is about 4.8 percent. Accordingly, with the unemployment rate climbing to 10 percent and core PCE inflation falling to 1 percent in 2009, this rule would have prescribed lowering the federal funds rate to minus 9 percent at the depths of the recession.

San Fransisco Fed President John Williams talked about R* in a research piece last week:

“…new realities pose significant challenges for the conduct of monetary policy. Foremost is the significant decline in the natural rate of interest, or r* (r-star), over the past quarter-century to historically low levels.”

Williams went on to say that “a variety of economic factors have pushed natural interest rates very low and they appear poised to stay that way.” With that in mind, the same formula cited in Yellen’s speech would prescribe that the Fed funds rate be set at 0.54% today, just above the high end of the current 0.25-0.50% target range. I don’t think the Fed is prepared to start micro-adjusting interest rates based on any formula, so the Fed funds rate is pretty much where it needs to be.

Nonetheless, Yellen really didn’t say anything that might dispel the notion that the Fed is on the cusp of anther rate hike. But even another 25 bps hike is largely meaningless in the grand scheme of things. Keep in mind that economic growth remains anemic, inflation is below target, wages and productivity have stagnated and the national debt continues its march to $20 trillion.

Posted in Daily Market Report, Gold News, Gold Views |

Gold retreats back into the range as market can’t quite figure out what message Yellen was trying to convey.

Posted in Gold News |

Gold Extends Gains as Yellen Sees Rate Rise ‘Over Time’

26-Aug (Bloomberg) — Gold futures extended gains after Federal Reserve Chair Janet Yellen said that while the case for an interest-rate hike has strengthened recently, a gradual increase will be appropriate “over time.”

Gold futures for December delivery rose 1.2 percent to $1,339.80 an ounce at 10:32 a.m. on the Comex in New York. A close at that price would mark the biggest advance since July 29.

“It seems like there is some sort of building consensus to a rate hike, but not imminent,” according to George Gero, a managing director at RBC Wealth Management in New York. Yellen’s remarks are “pointing more towards December than September as they await more data,” he said in a telephone interview.

Yellen said the case to raise interest rates is getting stronger as the U.S. economy approaches the central bank’s goals. The economy is “nearing” the Fed’s goals of full employment and stable prices, she said in the text of a speech Friday to central bankers and economists in Jackson Hole, Wyoming. The Fed chair didn’t discuss the specific timing of a rate move in her first public comments since June.

“Looking ahead, the FOMC expects moderate growth in real gross domestic product, additional strengthening in the labor market, and inflation rising to 2 percent over the next few years,” Yellen said in her prepared remarks. “Based on this economic outlook, the FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate over time to achieve and sustain employment and inflation near our statutory objectives.”


Posted in Gold News, Gold Views |

Here’s what the Fed’s rate should be, using rule footnoted in Yellen speech

26-Aug (MarketWatch) — Federal Reserve Chairwoman Janet Yellen has fought against a notion put forward by some in Congress to follow a mathematical formula to determine interest rates.

That said, in her keynote speech in Jackson Hole, there’s a footnote that lays out exactly such a rule. She says this rule is more “aggressive” than the so-called Taylor Rule, put forward by Stanford professor John Taylor that many Republicans in Congress have supported.

…It should be noted that the context for discussing this formula was the appropriate level of interest rates during the Great Recession; it prescribed a federal funds rate of negative 9% at the depth of the recession, compared to the Taylor Rule’s negative 3.75%. Yellen did not discuss the rule’s current applicability.

That said, using current data, the formula yields a federal funds rate of 0.54%, which is above the current target between 0.25% and 0.5%. (The effective federal funds rate was 0.4% this week.)


PG View: Can we expect a 4 bps rate hike this year? I doubt it . . .

Posted in Central Banks, Monetary Policy |

Beyond saying she believes the case for another rate hike has “strengthened in recent months,” market sees balance of Yellen’s speech as ‘same-old-same-old’.

Posted in Central Banks, Monetary Policy |

University of Michigan consumer sentiment final fell to 89.8 in Aug, below expectations of 90.7, vs 90.4 prelim and 90.0 in Jul.

Posted in Economic Data |

Gold falls within range as Yellen says case for a rate-hike “has strengthened in recent months,” but quickly rockets right back to new highs for the day.

