Daily Market Report: Gold Rebounds on Latest Evidence of Waning Economic Momentum

15-Apr (USAGOLD) — Gold rebounded from earlier modest pressure, regaining the $1200 level. The yellow metal is presently trading more than $9 higher on the day.

The latest evidence of waning economic momentum in the U.S. caused the dollar to give back its earlier gains. The NY Empire State index collapsed to -1.2 in April, well below expectations of 6.8, versus 6.9 in March. Industrial production fell 0.6% in March, below expectations of -0.3%, versus +0.1% in February and -0.4% in January.

The March decline was the biggest drop since 2009. Not surprisingly, Q1 GDP expectations continue to erode, which in turn is weighing on expectations that the Fed will initiate the first rate hike in nearly a decade at some point this year.

Some Fed hawks continue to suggest a June ‘lift-off’ remains on the table, but there are abundant concerns that such a move would trigger major volatility in financial markets.

While the Fed continues to say 2015 rate hike, Fed funds futures suggest the market is thinking 2016. However, if the market moves more in line with the central bank’s expectations, the IMF warned this week that a sudden rise of 100 bps in 10-year Treasury yields is “quite conceivable,” resulting in negative global shocks.

Meanwhile, Deutsche Bank warned that if the Fed starts raising rates, it could create a “perfect default storm” for global corporate bonds.

The German bank said that the low level of defaults had sunk further since the financial crisis “with QE and zero interest rate policies conducted around the world”. Mr Reid said: “Defaults will stay unusually low so long as current artificial conditions continue.” — Telegraph

“Artificial conditions” is an interesting turn of phrase. We have frequently categorized government bond buying with printed currency as “artificial demand,” which has grossly miss-priced risk in recent years. I think the Fed and other central banks would much prefer to just remain in the fantasy world of their own creation.

St. Louis Fed President Bullard said today that if ‘lift-off’ creates a shock to the economy, the Fed could just cut rates again. That’s true, but it’s also just silly in terms of maintaining credibility. If there is legitimate potential for a shock, the Fed will just keep rates at zero.

This whole argument may be mute, as the Fed has always maintained that ‘lift off’ is data dependent. And the data have been rather ominous of late.

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