Federal Reserve Remains at the Center of Attention Again
Last week, we noted that the Fed had been out of the spot light for a few weeks. When that happens, market participants start to forget about the Fed and its threats to raise interest rates. If market participants discount the Fed’s calls for rate hikes and the Dollar Index* falls, Fed officials feel obliged to remind market participants that the Fed is still relevant and can raise interest rates as soon as the next meeting.
Last Friday, Janet Yellen spoke at the Jackson Hole conference and indicated that rate hikes may be coming. Fed Vice Chair Fischer reinforced the view that the Fed might raise interest rates this year shortly after Ms. Yellen’s speech.
Most market participants are focused on the next move the Fed might make. Ms. Yellen, however, noted in her speech on Friday that the Fed might consider launching a $2 trillion quantitative easing (QE) program to fight the next recession. That QE program might be different than past QE’s in that it could consider buying a broader range of assets, such as other central banks have done as part of their QE programs.
Chicago Fed President Charles Evans earlier this week noted that low growth means low rates for a long time. Despite the focus on the potential of a rate hike in 2016, the potential for “normalized” US interest rates is close to zero with a sluggish economy and the rest of the world at close to zero, zero or negative interest rates.
After the Fed’s meeting on September 20-21 the markets will turn their focus on the U.S. Presidential election. From now until the Fed meeting we expect Fed officials promote their policy objectives and rate hike position such that their decision on September 21 will not come as a shock.
Gold and Silver
Gold fell in August after rising most of the year. Earlier this week, gold fell close to $1300 an ounce as interest rate concerns pulled gold down. Recent set backs in the price of gold have been short lived, but the period between now and the September 20-21 Fed meeting may weigh further on gold.
Year to Date Dollar Index, Oil and Gold Prices
Silver has fallen below $19 an ounce after holding gains above $20 in late July and early August. Despite the recent pull back, silver been the best performing asset in 2016, rising well over 40% in 2016. The price of silver is at its highest levels in two years, but far below its all time higher of $50 an ounce reached in April 2011. The price action in silver highlights that when silver falls, it falls harder than gold.
Year to Date Dollar Index, Oil and Silver Prices
The British Pound remains mired in the $1.30 area after showing some signs of life recently as the predictions of gloom and doom after the Brexit vote have yet to materialize. The British Pound hit a three week high earlier last week after having been on a downward trajectory ever since the Brexit vote. The British Pound reached its high of the year at around $1.50 prior to the Brexit vote then fell to around $1.30 after the vote and had remained depressed due to nagging fears of the implications of Brexit and the reduction of interest rates by the Bank of England. The Pound has not been able to break above $1.33 since Brexit.
Oil shot higher in the first six months of 2016. Since then oil has been trading on news of stockpiles and the possibility of output freeze talks. Oil, like gold has been stuck in a trading range and off its highs the past month. Oil has had difficulty holding onto any gains it gets from talks about upcoming meetings among oil producers to discuss output freezes.
After today’s job report market participants won’t have much to go on other than pronouncements of Fed Presidents regarding their views on the state of the economy. The next big event comes later in the month when the Federal Reserve’s Open Market Committee decides whether to raise interest rates following its September meeting.
Here are some economic reports that could impact gold, silver and currency movements next week:
Sep 6 ISM Services Sep
Sep 7 Fed’s Beige Book Aug
Sep 7 MBA Mortgage Index 09/03
Sep 7 JOLTS – Job Openings July
Sep 7 Crude Inventories 09/03
Sep 8 Initial Claims 09/03
Sep 8 Continuing Claims 08/27
Sep 8 Natural Gas Inventories 09/03
Sep 8 Consumer Credit Jul
Sep 9 Wholesale Inventories Jul
* The US Dollar Index tracks the US dollar vs. the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swedish Krona and the Swiss Franc. The Euro comprises nearly 58% of the index.
This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.