Posted in Central Banks, Gold News, Monetary Policy |

Gold rises as Yellen looms, but on track for weekly loss

26-Aug (MarketWatch) — Gold futures crawled up from one-month lows Friday but remained on track for a weekly drop as financial markets braced for potential clues on Federal Reserve interest-rate timing when Chairwoman Janet Yellen speaks at the central bank’s Rocky Mountain retreat this morning.

In a speech scheduled for 10 a.m. Eastern, Yellen may signal the Fed is ready to raise interest rates next month, or perhaps at the group’s final meeting of the year in December, after the result of the U.S. presidential election.

“Even though the Fed chief could spend most of her time discussing the implications of a low natural rate of interest and the longer-term future of monetary policy, any comments she makes with regards to the near-term rate path are likely to determine the dollar’s short-term direction,” said Charalambos Pissouros, senior analyst with IronFX Global.

The prospect for higher rates could lift the dollar, depressing the value of precious metals priced in the currency. Plus, a rate increase tends to cut demand for assets that don’t provide a yield, like gold.

“Fed signals regarding the likelihood of a hike this year have been ambiguous lately,” Pissouros added. “The July [Federal Open Market Committee] minutes had a dovish tilt, showing that most members were skeptical to commit to anything until more data validate a rate move. However, key FOMC officials have made relatively hawkish remarks after the release of the minutes, indicating that September remains a live meeting and that markets are underestimating the possibility of a near-term hike.”


PG View: Once again, the notion that higher rates bodes ill for gold is misplaced: A big chunk of gold’s cyclical bull trend occurred during the 422 bps tightening cycle between June 2004 and August 2006.

Posted in Gold News, Gold Views |

U.S. trade gap narrowed to -$59.3 bln in Jul, inside expectations of -$63.0 bln, vs -$64.5 bln in Jun.

Posted in Economic Data |

U.S. Q2 GDP revised down to 1.1%, in line with expectations, vs 1.2% prelim and 0.8% in Q1.

Posted in Economic Data |

Gold higher 1329.01 (+6.62). Silver 18.75 (+0.169). Dollar easier. Euro better. Stocks called lower. U.S. 10-year 1.56% (-1 bp).

Posted in Markets |

The Daily Market Report: Gold Defensive Within Range, Awaiting Guidance from Yellen

25-Aug (USAGOLD) — Gold is lower within the range that has dominated for the past 6-weeks, as everyone waits with baited breath for Fed Chair Yellen’s speech in Jackson Hole tomorrow. We continue to think the market is putting waaaaay too much emphasis on a potential 25 bps hike to the Fed funds rate.

Fed funds futures put the probability of a September hike at 24% today, and 44% for December. The softer gold price perhaps reflects this heightened expectation, but interestingly the dollar index seems nonplussed. The DX remains below 95.00, well off the 6-week high at 97.57.

While today durable goods orders for July came in better than expected at +4.4%, it was the first rise in 3-months and barely offset the -4.2% drop in June. Initial jobless claims for last week came in higher than expected.

In a WSJ op-ed yesterday, former Fed Governor Kevin Warsh offered a scathing rebuke of central bank policy in recent years, calling it “deeply flawed.” Wash sees the Fed’s models as unreliable, its policies erratic and its guidance confusing. I can’t think of anyone outside the haloed halls of the Eccles Building that would disagree.

The Fed often treats financial markets as a beast to be tamed, a cub to be coddled, or a market to be manipulated. It appears in thrall to financial markets, and financial markets are in thrall to the Fed, but only one will get the last word. A simple, troubling fact: From the beginning of 2008 to the present, more than half of the increase in the value of the S&P 500 occurred on the day of Federal Open Market Committee decisions. — Kevin Warsh

Central banks were never intended to be the center of the financial universe. In the wake of the financial crisis they were forced to center-stage, and whether by choice or by circumstances they seem inclined to stay there.

Markets and the financial press are willing enablers. In covering the Fed again today, I too am guilty, but seemingly the prospect of a measly 25 bps rate hike is all the market wants to talk about.

Wealth preservation minded investors need to look past the ridiculous noise and focus on the bog pitcher: The fact that the Fed and other central banks are center stage and have been for 8-years is indicative of an unhealthy economy.

Mr. Warsh believes “the economy is closer to recession than resurgence.” He goes on to warn that the “Fed is poorly positioned to respond with force, efficacy and credibility. The Fed is vulnerable.”

