Originally published by Chamber of Merchants
Did I mention before that Crude Oil is a bad idea? I think I did. And Crude keeps disappointing as, for some strange reason, the US economy just isn’t using as much oil and fuel as it should…
If the economy is not booming, it means that there is less transportation of goods on the road. Additionally, consumers use fuel more sparingly as they cut costs here and there. (Plus…no amount of rumours can make the globe use more crude…it’s a demand side issue…and supply keeps on increasing… Cheers Iran!)
Another set of weak economic numbers have come through from the US:
The above numbers tell the Merchant that all is not as inflationary as expected. The numbers above all relate to manufacturing and manufacturing expectations in the US and the results are all under expectations.
So what are the implications?
My first thought goes to the expected interest rate hike in December which is now 91% in the bag… Except the numbers above demonstrate that the economy is weaker than expected.
The most important indicator above is the PPI:
“The Producer Price Index (PPI) measures the change in the price of goods sold by manufacturers. It is a leading indicator of consumer price inflation, which accounts for the majority of overall inflation.
A higher than expected reading should be taken as positive/bullish for the USD, while a lower than expected reading should be taken as negative/bearish for the USD.”
So, the Merchant asks, ” is this bullish or bearish for the dollar?”
Well, the PPI came in at 0.0% compared to 0.3% last time and lower than the 0.3% expectation. In fact, worded differently, the the price of goods are on the cusp of contracting. Does that sound like an economy that needs higher interest rates, you know, to cool things down a bit?
No. Hence, Janet Yellen, the FOMC’s, recent rhetoric over the past several weeks which introduced the idea of running the economy “hot” for a while. By “hot” she means that the economy can start showing inflation but that interest rates will be kept low to let it gain momentum. Except, there is no momentum as of yet. In fact, raising interest rates could push the US economy into a technical recession.
I’m not alone on this point. The moment the PPI disappointed, the 30 year bond yield started adjusting for lower inflation expectations:
Look, I know the bond stuff can be confusing. Very simply the above chart shows that the bond market is not so convinced about the interest rate hike in December because inflation could be lower than expected. Raising interest rates in December would slow the economy and inflation down even more. That’s it in a nutshell.
That is good for Gold.
Finally, the dollar has touched its 52 week high of 100.6. ( I previously said 100.5 but that was from memory: when glancing at the actual numbers, the 52 week high was 100.6 and in the last few hours 100.6 has been tested again on the US Dollar Index)
So, the question on everyone’s mind is will the US Dollar break higher?
The answer will literally determine the trend of copper, iron ore, steel, agriculture, gold, silver, imports, exports and emerging market activity. Wow. It’s pretty big deal.
So let me briefly summarise what is happening and what I think is going to happen:
#1 The Fed does not want to raise interest rates…ok? It adds like a billion dollars extra of interest payments that they need to give to all bond holders in and outside the USA at 18 trillion dollars of debt, that could really put a squeeze on the budget.
#2 The dollar is handing around 100.4 on the DXY index: not quite the record high, but not out of breakout territory.
#3 The dollar is hanging around the 52 week high because of the expectation of raising interest rates in December.
#4 The PPI number was disappointing and decreases the chances of a rate hike.
#5 Tonight we have the all important CPI (actual inflation numbers) coming through..see below:
#6 We will also get hold of building permits, Jobless Claims and the Philadelphia Fed Manufacturing Index
#7 The results tonight will substantiate a rate hike in December or not raising interest rates in December.
This is important since disappointing numbers will completely bewilder the market since a rate hike is 90% certain for December. If the economy is weak, will the Fed still tighten further by raising rates? Or is the economy so weak that the Fed cannot raise interest rates?
Gold will continues to churn around $1200-$1230 until the market can decide what to do with the US Dollar. If the case for an interest rate hike reduces, then the entire market has just been handed a big pie…in the face. And the sell-off in the dollar will ensue while gold and commodities begin their elevator trip onto cloud 9.
Of course, the alternative scenario is that the numbers tonight meet or beat expectations. In that case I would expect gold to head to $1190-$1200 where it will continue to churn until the actual rate hike on December 14th. After that, the game is over, the rate hike is done. I expect the dollar to sell-off and gold to rebound in December since the next rate hike wouldn’t be due for a year, although the Federal Reserve will attempt to control the market by announcing that more rate hikes will be “appropriate” month after month until we reach December 2017.
So grab a coffee and relax.
I expect a boring day on the market… Neither here nor there. Miner’s may get lifted on the improved exchange rate. The exchange rate trade will not last long if the dollar fails to break to new highs. I expect exporters to lock in forward contracts around here.
Satisfied with my positions.
Think Better.