Morning Snapshot

04-Jun (USAGOLD) — Gold remains generally well bid in the wake of Friday’s impressive gains. Sadly, the catalyst for the biggest one-day rise in the yellow metal in three-years was a raft of pretty dismal US economic data, most notably the May nonfarm payrolls report, which saw the unemployment rate tick higher for the first time in nearly a year.

We also saw personal income, construction spending and manufacturing ISM all miss expectations on Friday and today’s factory orders report was a huge miss as well. In light of all the grim data, it’s reasonable to expect further downward revisions to GDP forecasts. Not surprisingly – amid heightened risk of a double-dip — talk of QE3 is on the rise once again.

With Treasury yields setting record lows last week, I suggested that there is probably little to be gained with additional quantitative measures. However, it is unlikely that the Fed will simply throw up its hands and say that they’ve done all they can do, particularly in light of the divided Congress, which is unlikely to do anything meaningful on the fiscal side ahead of the November elections. An extension of Operation Twist seems likely, if only largely symbolic. To maintain some semblance of credibility, the Fed must be seen as doing ‘something’; and not allowing Twist to expire at the end of June would qualify as ‘something’, while still keeping some powder dry in case the wheels really do come off…

However, the calls are out there for the Fed to go big or go home. An FT editorial today calls for the Fed to announce a third round of quantitative easing as quickly as the 20-Jun FOMC meeting. Additionally, they suggest that the Fed double its inflation target from 2% to 4% and that the government “can and should” choose a more expansive fiscal policy because yields are at record lows. In other words, the Fed has manipulated rates to near 0%, and the government should take advantage of that with additional deficit spending.

Fed chairman Bernanke speaks before the JEC committee on Thursday. It would be difficult for Bernanke to ignore the recent data, so the market will be hanging on every word of his testimony for a hint of a more dovish stance.

• US factory goods orders -0.6% in Apr, well below market expectations of +0.3% vs big negative revision for Mar from -1.5% to -2.1%.
• Factory inventories UNCH in Apr, vs negative revised +0.1% in Mar (+0.3% initial print).
• UK closed today for Spring Bank Holiday and Queen’s Diamond Jubilee tomorrow.
• Eurozone PPI UNCH m/m in Apr, vs +0.5% in Mar; +2.6% y/y, vs +3.3% in Mar.

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