By Gainesville Coins….
Against the backdrop of rising equities in both Asia and Europe, the U.S. markets were uneven in a short week of trading. Mounting unfavorable economic data and predictable ambiguity from the Federal Reserve have muddied the performance outlook for the second quarter, providing some modest safe haven support for the precious metals.
GOVERNMENT & POLICY
Dove This Even Make Sense?
The Federal Reserve is a news-making machine. But does its version of reality even make sense?
This week, Richmond Fed President Jeffrey Lacker stated that if all things remain equal in the interim, the federal funds rate should be raised in June. The likelihood of this move notwithstanding, this is purely for-show. In baseball, they call it a “Missouri fastball”–a Show-Me fastball, a pitch merely intended to influence the batter’s expectations of what will come behind it.
Lacker is playing his designated role: he’s generally a monetary hawk, dissenting with the majority of the FOMC on QE and ZIRP for all of 2012, but has voted with the patience crowd in both of this year’s policy meetings. He’s apparently been given his cue from the Fed to start moving the line in a more hawkish direction.
Whether or not Fed Chair Yellen–or anyone else at the central bank–wants to admit it, the Fed has absolutely no intention of raising rates especially soon. If the last few months of poor economic data isn’t a troubling enough sign, consider that the longer the Fed tries to delay normalizing rates, the less confident and more confused its hawks’ credibility becomes, and the more its capability of correctly managing the rate hike comes into question. Now is when the hawks must squawk, when anyone still believes them.
Even some in the mainstream financial media have begun openly questioning how the Fed will handle a rate increase scenario when it inevitably arises; admittedly, I’m all for criticizing the Fed’s agenda and the wisdom of its policies, but let’s not swallow the delusional narrative that the central bank is merely fumbling in the dark, and acts the way it does out of ignorance or blind innocence.
The Fed knows precisely what it’s doing, but it’s concerned with influencing the spin that the news stories will put on every step it takes in the coming months. Thus, we see this feigned incompetence shtick, which is employed by powerful institutions all the time: it’s always better to seem blind in your blunders than for it to be clear that you knew what you were doing the entire time.
So when you hear about dissent at the Fed over the timing and structure of the impending increase to the federal funds rate, remember that it’s convenient to appear to be of one opinion while quietly holding the opposite to be true when you know the audience wouldn’t stick around if they knew how the play is going to end.
Up and Down the Volatility-Go-Round
U.S. markets saw a choppy week of trading on largely disappointing economic data and new geopolitical developments abroad.
Stocks rallied on Monday while the precious metals slid, briefly reversing last week’s trend. Tuesday saw a 1% pullback for U.S. indices while the metals were flat. While stocks trickled even lower on Wednesday, it was the precious metals’ turn to rally, securing a solid advance for all four PMs on the week in spite of spot prices slipping on Thursday.
For the week, gold gained about $15 (+1.25%); platinum bounced $30 (+2.65%) from a 3-week low; palladium added $12 (+1.6%); and silver lagged behind, up only about 10 cents (+0.5%).
The metals rode the wave of bad economic data in the U.S. Despite a drop in imports during the first quarter (thanks to America’s greater energy independence and the slew of labor strikes at West Coast ports) that cut into the trade deficit, a number of important indicators have all been stagnant. Inflation, consumer spending, and real economic output are all flat or in decline. Factory output has been dropping, and the ISM manufacturing index is at a 22-month low, extending its worst streak of declines since the Lehman Bros. fiasco.
Meantime, the labor market has also been struggling of late. The ADP payrolls report fell below expectations (189,000 actual new jobs against 225,000 expected), snapping 12 consecutive months of at least 200,000 jobs created. Important sectors of the real economy such as energy and goods production saw five-digit job losses during 1Q. Even more staggering was the massive miss in March’s non-farm payrolls: 126,000 new jobs were added, barely more than half the 248,000 expected by analysts. Not surprisingly, January and February employment numbers were also revised lower. Paper gold and equities won’t react to the dismal NFP numbers until U.S. markets reopen on Monday, but expect some action when they do.
