The Daily Market Report: Gold Firm as Chances for 2015 Rate Hike Continue to Dim

15-May (USAGOLD) — Gold rebounded from an intraday pullback, following another round of generally disappointing U.S. economic data. The yellow metal appears poised to notch its biggest weekly gain in since mid-January.

Industrial production fell 0.3% in April, below expectations of +0.1%. It was the 5th consecutive monthly decline, the longest string of negative prints since 2008, the heart of the Great Recession.

The Empire State Index rebounded to 3.1 in May, from -1.2 in April. This however was below expectations of 4.0.

The University of Michigan consumer sentiment index (preliminary) fell to 88.6 in May, well below expectations of 96.2, versus 95.9 in April. On the heals of the weak April retail sales data, those expecting a Q2 rebound from the dismal growth in Q1 have been dealt a significant blow.

With that significant blow to growth expectations, comes a significant blow to Fed rate hike expectations. Prior to today, consensus in some surveys continued to favor ‘lift-off’ in September. I suspect after today’s data, that will shift toward December, and perhaps even into 2016.

The Fed has been adamant that ‘lift-off’ is data dependent. In light of the recent data, I don’t see how anyone can legitimately think a rate hike will happen this year. There are still some that say June is on the table, but I imagine we won’t be hearing any more from them now.

Fed funds futures already reflect diminishing expectations of a September hikes. They put the probability at 17%, which is down from 30% a month ago.

Jared Dillian, writing for Mauldin Economics notes the yield curve is “getting steeper at an alarming rate.” If the Fed is about to raise rates, that’s not supposed to happen!

What the market is telling us is that the Fed waited too long to hike rates. Now inflation expectations are becoming unmoored. — Jared Dillian

While gold is a hedge for all the various forms of “-ations” (see Black Swans, Yellow Gold for the supporting evidence), the yellow metal is more broadly perceived to be the ideal hedge against inflation.

“[T]he yield spread most sensitive to inflation expectations, the spread between 10- and 30-year yields, is ripping higher,” says Dillian. If the yield spread is accurately serving as a harbinger of impending inflation, gold may soon be off to the races.

The yellow metal has put in a solid performance this week, but an opportunity is still evident here, in close proximity to the $1200 level.