Gold remains under pressure as risk-appetite remains elevated, driving global shares higher. Last week’s passage of a 2018 budget resolution by the Senate further stoked hopes for President Trump’s proposed tax cuts.
Spanish Prime Minister Mariano Rajoy said over the weekend that he would seek to dissolve the Catalonian government under Article 155, thereby ending the region’s autonomy. The EU fell in line with Spain’s central government. However, Catalan foreign affairs spokesman Raul Romeva said, “the people and the institutions in Catalonia will not let this happen.” It would appear that a showdown is brewing.
Shinzo Abe has consolidated power as a result of the weekend snap election. Abe-nomics will continue, but he is also expected to modify Japan’s pacifist Constitution so that he can “deal with North Korea.” Japan needs to be able to defend itself, but this could mark the beginning of a new Asian arms race.
The U.S. calendar is very light today. The highlight of this week will be the ECB rate decision on Thursday.
Gold has retreated to the low end of the recent range after passage of the 2018 budget blueprint stoked optimism that the tax cuts will get passed as well. The prospects for lower corporate taxes is spurring risk appetite, sending shares higher.
As the stock bubble continues to inflate, the Fed may indeed be compelled to raise rates again in December, regardless of persistently weak inflation. The inflation that the Fed so desperately wants is occurring in asset prices, rather than in PCE, which they have identified as their primary benchmark.
As we’ve noted in previous commentary this week, PCE inflation has actually been declining since the central bank first started hiking rates in December of 2016. The Fed did do a one-off rate hike in December 2015, which proved to be a big mistake. That may still prove to be the case this time around as well.
The Fed also needs to consider the implications of a December rate hike if the rest of the world continues to lean toward easier policy:
With Fed quantitative tightening (balance sheet normalization) already underway, arguably the Fed is being plenty hawkish relative to the other major central banks. A December rate hike would result in greater and intolerable policy divergence, likely leading to a stronger dollar. Certainly appointment of someone like John Taylor to chair the Fed would have that effect.
However, President Trump has made it clear that he is not in favor of a stronger dollar. If reflation is the goal, via tax cuts, borrowing and spending. A weak dollar becomes all-but essential to pull that off successfully. The rest of the world maintaining easier policy may provide the necessary cover to maintain the pause in the current tightening cycle through year-end.
Gold is back on the defensive within the range after the Senate narrowly passed the 2018 budget blueprint by a 51-49 vote. This bolsters hope that the GOP proposed tax reform will be advanced as well, prompting a rebound in risk appetite; as reflected by higher stocks.
Yields have rebounded as well, pulling the dollar higher, which has in turn pressured the yellow metal. The budget blueprint allows $1.5 trillion to be added to the deficit over the next 10-years. This is one of the keys to President Trump’s tax cut, borrow and spend reflation agenda.
Geopolitical risks are likely to limit the downside. Spain is expected to terminate Catlonia’s autonomy tomorrow. CIA Director Pompeo and National Security Advisor McMaster both seemed to suggest a heightened possibility of a military confrontation with North Korea at a security forum on Thursday.
The U.S. calendar is light today with just September existing home sales (-0.9% forecast) and Treasury Budget for September. We’ll also hear FedSpeak from Mester and Yellen.
Heightened geopolitical tensions in Europe have prompted a rebound in gold, as the situation in Spain pushes the debate about the next Fed chair to the back-burner. U.S. yields and the dollar have dropped, providing support for the yellow metal.
For now, gold may be considered consolidative as investors await the weekend and Spain’s invocation of article 155, which would revoke Catalonia’s autonomy. Perhaps more important, will be the reaction of separatists and whether violence will erupt. A rise above Fibonacci/chart resistance at 1308.80/1313.62 is still needed to return confidence to the underlying uptrend. Monday’s high at 1306.04 now provides an intervening barrier.
The back-burner is exactly where the debate about potentially hawkish replacements for Janet Yellen belongs. If John Taylor for example were to get the nod, there would be an expectation that he utilize his own Taylor rule.
Even if he were to modify some of the assumptions of the rule he devised, as he has suggested he would consider, one might reasonably expect he’d push for faster policy normalization. However, it is also reasonable to ask, what is “normal” these days?
After nearly a decade of extraordinary policy measures, the landscape is nothing like what it was when Taylor created his rule 25-years ago. In accelerating the present tightening cycle — if you can really call it that — not only does he risk popping the stock bubble, but he could also tip the U.S. economy into a long-overdue recession.
