Gold heads into the weekend, month-end and quarter-end on a defensive footing. In light of the last three-weeks of downticks, some short-covering could be seen ahead of today’s close.
The latest inflation data draws attention back to Janet Yellen’s speech earlier this week, where she acknowledged that she and her colleagues may have misjudged the fundamental forces driving inflation. With core PCE falling to a 2-year low in August, investors should heed the following line from that speech:
Perhaps not surprisingly, December rate hike expectations have been further tempered to 73.9%, from more than 80% midweek. So the question becomes, is the Fed abandoning the 2% inflation target? If they are, they may very well hike rates before year-end. If on the other hand they remain committed to a higher level of inflation, further tightening policy — via balance sheet normalization and/or rate hikes — is the absolute wrong prescription.
The ECB is facing the same conundrum. With European inflation just 1.5% y/y in September, they have to decide whether to start tapering asset purchases ahead of year-end. “October’s meeting is likely to be one of the greatest balancing acts in the ECB’s history,” wrote analysts at ING according to the FT.
No central bank has more experience with ZIRP and QE than the BoJ. They’ve been at it for nearly two-decades and have the massive balance ¥514 trillion to prove it. The latest nationwide core CPI reading was 0.7% y/y in September.
At this point, I would think the cumulative brain-trust of central bankers would be able to conclude that their policies to specifically boost inflation have been an abject failure. I get that they can’t really admit that, although Yellen came pretty darn close this week.
If that’s the true motivation for initiating measures to normalize the balance sheets, that would at least make sense. However, I fear that such measures are going to tip the economy into recession.