Gold prices have retraced most of their losses since the election, but strategists at UBS are now lowering their outlook on the precious metal.
Joni Teves, an analyst at UBS, lowered her gold price forecasts to an average of $1,300 a troy ounce this year, from their previous estimates of $1,350 and also knocked her projections for next year to an average of $1,325 a troy ounce, down sharply from $1,450 previously.
While she maintains her broadly positive narrative surrounding the precious metal, she cites three key reasons for re-calibrating her gold outlook.
Firstly, she argued that a pick-up in gold interest in the first quarter was slower than expected. While gold prices have recovered by about 9 per cent since the start of the year, most investors are interested in gold not as an investment in itself but rather as a portfolio diversifier.
“Conviction levels have remained low and investors continue to hesitate to take more meaningful positions despite an underlying positive bias, especially as gold hovers below key psychological and technical levels,” she said.
We can now close the case on who leaked that confidential, market-moving data to Medley global back in 2012: it was Richmond Fed’s Jeffrey Lacker, who previously was expected to retire in October, and is resigning immediately.
In a statement, Lacker confirms he revealed confidential FOMC information to Medley Global and that he lied to the Fed’s general counsel on at least two occasions. His full statement is below:
Statement Of Dr. Jeffrey Lacker
During the past 13 years it has been my privilege to serve as President of the Federal Reserve Bank of Richmond. It has also been an honor to contribute to the development of our nation’s monetary policy as a member of the Federal Reserve’s Federal Open Market Committee (“FOMC”).
While transparency of the monetary policy process is important, equally important are the confidentiality policies that protect the internal deliberations of the FOMC and ensure the integrity of our financial markets. The Federal Reserve’s confidentiality policies seek to guide participants in maintaining the balance between transparency and confidentiality. The FOMC has had in place for many years two specific policies relating to confidentiality. the FOMC Policy on External Communications of Committee Participants (the “External Communications Policy-) and the Program for Security of FOMC Information (the “Information Security Policy”).
In 2012, my conduct was inconsistent with those important confidentiality policies. Specifically, on October 2, 2012, I spoke by phone with an analyst (“the Analyst”) concerning the September 2012 meeting of the FOMC. The Analyst authors reports on Federal Reserve matters on behalf of Medley Global Advisors (“Medley’). Medley publishes macro-economic policy intelligence for institutions such as hedge funds and asset managers and is owned by the Financial Times Limited.
The stage is set for the first official summit between two of the world’s most powerful leaders as China’s president Xi Jinping travels to Florida to meet his US counterpart Donald Trump next week.
Also competing for investors’ attention will be minutes from the Federal Reserve’s March 14-15 meeting, the second televised debate of the French presidential election and the release of the closely watched US jobs report.
Here is what to watch in the week ahead:
Xi, meet Trump
The leaders of the world’s first- and second-largest economies will meet at Mr Trump’s Florida retreat, Mar-a-Lago, April 6 and 7. According to the official White House release, the agenda will include “global, regional, and bilateral issues of mutual concern”.
That vague description belies the complex backdrop against which the two men will meet. Mr Trump pledged during the presidential campaign to label China a currency manipulator, and within weeks of his election prompted a formal protest from China after his phone call with Taiwan’s leader (Mr Trump has since said he will back the ‘One China’ policy to ease tensions.)
With a rate rise in the books investors get to hear from a handful of Federal Reserve speakers next week. On the geo-political front a hearing on Russia’s interference in the US presidential election and a meeting on combatting Isis take the spotlight.
Here’s what to watch in the coming days.
While the Federal Reserve decided to raise interest rates for the third time since the financial crisis, chair Janet Yellen reiterated that the pace of rate rises would be gradual and the so-called dot plot continued to signal just two additional rate rises this year. The move was interpreted by some as a dovish hike and Fed speakers could get the chance to refute that next week.
“Moreover, we’d also look for clarification on the addition of ‘symmetric’ in the press statement when it came to defining the inflation reaction function,” strategists at RBC Capital Markets said. “Our sense is that this was in an effort to put an end to inflation level targeting—also not a dovish development.”
Ms Yellen will deliver the opening keynote at the Federal Reserve System Community Development Research Conference in Washington on Thursday. Through the week, investors also get to hear from voting members of the monetary policy setting Federal Open Market Committee, including Chicago Fed president Charles Evans, Dallas Fed president Robert Kaplan and Minneapolis Fed president Neel Kashkari — the only voting FOMC member to dissent at the March meeting and who has explained his rationale for the move on Friday.
On the economic data front, the calendar is fairly light but investors will keep an eye on fourth quarter current account deficit figures due Tuesday and durable goods orders slated for Friday.
The fed hike case is built on a strong consumer led recovery. That’s good when people have money to spend, and when wages give them that money to spend. The wages (average hourly earnings) in the jobs reports report showed pay running at a decent 2.8% y/y. Today we get the inflation adjusted wage numbers in the CPI report and they don’t look as hot.
Last month, year on year real average weekly wages dropped for the first time since the start of 2014.
US real average weekly wages y/y
That’s not good news for the supposedly strong consumer and rate hikes won’t make the situation any better.
I’m quite surprised that the Fed will be raising so quickly after the Dec hike instead of letting that hike filter through, and monitoring the effects. To me that suggests that behind the scenes there’s something they are worried about. If they’re willing to hike in a moment when their whole basis for hikes (the consumer) might start finding things tougher, there’s something amiss.
