Sunday, 17 February, 2019

Gold hits one-week low on strong dollar; Fed minutes awaited

Why the Dow nosedived after the Fed minutes release Modal Trigger Shutterstock
Nellie Chapman | 22 February, 2018, 02:30

It has been broadly weakened by a number of headlines which include still tepid inflation, lack of fiscal policy direction from the current presidential administration, the slowness for the House and Senate Republicans (GOP) to pass tax reform and unclear directional signals for interest rates hikes from the Federal Reserve Board. Other officials have anxious aloud that three hikes might be too much, but nobody seems to suggest that there will be no hikes. This conclusion is reinforced by every other labor market measure ranging from job openings, quit rates, weekly unemployment insurance filings, and surveys that indicate that workers now believe jobs are easy to find. Now, however, as rising wages and fears of inflation have surfaced, so has anxiety about further rate hikes, which the Fed has not been shy about expressing are in the works. Only the timing of this process is uncertain at this point.

Investors looking to the greenback shrugged off worries about the USA budget deficit, focusing on large US government debt auctions this week and sending the dollar higher.

Proof may not yet be conclusive that USA inflation is on the rise but since when did markets need proof?

Treasury yields rose overnight with the benchmark 10-year yield crawling back to near a four-year peak as investors made room for this week's $US258 billion deluge of new government debt. Wellington climbed 1.4 percent and Taipei returned from a week-long Lunar New Year break to jump 2.6 percent.

All of this elevates the importance of the inflation data. If the Fed moves slowly in 2018, it will have to play catch-up at some point, which implies a sharper rise in rates later that could tip the economy into recession.

Traders have been anxious that inflation is picking up, and that higher rates would kill the rally, so the Fed saying it's not too anxious was greeted as a positive sign, and bond yields initially dropped.

"Members agreed that the strengthening in the near-term economic outlook increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate", said the minutes. Forex is likely to see a fierce wave of price action and increased volume in the coming hours as investors react to the U.K hearings and the U.S central bank's report this evening. "Higher inflation is bullish for gold", Schiff added. Investors finally seem to be grasping the risks of inflation and are driving up bond yields in response.

Yields are trading near highs not seen in a decade, and that provides quite a bit of incentive for dealers to snap them up - though it will not be a question of demand, but more so at what price levels will they be taken up.

The minutes could offer insight into how concerned policy makers are about inflation, an issue that spooked markets earlier this month. Contributors may have a stake in the areas they write about.