European and Asian markets fared better, spending most of the week in the green. Manufacturing has seen a decided uptick in the eurozone: Germany, Italy, and Spain all saw growth in manufacturing, while output hit an 8-month high in the U.K. Markit PMI for the euro region as a whole also registered at a 10-month high. After the euro experienced its worst quarterly performance ever in 1Q 2015, the currency spent much of the week flat near $1.07 before jumping back above $1.10 by week’s end on a softer dollar.
Crude oil found a bit of upward pressure around midweek when a possible nuclear deal between Iran and a group of Western nations became imminent: if a tapering of sanctions against Iran comes from the potential accord, then the world’s fourth-largest oil reserves could find their way back to the global markets. Besides this moment of optimism, the crude benchmarks traded in the red most of the week. WTI and Brent crude closed just a shade below $50 and $55 per barrel, respectively. Treasury yields have been largely rangebound between 1.87% and 2.00% for the 10-year note, settling around 1.90% on Friday.
GEOPOLITICS & WORLD EVENTS
In both the Greek and Iranian negotiations with their respective international partners (or adversaries, depending on how you look at it), hard deadlines are apparently not so hard.
The Nuclear Framework With Iran
Negotiations over Iran’s nuclear program were extended into double overtime beyond their March 31st deadline this week, as both sides put in extra hours at the proverbial office in order to hash out a tentative framework for a deal. If no agreement had been reached, at least in principle, then it would be unlikely that another global power besides the United States would sign on for new rounds of sanctions against an uncooperative Iran.
Critics were unhappy with the lack of disclosure about the tenets of the deal–which is being branded as more of an “understanding” than an actual treaty–when it was announced that the two sides were making progress. Iran insists that keeping the major details of the framework classified is in its national interest, especially among its own people, and the Western contingency is understandably wary of driving the Iranians away from the bargaining table by undercutting their political capital at home. Iran has supposedly been about two years away from being able to develop a nuclear weapon for the past 30 years, and the U.S. and its partners don’t want the lines of communication to break down now.
There is concern within the region that if Iran were to get a nuclear bomb, it would set off a neverending arms race among neighboring powers, particularly Saudi Arabia. The intense rivalry between the Saudis and the Iranians–the Arabs and the Persians–the Sunnis and the Shia–are all wrapped up in the situation at hand. Treading carefully and maintaining an open understanding seem to be the virtues of the day. Even though many are discussing the negotiations as if they are definitive, the consensus from the meetings seems to be that “nothing is agreed upon until everything is agreed upon,” and the latter step won’t take place until at least this summer.
The Debt Refi With Greece
The Greek government has continued to work with EU finance ministers to fast-track a list of proposed economic reforms for approval so that “The Institutions” (as Greek officials have taken to calling their creditors) can release more bailout funds to the ailing government. The deadline for the submission (or revision) of this list of reforms has been pushed back several times already. The Syriza administration is staring default squarely in the face, with perhaps only a few weeks’ worth of available cash. As the complaint that the reforms need to be stronger, and better defined, is repeated by the eurozone ministers, the tide seems to be picking up momentum against the Greeks receiving concessions from the rest of Europe.
Among others, Berkshire Hathaway Chairman Warren Buffett has opined (quite publicly) that a “Grexit” from the euro area may not necessarily be all that bad of a scenario. The notion is that Greece is dead weight, a burden on the rest of the currency union. The Greek finance minister, self-avowed “Chaos Marxist” Yanis Varoufakis, has thrown fuel on the flames by suggesting–even threatening–that the country could simply replace the euro with Bitcoin, the buzzworthy, decentralized cryptocurrency loathed by central banks everywhere.
Greece’s debt situation with the rest of Europe has reached a critical mass where even the ousted Greek prime minister, Antonis Samaras, who still heads the opposition party, is willing to form an alliance with the leftist Syriza administration in order to save the country from ditching the euro, a development that he has said “would signal a total catastrophe.” Whether this catastrophe comes to be, or is truly catastrophic in character, remains to be seen.
A LOOK AHEAD: Next week starts off slowly, with Services PMI being released in both India and the U.S. on Monday, while Canada announces broader PMI data. The rest of the week is busy with new economic data and central bank reports from across the globe as the second quarter kicks into gear.