Monthly Archives: May 2016
U.S. Market manufacturing PMI (flash) fell to 50.5 in May, below expectations of 51.0, vs 50.8 in April. Lowest read since Sep 2009.
Gold near three-week lows on Fed rate expectations
23-May (Reuters) — Gold dipped on Monday to a near three-week low on expectations the U.S. Federal Reserve will hike interest rates as early as June. Bullion has been under pressure since the Fed last week released the minutes of its April meeting, which showed officials believe the U.S. economy could be ready for another interest rate increase next month.
Higher interest rates increase the opportunity cost of holding non-yielding bullion.
Eric Rosengren, president of the Federal Reserve Bank of Boston, said on Friday that conditions for a rate increase are “on the verge of broadly being met”.
“The Fed minutes were clearly more hawkish than expected and this has resulted in some change in sentiment and there is now an increased likelihood that they may raise rates in June or
July,” ABN Amro analyst Georgette Boele said.
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PG View: Remember what happened when the Fed hiked last December? Gold launched on a 20%+ rally . . .
Greek Parliament Approves Fresh Austerity Measures to Secure Bailout Cash
22-May — Greece’s parliament approved a raft of fresh taxes and austerity measures that the country must legislate to unlock further rescue loans, as the country’s most influential creditors—Germany and the International Monetary Fund—remain deadlocked over debt relief.
The measures were backed by the 153 lawmakers from the ruling Syriza party and its junior coalition partner, the Independent Greeks, securing the majority in the 300-seat parliament late Sunday.
But Syriza lawmaker Vasiliki Katrivanou voted against two of the measures included in the bill. Early Monday, Mrs. Katrivanou announced her resignation from parliament. Another Syriza candidate from the prior elections, George Kyritsis, will run in her stead.
Parliamentary approval could pave the way for eurozone finance ministers meeting on Tuesday to clear the next disbursement of funds to Greece. But that could be complicated as the IMF and eurozone governments and especially Germany remain at odds over when Greece should get debt relief and how deep it should be.
“European leaders get the message tonight that Greece meets its obligations,” Prime Minister Alexis Tsipras told lawmakers ahead of the vote. “Starting from tomorrow it remains that the other side meets its own and I think this will happen.”
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PG View: Remember when Tsipras and Syriza got elected on the platform of no more austerity? Good times . . .
Gold lower at 1246.66 (-5.69). Silver 16.38 (-0.189). Dollar higher. Euro lower. Stocks called mixed. U.S. 10-year 1.86 (-1 bp).
Gold favored as Fed may have to backtrack, Mideast bank says
Bloomberg/Ranjeetha Pakiam/5-23-2016
“Gold may rally to $1,400 an ounce in the near term and go on hit $1,800 by the end of next year as the world’s central bankers err, according to the largest lender in the United Arab Emirates, which is advising clients to hold up to 10 percent of portfolios in bullion and buy recent dips.”
Week in Review (Video) – May 20, 2016
Look For Helicopter Money, Not Rate Hikes Says Marc Faber
20-May (Kitco News) – One famed economist, known for his usually “gloomy” economic outlook, says he doesn’t see the Fed’s tightening cycle continuing this year.
Marc Faber, publisher of the Gloom, Boom, & Doom report, outlined his views as markets await Wednesday’s Federal Open Market Committee minutes. Despite hawkish comments recently coming from Fed officials, the marketplace is not sure if the central bank can tighten just yet.
“My impression is that the Fed will not increase rates any further this year – my impression is that the economy is actually weaker than the statistics would suggest,” Marc Faber, publisher of the Gloom, Boom, & Doom report, told Kitco News Wednesday.
“My impression will also be that eventually there will be some type of helicopter money in the U.S, or the launch of QE4.”
The contrarian investor also chimed in on gold’s rise so far in 2016, which he expects will continue as the Fed delays tightening.
“I feel that the gold price and gold miners still have a significant upside potential,” he noted.
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The Daily Market Report: Gold Remains Defensive on Rate Hike Expectation Shift
20-May (USAGOLD) — Gold is maintaining a defensive posture in the wake of midweek losses associated with the shift in Fed rate hike expectations. The dollar remains firm near 7-week highs, which is weighing on the yellow metal.
In the wake of Wednesday’s release of the minutes from the April FOMC meeting, rate hike expectations have surged to 30% for June and 55% for July. However, it leaves one wondering why the economic optimism expressed in the minutes was not conveyed in the policy statement immediately following that meeting.
My guess is that uncertainty continues to reign. As the Fed tries to walk that fine line between optimism and caution, guidance becomes completely clouded. The allows the market to latch on to specific — often contradictory — verbiage in the statement or minutes and speculate on the central banks underlying intentions. That’s no way to run monetary policy as you continue to tout transparency and clarity.
