LAWRIE WILLIAMS: Gold on the rise as Fedwatch tool moves in favour of 75 bps increase
We recently commented on the volatile nature of the Chicago Mercantile Exchange’s Fedwatch Tool which analyses market sentiment on what the Fed’s most likely rate increase will be at the next FOMC meeting – still nearly a month away. This is a great day-to-day pointer to market sentiment on the state of the U.S. economy, and thus on short term market movements in all sectors that are dependent on such perceptions.
Over the past couple of days this has moved from favouring, only marginally, a 50 basis point rate increase being imposed at the September meeting to today’s 56.5:43.5 likelihood of the higher 75 basis point rise forthcoming. Of course this ratio is likely to be changed one way, or the other, by the latest U.S. GDP data, which has come out today, the Personal Consumption Expenditure (PCE) index data out tomorrow and analysis of Fed chair Jerome Powell’s address to the Jackson Hole Economic Symposium, also tomorrow. We could thus see some sharp movements in the Fedwatch forecasts by the weekend.
But of course the actual FOMC meeting does not take place until September 20th – 21st, allowing ample time for other relevant data, both economic and geopolitical, to affect the final rate increase decisions. Not least among these will be the next U.S. Consumer Price Index (CPI) data release due out on September 13th which will give us some idea if the Fed’s relatively aggressive interest rate raising policies so far are having any effect on inflation at all – and even if overall inflation appears to be easing the conclusions may still be inconclusive given that one of the biggest inflationary elements, the oil price, has been moderating on influences entirely outside Fed involvement. A worrying factor here is that it seems to be picking up slowly again, albeit still remaining well below recent peaks. Analysis of the core inflation figure, which excludes the biggest variables of energy and food prices, may thus give a better indication of the true state of affairs
There is a theory among some well-respected analysts that the Fed will not be too displeased if the U.S. economy is indeed seen to be seen either already in recession, or heading there, and will possibly give this likelihood something of a boost by raising rates by the higher 75 basis points which will have a negative impact on corporate performance. Hence the latest movements in the Fedwatch tool. This would depress equity prices and could give the dollar index a further leg up. What this might do to precious metals prices is a little more uncertain.
In theory a stronger dollar would tend to signify a weaker gold price in dollar terms but this is not always the case as the safe haven aspects of gold also tend to come into play with such Fed moves suggesting a continuing worry about the inflationary impact on the U.S. economy. Gold is sometimes viewed as an inflation hedge so it could also benefit. Certainly its early performance today in European markets was positive, although that could also have been due to a slightly weakening dollar. As trade has progressed in the U.S. this morning the price has slipped although is still up on yesterday’s close, with U.S. jobless claims falling a little, contrary to expectations and the GDP figure confirming a small Q2 contraction.
The markets will take a little time to digest this, but will largely be waiting on Powell’s Jackson Hole address and the new PCE data figure, before it draws any new conclusions. But the FOMC meeting is still 27 days away leaving plenty of time, and relevant data release announcements, to influence sentiment in the meantime. Interesting times ahead as the summer holiday period draws to a close and market makers and influencers are all back at their desks!