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 Gold came under further corrective pressure on Wednesday,
slipping to a new 3-week low. The yellow metal was weighed by a firmer
dollar, as rate hike expectations continue to edge higher.
The CME's FedWatch tool now puts the probability of a 25 bps rate hike in
September at 24.6%. Of course we've seen this pattern repeated time and time
again in recent years; and only once — last December — did a rate hike
actually occur.
Investors might consider waiting for the next jobs report to see which
anomaly — the huge downside miss in May (+11k) or the huge upside miss in
June (+287k) — is actually closer to reality. The advance Q2 GDP report out
on July 29 is also going to be important. Median expectations are +1.9%,
which would be a far-cry from a robust economy warranting a tightening of
monetary policy.
The manufacturing sector is already pretty clearly in a recession. The new
4-month highs in the dollar index is not going to help that cause at all. So,
if the Fed really wants to push the knife in to the hilt and give it a twist,
they should certainly raise rates . . .
Much like late last year, the Fed will also likely see policy divergence even
if they do nothing at all. The ECB, BoE and BoJ are all expected to ease
further in the months ahead. That should keep the dollar underpinned. With
the global policy bias still clearly toward easing, gold should remain
underpinned as well.
The growth and price risks that are prompting the other major central banks
to offer further accommodations also provide incentives for the Fed to hold
pat. If things continue to deteriorate overseas, there are risks for
detrimental knock-on effects here.
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