Courtesy of Everett Millman and GainesvilleCoins.com ….
ABSTRACT: As equities markets pulled back amid mostly soft economic indicators, the precious metals had an early-week rally snuffed out by Friday’s close, as both gold and the Dow Industrials have essentially wiped out all of their gains thus far through the 2015 calendar year.
GOVERNMENT & POLICY
Manipulation Is As Easy As F-O-M-C
The Federal Reserve Open Market Committee (FOMC) held its monthly meeting on Tuesday and Wednesday this week. In some ways, this time around, it’s different: the committee has opened itself up to rampant speculation due to its new meeting-by-meeting evaluation of whether or not the federal funds rate will finally be lifted from its near-zero level. If the chances of a rate hike were low before this week, they’re infinitesimally small now.
The easiest cover for the committee is that transient, seasonal drags on the economy–i.e. the cold winter weather and the labor disputes at West Coast ports–resulted in much of the dismal economic data from the first quarter. If we ignore for a moment that the weather is seemingly always to blame for shoddy quarterly performances, we can accept that the downturn in the U.S. during Q1 was exactly as the Fed characterized it, transient.
If that’s the case, then the Fed must believe that the real economy is actually in far better shape than the most recent numbers would indicate. In other words, we’re told publicly that our most influential central bankers collectively agree that the recovery is working. So why must rates remain abnormally low?
The most obvious answer to this rhetorical question is that the Fed doesn’t want to unleash a tidal wave of hawkish activity in the markets. Several times over the last year or so, analysts have characterized the tension between the Fed and the financial markets as a “game of chicken.” This seems to be what we’re watching, lending even more credence to the notion that the relative health of the markets is no longer even a ballpark estimation of how well the real economy is functioning. It’s merely a public game of chicken where neither side believes the other won’t swerve at the last moment.
Even as it attempts to tout an “economic recovery”–one whose hiccups are surely transient, of course–the Fed is nevertheless engaged in market manipulation. The alibis for delaying interest rate normalization are already baked into Fed statements: the FOMC announcement clearly reiterated that rates may remain unusually low for some time even after the central bank’s targets for inflation and unemployment are met. Unsurprisingly, the odds that analysts are giving for a rate hike in September are just 25%. For June, it’s below 5%.
At this point, finding any number of convincing reasons not to raise rates seems to be the Fed’s game plan. Yet it would stand to reason that just at the moment market sentiment hits a critical mass of believing that rates aren’t going anywhere is precisely when the Fed will act.
Here’s to the currently-inconceivable interest rate lift-off in T-minus 2 months!
News & Notes
The Supreme Court hears arguments this week regarding the constitutionality of individual state’s bans on same-sex marriage.
Riots erupt in Baltimore, Maryland in response to the death of a 25-year-old black man, Freddie Gray, while in police custody.
Gold’s Rebound Fleeting While Global Stocks Recede
It was a rough week for equities as Wall Street and its international counterparts all pulled back on slowing momentum in the world’s two largest economies, China and the United States. Improving sentiment in Europe, however, helped the euro rally to a two-month high against the dollar, above $1.12. Although the weakness in stocks and the softening of the dollar was initially positive for the precious metals, spot prices were battered sharply lower by week’s end.
Gold spiked more than $20 on Monday, and added another $15 on Tuesday. Some of this action was short-covering, while ongoing uncertainty surrounding Greece and mostly disappointing corporate earnings in the U.S. also drove some demand. Silver was sharply higher at $16.70/oz, up about a dollar per ounce from the previous Friday.
Tuesday saw the stock markets slump into the red as the veil is slowly pulled back to reveal the real economy. Homeownership hit a new 25-year low, while the dollar lost about 0.75% against its peers. The Dow Industrials and S&P 500 finished slightly better than the Nasdaq, which was dragged down by shares of Twitter sliding a staggering 20% on the day. This was the result of a financial intelligence service, Selerity, leaking the company’s earnings (ironically enough, through Twitter). The social media firm still posted more than $400 million in Q2 revenue, but this was below expectations. The sell-off was so bad that the company’s shares halted trading at one point in the day. Meantime, Apple, Inc. shined despite the the rest of the market, as their Q2 earnings topped estimates, surging 33% due to impressive sales of the new Apple Watch. The company is now on track to become the world’s first trillion-dollar corporation in the near future.
