Gold extended to the downside in early, establishing new 5-week lows as the dollar continued to rebound amid heightened rate hike expectations for December. The yellow metal subsequently garnered some support after more disappointing housing market data.
U.S. NAR pending home sales sank 2.6% in August. Low supplies have sapped momentum from the market and the NAR’s chief economist concedes that the the housing market has essentially stalled. Housing makes up nearly a fifth of GDP, but drives an even larger segment of consumption (think furniture, appliances, law care products etc.).
If Janet Yellen really believes gradual rate hikes are still appropriate, think about the implications for the already slowing housing market. Higher mortgage rates, higher carry rates on construction and bridges loans are unlikely to reinvigorate this critical segment of the economy. Such policy is also unlikely to stoke the inflation that the Fed so desperately wants.
Currently the market believes the odds for a December rate hike are about 80%, based on Yellen’s comments yesterday. However, the Fed is still very much data dependent and I imagine the probability will be pared in the weeks ahead if incoming data disappoint.
If that is indeed how things unfold, the dominant downtrend in the dollar should re-exert itself, providing support for gold in the process. Certainly any escalation of the tensions with North Korea will provide an underpinning for the yellow metal as well.