That seems like risks not many at the Fed would be willing to take; perhaps even Taylor himself. Certainly President Trump doesn’t want either of those two things to happen on his watch, so why would he drastically alter the status quo? My bet is that he does not . . .
Gold is rebounding today and has already exceeded yesterday’s high amid reports that Spain will move to rescind Catalonia’s autonomy today. This unprecedented move has sapped risk appetite, weighing on global shares and pushing yields and the dollar lower.
Spanish PM Mariano Rajoy said that Article 155 would be invoked today, asserting direct rule over Catalonia. Rajoy says Spain seeks to “restore the constitutional order.” Put another way, this move seeks to crush the independence movement, but I doubt the separatist will go quietly into the night.
Again, it’s interesting to watch the dollar come under pressure at times of heightened geopolitical tensions. There was a time, not so long ago, when the dollar was THE safe-haven currency. That is no longer the case.
U.S. economic data were mixed this morning. Initial jobless claims fell 22k last week. The Philly Fed index for October came in much better than expected. However, leading indicators fell 0.2% in September, below expectations of +0.1%.
We’ll hear FedSpeak from Ester George later this morning as well, as prospects for a December rate hike remains elevated.
Gold is maintaining a defensive tone as markets continue to ruminate over who might be the next Fed chair. Amid news that some perceived policy hawks are in the mix, worries over the implications for the ‘slow and steady’ policy normalization stance has lifted yields and the dollar, weighing on the yellow metal.
See yesterday’s DMR for a more in-depth look at why appointing a hawk to chair the Fed doesn’t really align with the President’s proposed fiscal policies.
Janet Yellen’s term as Fed chair doesn’t end until February 03, 2018, so this debate seems a bit premature. In fact, Ms. Yellen remains in contention for reappointment.
Of greater importance is what the Fed will do at its December FOMC meeting. The market believes another rate hike is all-but a sure-thing, but I’m wondering what has changed since the Fed paused in September?
Upticks in inflation are being largely attributed to the hurricane inspired rise in energy prices. That affect should be mitigated in the weeks ahead. If anything is “transitory” on the inflation front, it’s probably the recent gains.
The following chart shows the Fed’s preferred measure of inflation. Note that the annualized rate of core PCE inflation reached a high of 1.8% — shy of the 2.0% target — in December 2016 when the Fed raised rates for the first time since the feint of December 2015. Inflation reached 1.8% again in March of 2017 with the second rate hike of this cycle, presumably with the assumption that the central bank was serious this time. However, inflation has slowed since then, even with the June hike.
U.S. Core PCE Price Index YoY
So again, if illusive inflation was the cause for the pause in September, why is everyone convinced that the Fed will un-pause in December? Tighter policy is in fact an antidote for inflation, so if 2.0% inflation is what you desire and you never got there with policy that is easier than that of today, raising rates further really seems counterproductive.
Gold remains defensive after recent gains above $1300 faltered as talk about a potentially hawkish replacement for Janet Yellen began to circulate. That story continues to play out this morning, buoying yields and the dollar and pressuring the yellow metal.
As I wrote in yesterday’s DMR, appointing a hawk like John Taylor to chair the Fed risks derailing any hope that President Trump’s reflation agenda gets off the ground. What Mr. Trump really needs is an unabashed dove like Janet Yellen, or as DoubleLine Capital’s Jeff Gundlach speculated last week, Neel Kashkari.
U.S. housing starts and permits plummeted in September, well below the expectations of analysts who were already expecting a hurricane related slow down. Later today we’ll see EIA crude stocks and the Beige Book. FedSpeak from Dudley and Kaplan is already trickling out of a moderated discussion on economic development.
Gold retreated into the recent range amid the latest bout of speculation as to who will succeed Janet Yellen as Fed chair. Bloomberg reported that Stanford economist John Taylor impressed President Trump in a recent interview for the position.
If Taylor gets the nod, there is concern that he would attempt to implement his Taylor rule. That prompted rates and the dollar to jump today, putting gold under pressure. Stocks retreated intraday, but not before the DJIA set a new record high above 23,000.
The Taylor rule presently indicates that rates are far too low. While Taylor has signaled flexibility as to some of the inputs into his formula, it still suggests the potential for an acceleration of the present tightening cycle. That would of course be contingent on Taylor getting buy-in from other members of the FOMC.