If the Fed is vulnerable, so too are the markets. Now is the time to be adjusting one’s portfolio to hedge your own vulnerabilities.


Posted in Daily Market Report, Gold News, Gold Views |

Gold edges off 4-week low, awaits clues on Fed policy

25-Aug (Reuters) — Gold edged off the previous day’s four-week low on Thursday as the dollar retreated, but prices were rangebound ahead of a speech by Federal Reserve Chair Janet Yellen this week which will be watched for clues on monetary policy.

Investors are hoping Yellen will give a clearer signal on the path of interest rate hikes when she addresses a meeting of central bankers in Jackson Hole, Wyoming, on Friday.

…Minutes from the U.S. central bank’s July 26-27 policy meeting showed broad agreement that more economic data is needed before raising interest rates, but recent comments from other
policymakers have been much more hawkish.

“After the Fed minutes, gold reacted quite positively, and then a few days later there were comments from some officials saying actually the Fed should press ahead with a rate hike,”
Capital Economics analyst Simona Gambarini said.

“That weighed on the gold price. Now what we’re seeing is a bit of a wait-and-see mode, where markets are just monitoring the situation and waiting for further comments that might move
the market.”


Posted in Gold News, Gold Views |

The Federal Reserve Needs New Thinking

By Kevin Warsh
25-Aug (WSJ) — The conduct of monetary policy in recent years has been deeply flawed. U.S. economic growth lags prior recoveries, falling short of forecasts and deteriorating in the most recent quarters. This week in Jackson Hole, Wyo., the Federal Reserve Bank of Kansas City hosts the world’s leading central bankers and academics to consider monetary reform. The task is timely and consequential, but the Fed needs a broader reform agenda.

Policy makers around the world neither predicted nor can adequately explain the reasons for current inflation readings below their targets. So it is puzzling that so many academics are pushing to raise the current 2% inflation target to a higher target of 3% or 4%. In the telling of the economics guild, the Fed’s leaders should descend from the Grand Tetons with supreme assurance that their latest monetary policy invention will remedy the economy’s ills.

The Fed’s leaders should not take the bait. Raising the inflation target is a bad idea being considered at the wrong time for the wrong reasons.

…If, as is more likely, the economy is closer to recession than resurgence, the Fed is poorly positioned to respond with force, efficacy and credibility. The Fed is vulnerable. Its recent centennial as our nation’s central bank should not be confused with its permanent acceptance in the American political system.


PG View: The author of this opinion piece is a former Fed governor.

Posted in Central Banks, Monetary Policy |

U.S. durable goods orders rebounded 4.4% in Jul, above expectations of +3.3%, vs negative revised -4.2% in Jun; Ex-trans +1.5%.

Posted in Economic Data |

U.S. initial jobless claims -1k to 261k in the week ended 20-Aug, below expectations of 265k.

Posted in Economic Data |

Gold lower at 1320.10 (-6.84). Silver 18.52 (-0.061). Dollar lower. Euro higher. Stocks called lower. U.S. 10-year 1.56% (unch).

Posted in Markets |

The Daily Market Report: Gold Slips Within Range, All Eyes Still on Jackson Hole

24-Aug (USAGOLD) — Gold slid to a multi-week low in early New York trading, spurred by a large sell order in the futures market. However, the broader range that has emerged over the past 8-weeks remains intact, marked by the 1310.oo low from mid-July.

The sell order was reportedly for 10,000 contracts, the equivalent of 1,000,000 ounces of gold with a notional value of $1.3 bln. Given the size of the order and the recent narrowly confined price action, the yellow metal is actually displaying good resiliency.

As everyone awaits Janet Yellen’s speech on Friday, former Minneapolis Fed President Narayana Kocherlakota has a suggestion as to what her message should be:

She could start by repudiating the idea that future interest rate moves will follow any kind of timeline. In a constantly changing economic environment, the Fed cannot promise to act according to a pre-set calendar. Suggesting otherwise has harmed the Fed’s credibility in the markets and, no less importantly, with Congress.

If Ms. Yellen heeds his advice, that would be viewed by the market as being quite dovish. For the most part, U.S. economic data simply do not support tighter monetary policy.

While Yellen has pretty consistently maintained the data dependency of the Fed, but she is simultaneously trying to prevent the creation of a ‘Yellen put.’ That has led to the periodic assertion via FedSpeak that [insert next FOMC meeting here] is on the table for a rate hike.

