One of the buzz words going around at the moment re. Janet ‘will-she-won’t- she’ Yellen and the FOMC voting to start raising Fed interest rates is ‘normalization’. But whatever the Fed does it is no way going to be ‘normalization’ in any realistic sense of the word relative to past ‘normal’ interest rate patterns. The general consensus at the Mines & Money conference in London this past week was that rate rises would almost certainly begin this month as Yellen and the FOMC have talked themselves into a position where not to do so would destroy any remaining credibility that the Fed may actually have brought things under control – but ‘normalization’ – perhaps not..
Let’s face it, interest rate normalization is not raising rates by 25 basis points but more like instigating the start of a raising program which will see them rise to 2.5% or higher and there looks to be no way the U.S. economy is strong enough to handle this even over a couple of years. Indeed another one of the prevailing thoughts at the Mines & Money conference from some very savvy analysts and commentators was that even if the Fed does raise rates by as little as 25 basis points now, it will likely have to backtrack and bring them down again within the next six months AND then instigate a QE4 on top of that. The stock markets are weak and potentially on a hair trigger for a massive collapse. Q3 earnings figures from major companies were mostly pretty dire and the strong dollar is eating into exports, while making imports ever less costly. Government CPI and unemployment stats are largely a farce. The market is being held up by sentiment alone – certainly not by fundamentals. And sentiment can change overnight, sometimes on a seemingly innocuous piece of news.
The gold price performance today, and that of the general equity markets, ahead of any Fed announcement has been perhaps enlightening. At the time of writing gold has risen about $30 above its recent lows. Suddenly what had seemed a foregone conclusion that the Fed would start raising rates this month has perhaps run into doubt. While we await the decision we still feel the Fed is too far down the line not to raise, although we would see the possibility of a smaller rise being implemented. In some ways the Fed could be damned if it does raise rates, but perhaps even more damned if it doesn’t. A 10 basis point increase would be an uneasy compromise, but has to be a possibility. However it would be seen as a sign of weakness.
The fall in the dollar index by nearly 2% though would also definitely have strengthened the gold price which tends to move counter to the dollar. Whether the sharp dollar fall was a natural progression or part of Fed machinations to try and keep the rising currency, seen as damaging to the economy, under some form of control is less certain.
While some key indicators, notably today’s nonfarm payroll figures, are just what the Fed needs to support the interest raising decision, there are others like the recent Chicago PMI figure coming in at 48.7 (anything below 50 is seen as negative) suggests that all is not well in America’s industrial heartland. Tuesday’s broader ISM manufacturing index figure was equally pessimistic at 48.6, although the ISM services index was positive at 55.9, despite this being a little down on the previous month. So all in all it does look like the U.S. economy is far from out of the woods.
As noted above, the US Dollar Index dipped back from a brief foray above the 100 mark, back down to a current 98.3, which may have reduced slightly continuing concerns about U.S exports, although this is hardly conclusive. Mario Draghi’s decision for the ECB to only reduce bank deposit interest rates by a smaller than expected 10 basis points helped here. A bigger reduction might well have seen the euro move to nearer parity with the dollar.
Gold’s healthy performance today was despite the positive US nonfarm payroll figures and was perhaps down to the feeling that it has been oversold over the past month or so, resulting in a certain amount of short covering. Markets often react too far in this manner – but even so, if the Fed does raise interest rates by the expected 25 basis points it could take a further knock, but anything less could see it soar.