It’s a straw clutch to try and find anything that could derail the hike tonight but there’s plenty of evidence in why they might throw in some additional caution about future hikes, and the wages numbers today may aid that sentiment.
Bringing forward expectations of a Fed hike from May-June to March was worth something for the dollar, but to get more now, the market may need to recognize the risk of three (or more) hikes this year. With the strong February jobs growth and a 2.8% year-over-year increase in hourly earnings, rarely does the market’s confidence in an event surpass current expectations for a hike on March 15.
However, the market sees around a one-in-three or a one-in-four chance of a third hike this year.The risks for the updated forecasts from the Federal Reserve seem asymmetrically tilted higher, more rate hikes than fewer by more members. The hawkishness of regional presidents may be underestimated. The data and the global climate are conducive for expediting the normalization process. The hawks will likely feel vindicated by recent developments and may press their case with more vigor.
The focus of the Fed has arguably shifted. Previously, the issue was whether the data would confirm that the economy was evolving toward the Fed’s targets. It did. Rather than focus on the data points per se, officials appear more confident of the direction and resilience of the economy and prices. They now are looking for opportunities, which helps explain the campaign to prepare the market for the March 15 move.
Still, the dollar’s technical tone has deteriorated, and the risk is on the downside over the next several sessions. Our working hypothesis is that the dollar’s recovery that began in early February against most of the majors ended and a correction has begun, For the Dollar Index, this means potential toward 100.75 and possibly 100.40. The former is the 50% retracement of that rally and coincides with the 100-day average (~100.80). The latter is the 61.8% retracement. Alternatively, if the Dollar Index has carved out a double top near 102.25, the neckline is around 101.20 (38.2% of the rally is ~101.10). On a break of the neckline, the measuring objective is 100.
The euro’s pre-weekend rally saw it surpass the 50% retracement objective of its decline from the February 2 high near $1.0830. That retracement was around $1.0660, and the 61.8% retracement is closer to $1.0700. The euro’s five-day moving average crossed above the 20-day average for the first time in a month. The single currency may be tracing out a double bottom at $1.05 The neckline is $1.0630. The measuring objective is around $1.0760.
Jeffrey Gundlach, chief executive officer at DoubleLine Capital, said on Tuesday he expects the Federal Reserve to begin a campaign this month of “old school” sequential interest rate hikes until “something breaks,” such as a U.S. recession.
Gundlach, who oversees more than $101 billion at Los Angeles-based DoubleLine, said U.S. economic data support a rate increase as soon as the next Fed policy meeting on March 14-15, and further rises this year, after a series of false starts in 2015 and 2016.
“Confidence in the Fed has really changed a lot,” Gundlach said on an investor webcast. “The Fed has gotten a lot of respect with the bond market listening to the Fed” now that economic data support the tough rhetoric from Fed officials.
New York Fed President William Dudley, whose branch of the U.S. central bank serves as its eyes and ears on Wall Street and who generally spends a couple of hours a week planning policy with Fed Chair Janet Yellen, played a key role in orchestrating the messaging of a March rate hike.
The odds of a March hike rose to 94% on Friday compared to 35% on Feb 23. A concerted, coordinated effort from the Fed to push up the probability was clear by the end of the week.
If she didn’t intend to stoke hike optimism, then she badly misplayed her hand. The newspaper headlines today were:
Set to Lift Interest Rate, Fed Embraces Investors’ Optimism – NYT
Yellen points to March rate hike as Fed signals end of easy money – Reuters
Yellen signals another Fed interest rate hike – PBS
Janet Yellen Indicates Federal Reserve’s Rate Rise Coming This Month – Forbes
What would it take for the Fed not to hike? How about a +50K non-farm payrolls report with weak wage growth. That would definitely make things interesting.
Barring something like that, the debate will shift to future meetings. At the moment, there’s a 10% chance priced in of a second hike on May 3. That rises to 45% by the June 14 meeting. Three hikes by year-end are about a 50/50 probability.
While virtually all prominent market commentators, most recently Bloomberg’s Mark Cudmore, now seem convinced that the Fed will hike by 25bps on March 15, when just as recently as a week ago the question was June or September, some are still skeptical. One among them is Vincent Cignarella, FX strategist who writes for Bloomberg, who in his daily Marco View piece writes that “March is far from a slam dunk even if officials collectively see three hikes this”, and that the key clue will come tomorrow at 1pm when Janet Yellen speaks, and very well may stun markets who have sent the probability of a March hike up to 90% following recent hawkish comments from uber-doves Dudley and Brainard.
Here is Cignarella explaining why “You Should Be Nervous About Janet Yellen’s Speech”
Foreign-exchange and Treasuries traders may have gotten ahead of themselves.
While it seems obvious based on recent economic data that the Federal Reserve will eventually need to raise rates, Chair Janet Yellen could walk back market expectations on Friday to create padding for risk events ahead of the March 15 decision.
If so, markets appear precariously perched. Dollar-yen has risen around 2.5 percent and the U.S. 10-year yield has climbed more than 16 basis points in just three days.
Short positioning in eurodollars, which are highly sensitive to the path of Fed rate hikes, is near record levels with both real and fast money extending hawkish bets, according to the latest CFTC data.
These moves have been driven by Fed speakers saying this week that rates will need to rise soon. First Fed dated overnight-interest-rate contracts have priced in close to 80 percent odds of a March increase, based on Fed effective rate of 0.66 percent. Other measures of market-implied probability approach 90 percent.