If used as it was originally proposed, the Taylor Rule would imply that the Fed rate — currently set at a range of 1 to 1.25 percent — needs to be at 3.75 percent in order to meet the central bank’s goals of maximum employment and 2 percent inflation. Even if Taylor shied from pushing rates to that level as Fed Chair, using the rule would still make him appear much more hawkish than his two predecessors. — Bloomberg
However, given that President Trump’s economic agenda is premised on tax cut, borrow and spend fiscal policies, it would seem that tighter monetary policy would pose real problems. With a national debt already in excess of $20 trillion and headed higher, every uptick in interest rates makes servicing of that debt increasingly difficult.
Higher rates — or a wider differential with our trading partners — would cause the dollar to rise. President Trump has made it very clear throughout his first year in office that he is not a fan of a strong dollar. “Lots of bad things happen with a strong dollar,” said the President. He has also said that he “likes a low interest rate policy.”
That all seems incongruous with appointing a hawkish Fed chair. So, consider me a skeptic that Taylor is the latest front-runner for the position.
I would also point out that the Taylor rule was devised in the early 1990s. So much has changed in the past 25-years, one might reasonably assume that models of that era no longer reflect the present realities of markets and human behaviors. The Phillips curve is another glaring example, which attempts to show that unemployment and inflation have a stable inverse relationship.
Jim Rickards has consistently preached that the Fed is getting policy wrong because they continue to rely on antiquated models.
In a recent speech, Fed governor Lael Brainard, an ally of Yellen, said the Phillips curve today is “flat.” That’s a polite way of saying there is no curve. — Jim Rickards
Enacting monetary policy based on assumptions that these models are merely lagging, that the current conditions are “transitory,” may in fact be a recipe for disaster. I maintain that the main motivation for gradual rate hikes at the Yellen Fed is to give them enough clearance above the zero-bound to allow cuts when the economy eventually falls into recession.
Gold retreated into the range after failing to sustain recent probes above $1300, as the dollar firmed. However, political and geopolitical risks are still seen as supportive underpinnings to this market.
U.S. trade prices came in hotter than expected for September, with a 0.7% gain for imports and a 0.8% rise in export prices. Higher energy prices associated with the hurricanes contributed to the rise in import prices. While these gains may prove temporary, these data bolster the position of the policy hawks on the FOMC calling for a December rate hike.
Look for the probability of a rate hike to go back above 90%, which is pushing the dollar higher. However, with expectations already all-but a sure thing, there’s not much more room for improvement and gold has been holding up pretty well. There’s also still plenty of time before that December meeting.
U.S. industrial production rose 0.3% in September, in line with expectations, versus an upward revised -0.7% in August (was -0.9%). Cap use edged up to 76.0%, from a negative revised 75.8% in August (was 76.1%).
Later this morning we’ll see the NAHB housig market index for October, Treasury budget for September and August TIC data. We’ll also hear FedSpeak from Philly Fed’s Harker.
Gold is consolidating above the $1300 level, buoyed by persistent political and geopolitcal concerns. However, equally persistent strength in shares is driving risk appetite, which is limiting the upside for the yellow metal.
The near-term uptrend in the dollar that began early in September seems to have lost momentum ahead of resistance marked by the mid-August highs at 94.14. The dollar index rolled over early this month, but additional downside follow-through is needed to return confidence to longer-term downtrend.
If that happens, it would likely push gold through the next important tier of resistance at 1308.80/1313.62. That would return considerable credence to the uptrend that has dominated this year.
North Korea has renewed its threat to launch missiles toward Guam in response to the latest joint U.S./South Korea military exercises. As the saber rattling and drilling continues, the risk remains that one side or the other will misinterpret some action, leading to a shooting-war.
Spain continues to press Catalonia for clarification of exactly what happened last week. If they did indeed declare independence — or if they fail to clarify one way or another by Thursday — Spain may exert direct rule over the currently autonomous region. What kind of force might be used to accomplish that remains to be seen.
U.S. data remains uneven, but the market still seems inclined to ignore continuing signs of weak inflation. That’s because the Fed continues to indicate that they remain optimistic that inflation will eventually pick-up and therefore another rate hike is warranted this year.
Rate hike probability for December remains near 90%, although some FOMC members expressed last week a desire to remain on hold until there are actual signs of higher inflation, rather than mere Phillips curve driven expectations.
If the inflation data were sufficient to warrant a pause in the tightening cycle in September, nothing — beyond the hurricane related jump in energy prices — has really changed in the past month. The situation could certainly change ahead of that last FOMC meeting, but at this point the certainty of the market doesn’t make sense.
Gold remain well bid above $1300, having ended last week on an upswing. The next technical hurdle is defined by resistance at 1308.80/1313.62. A breach of this level would return confidence to the dominant uptrend.
