A mix of weak economic data in the U.S. and a focus on Fed Chair Janet Yellen’s remarks at the central bank symposium in Jackson Hole, Wyoming are having the heaviest influence on gold prices this morning.
After the spot gold price closed at about $1,322/oz on Thursday, the yellow metal is now trading 1% higher to above $1,335/oz on Friday morning. Meanwhile, the silver price was about 40¢ higher (+2%) to $19/oz, but remains well off of its recent highs above $20/oz.
What Was Yellen Yellin’?
The Jackson Hole summit actually kicked off on Thursday night, but the big fireworks of the annual two-day meeting were the opening remarks given by Chair Yellen at 10 am EST.
As part of “The Federal Reserve’s Monetary Policy Toolkit,” Yellen’s speech had two major observations that are being taken as hawkish:
- She said the “FOMC continues to anticipate that gradual increases in the federal funds rate will be appropriate”; and
- “I believe the case for an increase in the federal funds rate has strengthened in recent months. Of course, our decisions always depend on the degree to which incoming data” confirms (or invalidates) the Federal Reserve Board’s view.
As expected, this was a rehash of the Fed’s consistent line that interest rates will rise gradually and the FOMC will remain data-dependent in its decision-making.
Positions in gold evened out a bit ahead of Yellen’s speech thanks to the seeming balance between hawkish and dovish interpretations. Yellen did imply that a September rate hike would be “appropriate,” but left enough wiggle room that the Fed can continue to keep rates lower for longer.
Had she been more dovish, the dollar would surely have traded much lower against its peers. Still, Yellen’s comments on the economy and what tools the Fed might consider using in the future will still have a significant impact on the foreign exchange markets.
The DXY dollar spot index was 0.2% higher, approaching 95.0, as Ms. Yellen spoke. European stocks were mostly flat during Yellen’s speech. U.S. stocks were slightly lower on Thursday before jumping ahead of Yellen’s comments.
Gold reacted positively to some worse-than-expected economic data released on Friday morning. Second-quarter GDP was revised lower to just 1.1%, even further below the anemic 1.2% Q2 GDP estimate that was initially reported. This followed just 0.8% growth during the first quarter; the first half of the year (H1 2016) saw the U.S. economy grow a mere 1% overall.
Economists remain optimistic about the third quarter. Their optimism is pinned on the hopes of “robust” consumer sentiment. Consumer spending was revised higher to +4.4% in Q2 compared to Q1, showing that this measure has indeed been strong despite stagnant economic conditions around the globe. The higher spending is believed to have contributed to the $12.4-billion drawdown in business inventories during Q2, the first time inventories have fallen since Q3 2011.
Nonetheless, corporate investment is poised to remain weak. Today’s report included a 2.4% decline in corporate profits when inventory valuations and capital consumption adjustments are taken into account. This means that capital expenditures and investment are very likely to remain subdued as corporate earnings continue to tread water. In fact, spending on equipment by businesses contracted for the third straight quarter—the first time this has happened since the worst stretch of the financial crisis and recession.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.