Kocherlakota says Yellen should ditch the dot plot. I agree, nobody pays much attention anymore, other than to make jokes about it. Instead he thinks the Fed should focus on just a few key drivers: Inflationary pressures, downside economic risks and the labor market.

The inflation situation alone”hardly justifies a rate increase,” says Narayana Kocherlakota. He clearly has concerns about downside risks, saying “The best response is to keep rates low now, so the economy will be as resilient as possible when any new shock hits.”

If there is any bright spot it would have to be the labor market, with the unemployment rate below 5%. But even here, Kocherlakota thinks “the labor market has room to improve. Why not let it do so by holding off on rate increases?”

Yellen is a dove at heart. I suspect the message from her speech will be closer to Kocherlakota’s than many are hoping.

Posted in Daily Market Report, Gold News, Gold Views |

What the Fed Chief’s Next Message Should Be

By Narayana Kocherlakota
24-Aug (Bloomberg) — In December, Federal Reserve officials indicated that they planned to raise interest rates by a quarter percentage point every three months for the next three years. That framework is already in disarray, leaving investors and the general public guessing about how the Fed plans to manage the economy.

When Chair Janet Yellen speaks later this week at the Kansas City Fed’s annual conference in Jackson Hole, she’ll have to offer a much more durable and convincing plan.

She could start by repudiating the idea that future interest rate moves will follow any kind of timeline. In a constantly changing economic environment, the Fed cannot promise to act according to a pre-set calendar. Suggesting otherwise has harmed the Fed’s credibility in the markets and, no less importantly, with Congress.

The Fed’s practice of releasing official forecasts of rate changes to the public every three months doesn’t help in this regard. Yellen should dismiss any idea that these forecasts have any relevance for the evolution of actual policy.

…Inflation remains below the Fed’s target of 2 percent, as has been true for more than four years. The minutes of the central bank’s July policy-making meeting suggest that Fed staff expect inflation to remain below 2 percent through 2018 — a situation that hardly justifies a rate increase.

…In light of these three factors, the Fed’s decision to keep rates low in 2016 makes a lot of sense. Yellen should explain this connection and stress that such indicators are likely to remain central in the central bank’s decision-making over the next two years.


Posted in Central Banks, Monetary Policy |

Gold falls to 4-week low, but remains within narrow range

24-Aug (USAGOLD) — Gold fell through support at 1328.00 in early New York trading on Wednesday, driven by a large 10,000 contract sell in the futures market. That pushed gold through close-in support, establishing new 4-week lows. Nonetheless, that leaves the yellow metal still narrowly confined within the broader range that has emerged over the past 8-weeks.

Actually, gold is showing some resiliency in the face of that big sell order; which is the equivalent of 1 million ounces with a notional value of around $1.3 bln.

Posted in Gold News |

U.S. existing home sales -3.2% to 5.39M in Jul, below expectations of 5.525M, vs 5.570M in Jun.

Posted in Economic Data |

Gold steady as investors await U.S. rate clues

24-Aug (Reuters) — Gold held steady on Wednesday as investors took to the sidelines ahead of a speech by Federal Reserve Chair Janet Yellen this weekend which will be closely watched for further clues on U.S. interest rate policy.

Yellen is scheduled to address a meeting of central bankers in Jackson Hole, Wyoming. Recent hawkish comments from policymakers have raised investors’ expectations that she might adopt a less cautious tone on rates.

…”Volatility (in gold) is very low, and that means people are waiting for new information that they can price in,” LBBW analyst Thorsten Proettel said. “Many people are looking to Jackson Hole, and what is going to be said there.”

While recent comments from Fed officials have supported expectations that rates will rise sooner rather than later, minutes from the U.S. central bank’s July 26-27 policy meeting showed officials remain divided over whether it is time to act.


PG View: Gold just slipped to a new low for the week, but remains within the recent range.

Posted in Gold News, Gold Views |

Gold lower at 1331.40 (-7.42). Silver 18.84 (-0.082). Dollar higher. Euro lower. Stocks called better. U.S. 10-year 1.55% (unch).

Posted in Markets |

The Daily Market Report: Gold Consolidates Amid Mixed Data, Jackson Hole Expectations

23-Aug (USAGOLD) — Gold is consolidating at a slightly higher level within the recent range. The yellow metal has been buoyed somewhat by a dip in the dollar.