If the goal truly is clarity, there’s lot’s of room for improvement. If the goal is really to keep markets off-balance and confused . . . mission accomplished.
The market will be closely watching growth and inflation data in the coming weeks, ahead of the June FOMC meeting and the end of Q2. In the data one can hope to find the clarity that the Fed can’t quite seem to get a handle on. Remember that the despite all the words surrounding it, the key phrase in all Fed communications has to do with ‘data dependence’.
While gold is poised to notch its third consecutive weekly decline, losses since the high was set early in the month have been less than 4%. That leaves the yellow metal up about 18% YTD and nearly 20% since the cycle low was hit last December. The indication being that recent losses are a reasonable correction within the dominant uptrend.
U.S. existing home sales +1.7% to 5.45M in April, above expectations of 5.39M, vs positive revised 5.36M in Mar.
The Fed Has Something to Prove to Wall Street
20-May (Bloomberg) — It’s hard to fault investors for being complacent when the Federal Reserve says it’s on the brink of raising interest rates again.
Policy makers have been delivering that message since the start of last year, only to later back off when the data showed they overestimated the strength of the U.S. economy. This scenario is playing out again in global markets. Even after the Fed’s minutes Wednesday sent a strong signal that an increase may come as soon as June, the bond market is only pricing in a 28 percent chance of that happening.
“The Fed and other central banks can get hawkish trying to manipulate the direction of rates, but the market says we don’t believe you,” said Steve Major, the London-based head of fixed-income research at HSBC Holdings Plc, which is one of the 23 primary dealers of U.S. government securities that trade with the Fed. “Structural headwinds to growth and the international backdrop are limitations on how far U.S. rates can go.”
While minutes from the Fed’s April meeting indicated policy makers considered a rate hike likely next month if the economy continued to improve, investors see plenty of obstacles. A referendum in Britain on June 23 will decide whether the country remains a member of the European Union. Growth momentum in China is fading following a credit-fueled rebound earlier this year and the dollar is rising again.
…So far, the markets have been right to call the Fed’s bluff. The Fed officials have cut their median forecast for the long-term fed fund rates to 3.25 percent, from as high as 4.25 percent in 2012.
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Can gold keep rising?
20-May (MarketExclusive) — Gold appeared to behave well in Asian trading on Friday following Thursday’s pullback. The growing possibility of the Fed raising interest rates doused appetite for gold as investors turned attention to yield-bearing assets. The gold market generally flourishes when interest rates are low and that explains why gold prices recently got hit following the release of the Fed’s minutes for their April meeting at which officials set sight on June and July for possible rate increases.
…The Fed’s April meeting discussed possible interest rate hikes in the second half of 2016. According to the minutes, the officials appeared to favor making a rate increase move in either June or July if economic data showed that the U.S. economy was picking up pace. The release of the minutes strengthened the dollar, making dollar-priced commodities such as gold expensive in the eyes of buyers holding currencies other than the USD. Additionally, the minutes generated appetite for equities and other yield-bearing assets, thus leaving gold in the cold.
…Despite the recent pressures on gold owing to a growing possibility of interest rate hikes and recovery of oil prices, gold prices remain up 19% so far in 2016. A missed Fed interest rate hike in July could once again trigger interest in gold.
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PG View: Gold has indeed bee pretty resilient in the face of this marked shift in rate hike expectations . . .
Gold easier at 1255.78 (-1.23). Silver 16.54 (+0.013). Dollar easier. Euro higher. Stocks called higher. U.S. 10-year 1.87% (+2 bps).
Dollar Holds Key to Whether Fed Has Scope to Raise Rates in June
19-May (Bloomberg) — As soon as the Federal Reserve released meeting minutes describing a weaker dollar, the currency surged to a seven-week high.
That’s the dilemma facing U.S. central bankers, who are weighing economic data to determine when next to raise interest rates. The Fed’s signals of a potential June move may backfire if the resurgent greenback undermines growth and weighs on stocks and oil prices, ultimately eroding the case to boost borrowing costs.
The dollar’s surge since mid-2014 hurt the outlook for growth and inflation, and contributed to the Fed delaying to December its liftoff from near zero, according to strategists. Officials from Janet Yellen to Stanley Fischer have warned that the dollar’s appreciation will limit the pace of tightening.
“The Fed’s in a bind,” said Douglas Borthwick, the New York-based head of currencies at Chapdelaine & Co., a unit of the British interdealer brokerage Tullet Prebon Plc. “The Fed can’t raise rates because it means a stronger dollar, and it means deflationary pressure in the world. The Fed’s under pressure to talk a mighty game, but it can’t actually do a lot.”
