USAGOLD/Peter A. Grant/02-14-17
Gold rose initially on Tuesday after an indication of higher inflation. However, these gains could not be sustained as Janet Yellen continued to beat the drum of multiple rate hikes this year.
January PPI came in a +0.6%, twice expectations of +0.3%. Core was +0.4% on expectations of +0.2%. Higher energy prices were cited as the primary driver and we’ll find out tomorrow if these same forces carried through to consumer prices. CPI is expected to show a 0.3% gain in January, with core rising 0.2%, when the data are released tomorrow morning.
Gold gained on PPI data, but retreated when Janet Yellen suggested in testimony before the Senate Banking Committee that it would be unwise to wait too long before raising rates again. The suggestion was that March is on the table, but the market seems to think June is the more likely reality.
“As I noted on previous occasions, waiting too long to remove accommodation would be unwise.” — Janet Yellen
Ms. Yellen expressed some degree of caution though, adding that “considerable uncertainty attends the economic outlook,” citing “possible changes in U.S. fiscal and other policies.” In essence, everything could change based on the fiscal policy agenda pursued by the Trump administration.
The generally hawkish tone pushed yields higher and the dollar index reached new 4-week highs. U.S. stocks dipped and then recovered as the prospects for a corporate tax cut seems to outweigh tighter monetary policy at this point. We’ll see how that plays out if the dollar recovers further.
As for Ms. Yellen’s optimism, I redirect you to yesterday’s DMR, where we talked about anemic growth. When Yellen said the rate hike this past December was justified because of an improving economy, she seemed to be ignoring the rather significant growth slowdown seen in Q4-16.
We’ll wait and see how this all reconciles in the weeks and months ahead. However, there is still enough uncertainty out there to keep the gold market underpinned.