U.S. data for the day were mixed once again: U.S. new home sales surged 12.4% to 654k in July, well above expectations of 580k. However, Markit manufacturing PMI missed expectations and the Richmond Fed manufacturing index posted its biggest decline ever.

These data reflect the ongoing unevenness of the recovery, keeping uncertainty about the Fed’s next move elevated. The market is hoping to glean some fresh insight on this front when Janet Yellen speaks at the Jackson Hole symposium on Friday.

In the interim we’ll get a look at July durable goods orders (where a rebound from June’s dismal number is expected) and a second peak at Q2 GDP (where a modest negative revision is anticipated). If the latter is revised below 1%, that would make for a third consecutive quarter of sub-1% growth, and would likely reverse the recent uptick in rate hike talk.

Adam Posen writing in the FT today, suggests that negative rates are no big deal. “Negative rates are just another monetary policy tool, good for some situations and not for others, with no deep mystery or drama required,” offers Posen.

Interesting though that he calls it his “pre-Jackson Hole reading.” I somehow doubt that Ms. Yellen is going to have much to say about negative rates here in the U.S. at this juncture. However, Posen reminds us that Yellen has not ruled out the the use of NIRP.

Meanwhile, Janet Yellen, chair of the US Federal Reserve, told Congress in May that “while [she] would not completely rule out the use of negative interest rates”, they would be a last resort. — FT

That kind of thinking actually gives the Fed plenty of room to maneuver. WSJ FedWatcher Jon Hilsenrath suggested otherwise yesterday, noting that the Fed cut rates more than 500 bps in each of the last 4 economic downturns.

If they were put in a position of having to cut 500 bps from here, it would just take Fed funds to -4.5%. Unlikely for sure, but in the minds of Posen and others, there is no reason to “fuss” over such policy.

Posted in Daily Market Report, Gold News, Gold Views |

U.S. Richmond Fed index plunged to -11 in Aug, well below expectations of 6, vs 10 in Jul.

Posted in Economic Data |

U.S. new home sales surged 12.4% to 654k in Jul, well above expectations of 580k, vs negative revised 582k in Jun.

Posted in Economic Data |

U.S. Markit manufacturing PMI (flash) fell to 52.1 in Aug, below expectations of 52.6, vs 52.9 in Jul.

Posted in Economic Data |

Negative interest rates are not the drama they seem

by Adam Posen
23-Aug (FT) — Ah, for the good old days of quantitative easing when central bankers agreed what needed to be done to spur economic growth. No longer. In Tokyo, Haruhiko Kuroda, Bank of Japan governor, has just reiterated that he will not rule out a “deepening cut” to the country’s negative interest rates.

In contrast, Mark Carney, Bank of England governor, has announced he is “not a fan of negative rates” and Thomas Jordan, president of the Swiss National Bank, has reaffirmed his belief that its “current approach”, including negative rates, “is the right one”.

Meanwhile, Janet Yellen, chair of the US Federal Reserve, told Congress in May that “while [she] would not completely rule out the use of negative interest rates”, they would be a last resort.

This is too much fuss over just another policy instrument. The drama and division among central bankers reflect two intellectual errors that have distorted monetary policy discussions. These are the same mistakes that led to the demonisation of quantitative easing as “unconventional” and thus dangerous, when in fact it worked pretty much as expected in reducing interest-rate spreads, encouraging riskier asset purchases and adjusting the currency. Negative rates will prove less universally applicable but have also proved predictable and useful in impact.

The first error is believing that the majority of financial decisions will respond significantly to any shifts in government borrowing costs. In pre-crisis days, policymakers assumed that tweaking short-term interest rates was enough to influence all important financial decision-making. This was wishful thinking, based on a couple of decades of atypical US experience. Other economies still needed extra policy instruments, as has the US since the crisis. The absence of stable relationships between credit growth and interest rates, as well as the history of central banking, should have told policymakers and investors that government bond markets were not the only game in town.

…Negative rates are just another monetary policy tool, good for some situations and not for others, with no deep mystery or drama required.


PG View: But this has never happened before and we’re more than 7-years down the road from the end of the U.S. session. NIRP may just be another policy tool, but it seems to be having a limited impact where it has been employed.

Posted in Central Banks, Monetary Policy, Negative interest rates |