Gold is moderately lower this morning after the U.S. Labor Department reported that employment costs in the second quarter rose at the fastest pace since 2008. Employment costs rose 0.7% in the second three months of the year, after a 0.3% rise in the the first three months. Wages increased 06%.
These numbers put the fear of a hike in overnight lending rates by the Fed occurring sooner rather than later. This outlook, combined with some disappointing earnings reports had Wall St opening in the red, with both the Dow and the S&P 500 showing a loss for the month. An interview with former Federal Reserve Chairman Alan Greenspan hasn’t helped the market mood, as he declared that he saw a “significant correction” coming in the stock market some time in the future. A poll conducted by Bloomberg showed that 47% of financial professionals think stocks are near unsustainable levels, and 14% say we’re already in a stock bubble.
Gold has been trading in a very tight range, and this morning’s break downward may be partially due to speculators positioning themselves before tomorrow’s non-farm payrolls report. The Fed has declared that the labor participation rate and wage growth will be its new benchmark for raising rates, which means the eyes of traders all over the world are focused on tomorrow morning’s payroll report.
Chinese gold buyers took advantage of lower prices last night, as physical demand had the premium in Shanghai up to $4. Reports of lower Chinese gold demand are overlooking two things:
1) They are comparing current numbers to last year, when a big drop in gold prices led to the largest level of physical gold demand in decades; and 2) China is importing gold through Beijing now, which is making the numbers for imports through Hong Kong lower.
The imports through Hong Kong are the only ones that are transparent to Western observers, and have long been used as a proxy for Chinese gold demand. Because the level of gold imports is considered a “state secret” at the highest levels of government, imports through Beijing and Shanghai have been increased, to mask as much as possible the amount of gold flowing into the Middle Kingdom.
The idea of an earlier interest rate hike gave the dollar another morning boost, after receiving one yesterday from the better than expected GDP report. The greenback is set to record its best month since February 2013 at this rate. This same interest rate outlook is beginning to hurt the emerging markets, as foreign investors start pulling money in preparation to take advantage of higher U.S. Treasury yields.
First-time jobless claims unexpectedly rose last week, with 23,000 more people filing unemployment applications. 302,000 people were shown the door by their bosses last week, but July as a whole saw the least number of firings in eight years.
Euro markets are shaken as troubled Portugal bank Espirito Santo recorded an astounding € 3.5 billion loss yesterday. Securities regulars stepped in and forbade the short-selling of the bank’s stock. The fear of an EU bank collapse contagion has become very real indeed. One hopes that depositors got their money out before the probable incoming “bail-in” which will confiscate deposits over a certain amount.
The mood in EU markets wasn’t helped when it was reported that inflation actually dropped again, to 0.4%. This is the lowest inflation in five years. The European Central Bank is now charging banks for keeping deposits at the central bank, in an attempt to do something, anything, to keep the union from falling into deflation.
Both precious metals and equities are more worried about economic events in their own front yards than they are violence abroad. Israel has called up another 16,000 reservists as fighting intensifies in the Gaza Strip. The government has vowed not to leave until it has broken the back of Hamas, by destroying its rocket-making ability, and the tunnels used to attack Israeli settlements.