Happy Friday, traders. I’m usually desperate for the weekend at this point, but we’ve come to the time of year where I feel a little listless looking at a Saturday and Sunday with zero football on deck. Soccer will have to sustain me until Monday, I suppose.
In the meantime, what kind of week has it been?
For gold price action, it’s been a round-tripper. Some strong selling came into the market on Wednesday, perhaps as a result of positions getting liquidated as momentum seemed to stall. But as the threat of some real uncertainty was injected back into global equities markets on the back of some negative US-China headlines, gold spot has now regained it’s high-points for the week, near to $1315/oz.
US-China Trade Talks Roil an Otherwise Calm Week
Macroeconomic stories within and related to the US economy seemed to be the primary driver for gold price action throughout a pretty tepid, inert week in the charts. What few notable data releases we had on the calendar delivered as expected: services sector PMI deteriorated a little bit (although the catch-down pattern in PMI for the manufacturing sector suggests it may have further to fall in the coming months,) and initial jobless claims this week moderated to a level between last week’s 16-month high and the historic low of two weeks gone.
After some mid-week selling that looked like it would force gold-spot to test the all-important psychological level of $1300/oz, a strong thrust of momentum returned to the gold market amid growing concerns about the resumption of currency and trade-based hostilities between the US and China, the two largest economies on the planet. Late in the trading session on Thursday, the president made it known that while the delegations would continue to work on a longer-term deal that can be agreed to before the 90-day trade truce expired on March 1, Trump himself plans for a meeting with Chinese Premier Xi ahead of the deadline.
?? ?? ?? #Tradewar | Xi Jinping and Donald Trump ‘may meet in Da Nang, Vietnam’ at the end of February - SCMP
*Source familiar with discussions says the two sides are considering a meeting in the coastal city on February 27 and 28.https://t.co/M29Nk4BjkU— Christophe Barraud? (@C_Barraud) February 3, 2019
Equities markets have been unsettled by the appearance that trade war is back on the near edge of the table, and risk-off gold prices have responded in kind by returning to the high marks that begin the week.
Fed Commentary Leaves the Future Still Fuzzy
This week has been the first to see a shifted environment for FOMC members’ public comments, one in which prominent members’ language is getting the increased attention they earned with last week’s super-dovish meeting and statement.
Cleveland Federal Reserve President Loretta Mester was the first notable speaker this week, her commentary of particular interest because as a usually dependable hawk she had over the last few months shown an unexpectedly dovish shift that matched that of the committee as a whole. While backing the party line of supporting a very data-dependent “pause,” Ms. Mester reverted a little closer to form, saying “If the economy performs along the lines that I’ve outlined as month likely, the fed funds rate may need to move a bit higher than current levels,” and leaning into the view that short-term rated are currently on the lower bound of what the FOMC views as “neutral.”
The next news item from the FOMC this week actually wasn’t on anybody’s radar or schedule (how rude) when reports broke on Monday night that FOMC Chairman Jerome Powell (and Vice Chair Richard Clarida—safety in numbers) had had dinner with the President and a small team that included Treasury secretary Steve Mnuchin. Almost as soon as the information was public the Fed issues a statement to confirm that there were no discussions of future monetary policy beyond what was announced at last week’s FOMC meeting. Honestly, I’m impressed with how even-keeled the markets were about the whole ordeal. After initially taking a firm stance in the face of (noisy, but unfounded) criticism from Trump’s twitter account, the relationship between J. Powell and the administration has gotten murkier with what many see as a recent about-face from the Fed in terms of the path of continued rate hikes. Private meetings between a president and the sitting Chair of the FOMC are not unheard of but still fairly uncommon, so risk markets could have been forgiven for spooking a little bit, but instead the waters remained fairly calm. So far, the news flow (or lack of it) following the dinner has confirmed that there isn’t much to worry about. For now.
In contrast to Mester (as has often been their dynamic,) President of the St. Louis Federal Reserve James Bullard pushed the boat farther into dovish waters than even last week’s meeting. Bullard, a long outspoken monetary dove, criticized the track record he sees the FOMC developing with consistent failure to push inflation to the Fed’s mandate of 2%. Bullard lays this failure at the feet of what he things have already been too many rate hikes, pushing interest rates into what he views as restrictive territory.
A major impact factor for gold price action in 2019 will be who’s overarching view, between the hawkish Mester and the dovish Bullard, will prevail in the Fed’s decision making. A resumption of rate hikes could initially boost gold buying as investor’s shift away from roiled equities markets but the further raising of interest rates and yields would likely keep a temporary ceiling on the yellow metal’s upside. Should Bullard’s view win out, the long term pause on hike (or even the start of a rate-cutting cycle) would be a big tailwind for gold prices.
Next week, more FOMC commentary is on the schedule, as well as a few big releases of macro data like retail sales and the most recent read on inflation (which could be another win for James Bullard’s argument.) We’ll have a full slate of macro stories to follow as well: next Friday is the deadline for the current funding agreement that is keeping the federal government open, and if there’s not a voteable deal on the table by Monday chances of avoiding another shutdown will begin to rapidly deteriorate. We’ll also be keeping tabs on the trade talks between the American and Chinese delegations, as that situation is starting to heat up again. Also, due next week is another round of voting on the Brexit package for the UK which is expected to be as fruitless as the last two (or three?) but we’ll be keeping half and eye on London and Brussels just in case.
Until then, traders, enjoy your weekends! I’ll see you back here on Monday for a closer look at the next five trading days ahead of us.