The dollar index is modestly higher, but momentum on recent uptricks has been lackluster. Fed funds futures suggest the probability of a December rate hike remains near 90%. These factors are limiting the upside.
North Korea has renewed its threat to fire missiles toward Guam as U.S. and South Korean forces begin new naval drills. Spain is still waiting for clarification from Catalonia as to whether they declared independence or not last week. If they did, or they do not respond by Thursday, Spain has threatened to impose direct rule.
The U.S. calendar is light today. NY Empire State index surged to an 8-year high of 30.2 in October, well above expectations of 20.0, versus 24.4 in September. September Treasury budget is out this afternoon
Gold typically trades inversely to the dollar, or whichever currency it is being measured against. USAGOLD founder and president Mike Kosares wrote in this month’s newsletter that many might be surprised to find that gold is up against every major currency this year.
Euro –– + 1.1%
Japanese yen –– + 8.0%
Chinese yuan –– + 6.5%
Swiss franc –– + 6.1%
British pound –– + 3.4%
Australian dollar –– + 2.1%
Canadian dollar –– + 3.2%
U.S. dollar –– + 11.5%
(As of 9/27/2017.)
The dollar has been in a strong downtrend since 1971 when Nixon ended the gold backing. This was a disastrous decision for the world’s financial system and for the US economy. It has led to a total collapse of the dollar and a financial system based on debt only. — Egon von Greyerz
I would suggest the downtrend in the dollar goes back much further, to the late-1800 and the end of the Spanish American War. However, most analysts benchmark 1913 and the advent of the Fed. The BLS’s own CPI Inflation Calculator shows that a 1913 dollar presently has 4¢ of purchasing power. In other words, the value of that 1913 dollar has devalued by 96% since the Fed came into being.
The price of gold in 1913 was fixed at $20.67. In the intervening years — and even taking into consideration the corrective consolidative phase since the 2011 peak — the price of gold has risen a whopping 6,189%.
Can the dollar’s value really erode further? Absolutely. Over time, that 4¢ in purchasing power will become 2¢, will become a penny and then we’ll be talking fractions of cents. It is the inevitable reality of a fiat currency in a net-debtor nation.
And what of that debt? Last month, Congress suspended the debt ceiling yet again, allowing our national debt to surge beyond $20 trillion.
When the debt ceiling is reinstated on December 08, you should have no doubt as to what will happen. Oh sure, there may be at least a little debate next time, but the debt ceiling will be raised or suspended once again. There is absolutely no reason to consider any other conclusion. Since the very first debt ceiling was implemented in 1917, there’s never been a level that hasn’t ultimately been exceeded. In it’s entire 100-year history, the debt ceiling has never been lowered.
If you asked me to bet the “over/under” on the debt in 2027, I would bet the over at $35 trillion. — John Mauldin of Mauldin Economics
I think the national debt could easily double in the next decade, so I’d have to take the “over” as well. The only way out government will be able to service such a massive debt load will be to weaken the dollar, as it has since President Nixon closed the gold window in 1971, ending convertibility of the dollar to gold.
“I directed [Treasury] Secretary Connolly to suspend temporarily, the convertibility of the dollar into gold or other reserve assets, accept in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.” — President Richard M. Nixon, August 15, 1971
Nearly 50-years later, I think we can all agree there was nothing “temporary” about it. Nixon also called concerns about devaluation a “bugaboo,” claiming that “the effects of this action will be to stabilize the dollar.” In reality, nothing could have been further from the truth. The dollar tumbled in value against other currencies and against gold.
At the time of Nixon’s speech, gold was trading around $43 per ounce. By January of 1980, it had reached a high of $850, nearly a 20-fold increase.
The dollar index has fallen about 9% YTD in 2017. The recent 3% corrective bounce seems to have lost momentum, suggesting the dominant downtrend is re-exerting itself. A weaker dollar into year-end bodes well for higher gold prices over the same period. This may be the last opportunity to buy gold at these levels.
Gold jumped back above $1300 after a tame core CPI print for September, shows that the Fed continues to face an inflation problem. Headline inflation rose 0.5%, the biggest m/m jump since January, but it was still below expectations of +0.6% and attributed to hurricane distortion.
Like PPI yesterday, higher energy prices in the wake of the recent hurricanes pushed the broader measures of inflation higher. However, these gains are unlikely to be sticky.