…“The Fed’s very thought of a June increase — much less the signals it may have been trying to convey to decrease the risk of complacency — could reverse some of the very trends they liked so much,” said Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee.
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Riksbank Deputy Governor Cecilia Skingsley Discusses Potential for Helicopter Money
19-May (Riksbank) — Now that Swedish inflation is starting to approach the target, it may be time to think about the conditions for monetary policy over a longer perspective, according to Skingsley. If it has become more difficult to conduct monetary policy, what can the Riksbank and other central banks do?
Skingsley says that it will not be possible, in the future, to conduct monetary policy in the way and with the impact we have previously been accustomed to. And this is something for which we need to prepare ourselves. She notes that, alongside cutting the policy rate to below zero and purchasing securities, so-called helicopter money could provide a hypothetical path to take to increase scope for monetary policy.
“It is probably something that should not be tried until other possibilities have been exhausted. However, considering the difficulties that are weighing many of the world’s economies down, I think that it is wise to discuss the different possibilities, without closing any doors,” says Skingsley.
She also examines the possibilities of raising the inflation target to create a greater degree of freedom in monetary policy.
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The Daily Market Report: Gold Retreats, But Confusion Over Fed Intentions Should Limit Downside
19-May (USAGOLD) — Gold extended lower, weighed by a firmer dollar and the recent spike in Fed rate hike expectations. The yellow metal slipped intraday to a three week low of 1242.90, which is less than 5% off the early May high of 1303.80.
Yesterday’s release of the minutes from the April FOMC meeting suggested that a June hike would be appropriate if data are consistent with GDP pickup in Q2. The Atlanta Fed’s GDPNow model is presently tracking at 2.5% for Q2. Other forecasts are not as high. While it may seems likely now that Q2 will be an improvement over the dismal Q1 print, there’s still six-weeks left in the quarter in which the data can deteriorate and undermine these expectations.
source: tradingeconomics.com
You may recall that the GDPNow model was calling for growth around 2% late in March. When the Commerce Department released the preliminary Q1 number, it was a mere 0.5%. The annualized growth rate has been trending gradually lower since Q3-14.
Investors seemed to gloss right over this sentence within the minutes:
“Several participants were concerned incoming information might not provide sufficiently clear signals by mid-June” https://t.co/o07k3AuF7j
— Pedro da Costa (@pdacosta) May 18, 2016
I would suggest that the jury is still very much out on whether the economy has improved enough to warrant another rate hike. However, the rise in market expectations of a hike certainly reduces the likelihood of unwanted market volatility if they were to pull the trigger.
Prior to the April FOMC meeting there were hints from the Fed that they would be looking to clarify their guidance. There have been periodic claims of such intent over the years, but in the past month, the Fed’s intentions have become ‘clear as mud.’
The moving of the goal posts goes all the way back to the Fed’s 6.5% unemployment target. As this level was approached in 2014, the Fed pulled it, and the goal posts have pretty much been on the move ever since.
The June FOMC meeting is also just nine-days ahead of the Brexit referendum date. They’d have to be pretty confident the citizens of the UK were going to vote in favor of staying in order to initiate a second rate hike.
There are a myriad of risks still looming over global markets. I suppose one could count a Fed rate hike among those risks: The stock market certainly seems less than enthusiastic.
Recent price movement in gold may prove to be just another temporary setback within the dominant uptrend. The lower prices have certainly resulted in higher call-volume at our offices.
U.S. leading indicator +0.6% in Apr, above expectations of +0.3%, vs +0.2% in Mar.
Gold Falls As Fed Rate Rise Speculation Boosts Greenback
19—May (WSJ) — Gold prices were slightly weaker in London Thursday, as growing expectations of a Fed interest rate increase supported the dollar.
Spot gold was down 0.3% at $1,254.84 a troy ounce in morning European trade, having hit a three-week low earlier in the session at $1,252.50 an ounce.
“Commodities, including gold and oil, took a hit from the repriced Fed odds,” said ANZ Research in a note.
The Federal Open Market Committee released the minutes from its last meeting late on Wednesday, with the market interpreting the tone as hawkish in its indication of the month of June as a strong possibility for the next increase in U.S. rates.
Markets are now pricing a 30% chance of a Fed hike by June, said ANZ.
The greenback firmed in the aftermath, as rate rises tend to boost the dollar and weigh on dollar-denominated gold. The WSJ Dollar Index was recently up 0.02% at 87.52, making the metal more expensive to buy for those holding other currencies.
Looking ahead, profit-taking could further chip away at the gold price.
“We would be wary in case fund longs start to take profits as their long positions have become quite extended in recent weeks,” says William Adams, head of research at Fastmarkets.
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