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Gold came under pressure in overseas trading on Tuesday, weighed
by continued uncertainty as to the Fed's intentions. However, most of those
losses were subsequently retraced as the market continues to process Yellen's
halfhearted hawkishness from yesterday.
"I continue to believe that it will be appropriate to gradually reduce
the degree of monetary policy accommodation, provided that labor market
conditions strengthen further and inflation continues to make progress toward
our 2[%] objective," said Yellen in her Philadelphia speech. Always the
caveat regarding incoming data, which in the weeks following the hawkish FOMC
minutes, the financial press seemed inclined to ignore.
This was a great quote from a Wall
Street Journal Recap of that speech:
“Either 1.) the U.S. economy is as relatively ‘moderate’
as previously proposed by a plethora of Fed officials over the past month and
the Committee is comfortable moving forward with a continued removal of
accommodation near-term despite a lackluster May employment report, or 2.) the
hawkish rhetoric of a more stable economy spoon fed to the marketplace
leading up the June meeting was false or at least so unfounded that one data
point could derail both Committee members’ more positive assessment of the
current economy, as well as expectations for future growth, leaving policy
makers cowering in the corner and further delaying a second rate hike.”
— Lindsey M. Piegza, chief economist at Stifel, Nicolaus & Co.
The nonfarm payrolls disaster
from last Friday is hard to ignore, particularly within the negative payrolls
trend that has emerged since late last year. Similarly, the Fed's own Labor
Market Conditions Index has seen seven consecutive monthly declines, reaching
a seven-year low in May. I don't know what Ms. Yellen is looking at on the
labor front that needs to "strengthen further". That would
imply something is currently strengthening . . .
When all the new-found hawkishness surfaced with the release of April FOMC
minutes on May 18, gold was trading above $1,270. Now that June rate hike
odds are back to a mere 2%, below where they were on May 18, $1,270 may prove
to be a short-term attraction.
The June FOMC meeting beginning a week from today. It has become pretty
evident that the Fed hiked into weakness when they raised rates last
December, but they had pretty much painted themselves into an expectations
corner. They seemed on a similar path over the past month, right up to the
point that the May jobs report came out.
Will they do the prudent thing and hold, because the data simply do not
support a tightening? I suspect so, even at some risk to their credibility.
However, I do imagine that the marketplace is going to turn up its nose at
any future "rhetoric of a more stable economy" until it is actually
evident in the data.
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