Wednesday saw the release of Q1 GDP numbers in the U.S., which showed a paltry 0.2% annualized growth, the slowest on record since the financial crisis. Transient factors such as the West Coast port disputes and the inclement winter weather were also cited as dragging on GDP. Nonresidential construction saw its fastest decline in 4 years, tumbling 23% during the quarter. The dollar plunged again, losing nearly 1% on the day to close just above 95.0 on the DXY index.
Yet, the one silver lining is that the massive spending cuts by big oil firms have likely all been front-loaded in Q1, opening the prospect of more uninhibited growth during the second quarter.
Crude oil rallied this week, with both major benchmarks advancing despite dipping into the red on Friday. Brent crude remained above $66/bbl while WTI was just below $59/bbl after touching a 4-month high on the back of its best monthly gains in 6 years. While it is unclear whether or not this recent surge will peter out, it is somewhat encouraging that crude prices are recovering even as Saudi Arabia pumps out its oil reserves at a feverish pace in order to gobble up more market share. Expect the record-high oil stockpiles around the world to ease up a bit when the strong seasonal energy demand during summer kicks in.
Wednesday was also the conclusion of the FOMC’s April meeting, and the committee essentially downgraded its outlook for the U.S. economy. Although the FOMC is now evaluating the possible increase to the federal funds rate on a monthly basis, the markets seem less convinced that this policy move is imminent than at any other time since the end of quantitative easing.
Analysts give virtually no chance of the rate hike coming at the committee’s June meeting, and it should be noted that the FOMC statement even included a comment about the Fed retaining flexibility to keep rates unusually low even after its targets for full employment and healthy inflation are reached. Overall, the consensus from various Fed watchers is that the central bank is taking a less rosy view of the economy, and quietly harbors fears that the global economy may simply be too fragile for any normalization of monetary policy just yet.
Stocks slid about 1% in early morning trading on Thursday, as equities were in the red in just about every corner of the globe. The FTSE 100 in London and the CAC 40 in France were notable exceptions, as Europe may finally be breaking out of its recession if the Greek situation can be resolved.
In spite of a modest rise for consumer spending in March, fairly robust consumer sentiment in the States, and first-time jobless claims hitting a 15-year low, falling shares on the Dow have wiped out essentially all of the index’s gains for 2015, though the S&P and Nasdaq have fared better over the past 4 months. While gold and silver again tumbled about 2% each on Thursday, bonds fell significantly, with 10-year yields rising to 2.09%. This paled in comparison, however, to the sell-off of the German Bund, which saw its 10-year yields skyrocket from as low 0.08% last week to 0.39%, adding 20 basis points in just the last two days.
Markets in Europe and China were closed Friday in observance of International Worker’s Day, which is alternately known as Labour Day or May Day. Shares in the U.S. and U.K. did open higher on Friday, while the precious metals again sank into negative territory when trading opened. While silver held just above the $16/oz mark by week’s end and palladium stood pat at $780/oz, gold struggled to find support at $1,180, falling $10 to about $1,175/oz. Spot platinum sat some $35 below the gold price at $1,135/oz.
GEOPOLITICS & WORLD EVENTS
News & Notes
Greek Finance Minister Varoufakis endures sharp rebukes from European finance ministers at meetings held in Riga, Latvia this week. The possibility of an alliance between Greece and Russia continues to stoke anxieties in Europe.
Iranian authorities detain a commercial cargo ship from the U.S., prompting the military to send planes and a destroyer to the Strait of Hormuz to monitor the situation. This is straining the finalization of a multilateral nuclear deal with Iran that is currently on the table.
Ahead of elections in the U.K., GDP growth declines to its slowest pace in 3 years. Immigration concerns and a weak economic outlook in Great Britain may open the door for the controversial U.K. Independence Party (UKIP) to match its success in the 2014 European Parliament elections.
China’s stock market continues to overheat in part due to a new round of economic stimulus. Japan has also kept the QE taps running, and could increase its stimulus program to $1 trillion per annum.
A 7.9-magnitude earthquake unleashes an humanitarian crisis in Nepal, thus far claiming 5,500 lives, causing 11,000 injuries, and broadly affecting some 8 million people.
The Bank of Italy reveals it is considering a solution for €100 billion of bad loans on state banks’ books, potentially freeing these institutions to expand lending.
Cash-strapped Venezuela agrees to exchange about 1.4 million ounces of its gold reserves to CitiBank for $1 billion. Details about the swap remain undefined.
A LOOK AHEAD: The reporting of China’s monthly Manufacturing PMI will happen overnight on Sunday. On Monday, Flash Services PMI and the Dallas Fed Manufacturing survey will both be announced in the U.S. while Japan releases its retail sales figures for April.