This morning’s gains put the yellow metal decisively back above the entire 20-, 50-, 100- and 200-day moving average complex, returning considerable credence to the underlying uptrend. Next resistance is at 1308.80, the halfway back point of the decline off the September peak at 1357.50.
Gold remains fairly well bid, despite today’s firmer inflation data. The yellow metal is trading just below $1300, underpinned by geopolitical risks and perhaps slightly more dovish than expected minutes from the September FOMC meeting.
Below target inflation remains a considerable concern for the Fed based on the FOMC minutes that came out yesterday. However, that has seemingly done little to temper December rate hike expectations, which continue to hover near 90%.
Warmer producer inflation in September is being attributed at least in part to hurricane distortions. Focus now shifts to tomorrow’s CPI data, which is also expected to rise. The market and the Fed will need to ascertain if inflation is really picking up, or if these upticks are merely aberrations.
St. Louis Fed dove James Bullard says the central bank needs to defend the inflation target, or risk losing credibility. Continuing to raise rates when inflation is below 2% sends a signal that “the inflation target is not that important,” he warned.
“If you are going to have an inflation target you should defend it. If you say you are going to hit the inflation target then you should try to hit it and maintain credibility.” St. Louis Fed President James Bullard
In saying that it is a “denial of reality” to think inflation and rates would soon return to the norms of the ’90’s and 2000’s, Bullard is also acknowledging that something may have fundamentally changed. In the extreme, that may mean we will follow the path already blazed by Japan and that we are in for a perpetual state of easy monetary policy and moribund growth.
If that is to be the reality, one might wonder how stocks could possibly sustain current valuations. It would also favor the long-term downtrend in the dollar, which would be supportive for gold.
Gold re-approached the $1300 level in overseas trading, buoyed by heightened geopolitical tensions and a toppy-looking dollar. The yellow metal has retreated modestly intraday in the wake of warmer than expected inflation data.
U.S. PPI rose 0.4% in September, stoked by hurricane distortions and in line with expectations. Core PPI jumped +0.4% as well, which was above expectations of +0.2%.
Initial jobless claims fell 15k last week, suggesting that the hurricane effect on labor may already be reversing. However, it remains to be seen if that will be sufficient to reverse the existing downtrend in payrolls that had developed long before this hurricane season.
A move back above $1300 would put gold above the 20- and 50-day moving averages, returning confidence to the dominant uptrend. The halfway back point of the recent correction comes in at 1308.80.
Gold is maintaining a consolidative tone as traders await the minutes from the September FOMC meeting at 2:00ET. The recent bounce in the dollar seems to have lost momentum, which should help to underpin the yellow metal.
Immediately following the FOMC meeting, Janet Yellen warned that “payroll employment may be substantially affected in September” as a result of the hurricanes. However, the actual NFP print for the month was well below even the most pessimistic projection.
While a payrolls rebound would seem likely for this month, pay attention to the trend. If there is another bad number (it need not be negative necessarily), maintaining the “labor market continued to strengthen” line will become difficult. If the Fed is missing on both the inflation and jobs fronts, it seems like a rate hike in December would be ill-advised.
However, we won’t get the next jobs report for several more weeks. Until then, look for gold to garner support from the heightened geopolitical tensions and weakness in the dollar.
TASS news agency quoted North Korean Foreign Minister Ri Yong Ho as accusing President Trump of lighting “the wick of war.” Meanwhile, the U.S. and South Korea conducted more joint training missions that North Korea will assuredly view as provocative.
Catalonia sort of declared independence from Spain yesterday, saying they had the mandate to do it, but suspended it for the time being in favor of further dialog. Spain wants to know if they’ve declared independence or not and are reportedly considering direct rule over Catalonia. This saga is far from over.
Gold is consolidating below the $1300 level as traders await the minutes of the September FOMC meeting. Geopolitical tensions and a softer dollar are seen as being supportive to the yellow metal.
The Fed paused the recent tightening cycle in September amid persistently sluggish inflation. The minutes will perhaps provide some additional clarity as to just how concerned the members are and if current market expectations for a December hike are realistic.
Recent gains in the dollar index stalled well shy of the 100- and 200-day moving averages. The trend is still down and negation of this 92.90/88 support level would return considerable confidence to that trend, which should push gold higher.
Gold jumped back above $1290 in earlier trading, driven by strong physical demand from India and China. Risks appetite has been tempered this week by heightened geopolitical tensions and a loss of monetum for President Trump’s tax plan.
Catalan President Puigdemont was supposed to speak before the parliament about an hour ago, but that has not happened yet due to a reported disagreement about the text of the declaration. Speculation is that he will declare independence from Spain, or at least lay-out a path to independence. Spain is adamantly opposed to such a move and is prepared to arrest Puigdemont.
LATEST: Puigdemont Speech To Catalan Parliament Delayed One Hour Over Disagreement With CUP Over Declaration Text https://t.co/2Sk9assFH0
Despite the rising level of uncertainty — and the persistent unevenness in U.S. economic data — markets continue to believe the Fed will raise rates in December. It seems to be in the best interest of the Fed to stoke those beliefs in order to keep asset bubbles at least somewhat in check.
If markets get the sense that the economy is slowing and the Fed is going to remain on hold through year-end, the bubbles could continue to inflate leading to an untenable situation. The current situation where any news — good or bad — is good news for stocks, can’t go on indefinitely.
Gold extended to the upside in overseas trading amid rising geopolitical risks and mounting concerns that the President is going to have difficulties passing tax reform. The yellow metal is up more than $30 since hitting an 8-week low at 1260.10 on Friday.
Catalonian President Puigdemont is slated to address parliament today and is expected to declare independence from Spain, or at least a movement toward independence. Spanish PM Rajoy has vowed that “Spain will not be divided” and that he is prepared to employ “all means” within the law to preserve national unity.
Bloomberg has reported that Spanish National Police are in place and prepared to arrest Puigdemont. If the Catalan police attempt to shield Puigdemont, there is the risk of violence. However, it is the longer-term and broader implications for Spain and Europe that are of concern to markets.
The Hill reports this morning that based on recent rhetoric, Kim Jong Un may believe that a U.S. decapitating strike is imminent. That may prompt the North Korean leader to launch a preemptive strike.
There is growing concern that President Trump’s tax reform plan is losing momentum. This had been a big driving force in the stock market rally as investors salivated over the proposed corporate tax cut. This is a must-win issue for the President, given the failure of repeal-and-replace and the lack of progress on immigration reform and the the wall.
Gold firmed in overseas trading as Chinese markets reopened after the long Golden Week holiday. Additionally, the North Korean situation seemed to be escalating yet again, providing a bit of a safe-haven bid.
U.S. markets are on a partial holiday, with the Treasury market closed today, but focus remains on the mixed data in recent jobs report. On Friday, the Labor Department reported that nonfarm payrolls dropped 33k in September. It was the first negative print in 7-years, but markets were quick to dismiss it as hurricane distortion and latch on to the uptick in wages and the drop in the unemployment rate.
Nonetheless, St. Louis Fed President Bullard called the negative number “startling.” As noted in my Friday commentary, the NFP data rolled over long before Friday’s negative print and the current hurricane season.
I’m sure the official Fed line will categorize weakness in payrolls as “transitory,” just as they have for inflation. Bullard thinks we need to see more data before committing to another rate hike and I suspect Minneapolis Fed President Kashkari will likely echo that sentiment when he speaks at a regional economic conference tomorrow.
Surprisingly, Fed funds futures as of Friday’s close continue to see a rate hike in December as all-but a sure thing. We’ll see if those expectations have tempered somewhat when that market reopens tomorrow.
For now, gold remains consolidative to corrective. The fact that losses seem to have stalled ahead of the 200-day moving average is encouraging, as is today’s move back above the 100-day MA. A rebound above $1300.00/1308.80 will further ease pressure on the downside and return a measure of confidence to this year’s uptrend.
Gold starts the week at a 5-session high after finding support on Friday at the 1260.00 level in the wake of September’s negative nonfarm payrolls print. Heightened geopolitical tensions are also providing support to the yellow metal.
St. Louis Fed President James Bullard called the negative NFP number “startling” and said more data were needed before committing to a December rate hike. Nonetheless, Fed funds futures continue to suggest the probability of a rate hike is all-but a sure thing.
There will be quite a bit of FedSpeak again this week. We’ll see if anyone else is troubled by the deterioration in the labor market. As noted in commentary on Friday, the trend in payrolls rolled over long before this hurricane season.
Geopolitical tensions are on the rise again amid expectations of an impending North Korean missile tests. The UK is reportedly developing a war plan as such a test may result in a U.S. military response.
The Treasury market and the Fed are closed today for Columbus Day. However, Chinese investors are back in the mix after the long Golden Week/National Day holidays.
Gold has rebounded after falling to an 8-week low in the wake of this morning’s jobs report. The yellow metal is now higher on the day and more than $10 off the intraday low.
Nonfarm payrolls for September saw the first loss of jobs in 7-years. The NFP print was -33k, well below expectations of +87k, versus a positive revised +169k in August (was +156k). That low expectation was already deemed to have taken into consideration hurricane distortion, so today’s miss was pretty significant.
Nonetheless, the market was quick to dismiss the bad number as hurricane “noise” and latch on to the better than expected 0.5% rise in average hourly earnings. However, there is perhaps some reason to be suspicious.
Additionally, the trend in payrolls had rolled-over long before today’s negative print and long before this hurricane season.
Today’s intraday rebound in gold — and retreat in the dollar — may just be profit-taking ahead of the weekend, but it could also indicate that investors are taking a more discerning look at today’s data and eschewing that initial spin.
Speculation this morning that North Korea may stage another missile test as soon as next week has heightened risk aversion. A Russian diplomat recently returned from the DPRK told reporters that the mood in North Korea was “rather belligerent” and that they may have a missile capable of reaching the west coast of America.
With the additional risk that Catalonia may declare independence from Spain on Monday, risk appetite seems to be evaporating. How Spain might react to that declaration of independence and the broader implications for the EU present considerable uncertainties. I don’t believe Spain can allow this to happen, so I envision the police or military moving to block access to the Catalonian parliament or even detaining key politicians.
At this point, the Fed funds futures market sees a December rate hike as all-but a sure thing. However, December is still a long way off and those expectations can only be trimmed from here.
Gold remains defensive, edging to a new 7-week low as the market seems inclined — at least initially — to shrug off the weak headline jobs data as hurricane distortion. The dollar index reached a 10-week high, modestly exceeding the August high at 94.15.
U.S. nonfarm payrolls fell 33k in September, well below expectations of +87k, versus a positive revised 169k in August (was +156k). July was revised down to 138k, from 189k previously.
While the hurricanes clearly affected the data in September, payrolls began trending lower earlier in the year, before the bad weather rolled in. This may in reality not be transitory at all. So the question now is, how will the Fed view the data? They will likely be encouraged by the beat in earnings.
There is FedSpeak from Kaplan, Bostic, Dudley and Bullard today, so we won’t have to wait long for the central bank’s initial spin. In fact, Dalls Fed hawk Kaplan has already indicated on CNBC that he’s “not there yet” with regard to a December hike, but is open minded.
Gold is maintaining a consolidative tone at the low of the recent range, weighed by a firmer dollar and the risk-on mindset that continues to drive stocks higher. Look for price action to be limited ahead of tomorrow’s important release of September jobs data.
The dollar index has eked out a new 7-week high at 93.96, but the August highs at 94.15 remains intact at this point. Dollar strength is being driven primarily by weakness in the euro, amid uncertainty as to the broader implications for Europe if Catalonia declares its independence from Spain on Monday.
Interest rate differentials continue to favor the dollar as well. While Janet Yellen laid out a number of concerns in a speech last week that could warrant easier monetary policy, the market now sees an 81% probability of a rate hike in December.
There does seem to be some optimism about growth, but inflation remains persistently weak. Those rate hike expectations may be tempered somewhat if the jobs report is weaker than expected. At this point, median expectations are looking for 87k new payrolls added in September and the jobless rate to hold steady at 4.4%.
If the real underlying purpose of tighter policy is to let some of the air out of asset bubbles, clearly the Fed is going to have to get more aggressive. At this point, good news is good news and bad news is good news for stocks. That however can not go on forever and gold is displaying good resilience in the face of this solid risk appetite.
Gold is consolidating within yesterday’s range as the market looks ahead to tomorrow’s jobs report. Solid resistance in the dollar index has capped the upside thus far, which is helping underpin gold as well.
U.S. initial jobless claims fell 12k last week as hurricane affects work there way through the system. However, a soft 87k rise in nonfarm payrolls is anticipated for September, with perhaps some downside risk based on the ADP jobs survey miss yesterday.
Recent strength in PMI data has pushed December rate hike expectations back above 80%, but weak jobs data could reverse that bias. If rate hike expectations dim again, look for the greenback to retrace recent gains, shich should bolster gold.
Gold firmed in overseas trading after the dollar backed off its recent highs. While some of the yellow metal’s gains have already been retraced, the dollar is up against a formidable resistance level and is quite overbought.
The U.S. ADP jobs survey came in below expectations, weighed by weather affects. This sets up some downside risk for the already weak September nonfarm payrolls expectations.
Reuters is reporting that Catalonia will declare independence from Spain on Monday. Does Mariano Rajoy and the government of Spain allow that to happen? Given the violence already used in an effort to squelch the referendum, will they go so far as to shut down the Catalonian Parliament?
Jeff Gundlach is predicting that Neel Kashkari will be the next Fed chair. “He happens to be the most easy money guy that’s in the Federal Reserve system today and that’s why he may win,” said Gundlach. That’s the exact reason that I thought he might seek to reappoint Yellen and why Kevin Warsh was an unlikely candidate. Easy policy and a weak dollar would certainly make execution of President Trump’s economic agenda more likely to be successful.
Gold firmed slightly intraday after eking out a 7-week low in overseas trade. The yellow metal continues to be pressured by heightened risk appetite associated with the President’s tax cut proposal and a firmer dollar.
The greenback has garnered support both from the proposed tax cut and rising expectations that the Fed will lift rates one more time this year, despite persistently weak inflation. The dollar index also set a 7-week high today, shy of good resistance at 94.14.
The overall trend remains unmistakably negative since peaking 103.82 early in the year. That means the dollar index is still down about 10% year-to-date, even after the last 3-weeks of gains.
As noted in this morning’s snapshot, the next big event will be the release of September jobs data on Friday. Expectations are running at just +87k for nonfarm payrolls, factoring in a significant weather related hit. Even if NFP misses expectations, the market may quickly discount the news as temporary hurricane fallout, but will the Fed discount a bad number as well?
North Korea threatened to “bring nuclear clouds to the Japanese archipelago,” while mocking PM Abe as a “headless chicken.” Japan is definitely within missile range and Pyongyang says they will be “the first victim of nuclear disaster in the world.”
Japan called the latest threats outrageous and provocative. I imagine they, along with South Korea, wish President Trump would quit poking the hornet’s nest via Twitter.
Until the U.S. evacuates not essential military personnel and family members from the region, it seems unlikely that the U.S. will initiate any action against the DPKR. However, the constant goading from each side makes the situation inherently unstable and provides an underpinning to the gold market.
Gold is trading in a narrow range, having edged to a new 6-week low overseas. Heightened risk appetite and December rate hike expectations have sparked a rebound in the dollar over the past three-plus weeks, which has weighed on the yellow metal.
Today’s economic calendar is very light with just September auto sales. Traders may already be looking ahead to Friday’s jobs data. Median expectations for nonfarm payrolls is just +87k. The unemployment rate is expected to hold steady at 4.4%.
Additionally, Chinese markets are closed this week for the Golden Week holiday, which is likely sapping Asian demand. This year they are calling it a “Super” Golden Week because the Mid-Autumn Festival coincides with the National Day holiday. China’s tourism administration says they expect about half of the 1.3 billion population to be on the move this week.
Gold retreated further to begin the week, setting a new 6-week low at 1271.15 amid heightened risk appetite and a firmer dollar. There has also been no significant heightening of geopolitical tensions of late, which may be also weighing on the yellow metal.
December rate hike expectations have eased somewhat in the wake of last week’s soft inflation data, but investors still seem to be thinking the Fed is more likely to tighten than not. Mixed data today didn’t offer any clarity on that point.
Minneapolis Fed dove Kashkari thinks the central bank should be cautious until inflation gets back to 2%. However, later today Dallas Fed hawk Kaplan will likely offer the contrary opinion.
Further stoking risk appetite is the GOP tax plan, which includes a significant cut to corporate taxes. While stocks are perhaps understandably optimistic about the likely impact on profits, there is also a reasonable concern that the lower tax revenue is going to lead to bigger deficits and a bigger national debt.
Amid the initial euphoria of lower taxes for some, little attention is being paid to the downstream implications for deficits, the debt, Treasuries, the dollar and by extension monetary policy. Can the Fed really pursue tighter policy if the tax plan is going to blow a hole in the budget?
Gold remains on the defensive after Friday’s soft close. The yellow metal is being weighed by a rebound in the dollar to challenge last week’s highs and revived risk appetite amid investor hopes for U.S. tax cuts.
Dollar gains are primarily associated with euro weakness in the wake of the Catalonia referendum that has thrown Spain — and the broader EU — into crisis.
Today’s calendar includes Markit manufacturing PMI and U.S. manufacturing ISM for September, as well as construction spending for August. We’ll also hear FedSpeak from Dallas Fed hawk Kaplan.
While the geopolitical rhetoric between the U.S. and North Korea is still flying, the recent absence of new DPKR missile and nuclear tests has pushed the still percolating conflict off the front page. South Korea is anticipating that fresh North Korean provocations are in the offing for this month.