Gold is near steady this morning in New York, after dropping on speeches by Fed Chairman Janet Yellen and New York Federal Reserve president William Dudley (the #3 man at the Fed.) In testimony before the House Financial Services Committee, Yellen remarked that an interest rate hike next month was "a live possibility." Later in the afternoon, Dudley said that he would "completely agree" that a December rate hike was possible.
This news hit bonds, stocks, and commodities hard. Gold has given back the over 3% gains it notched in October, while bonds fell, with yields hitting seven-week highs.
Fed Fears Roil Markets
Stocks, bonds, and even gold were once considered to have "baked in" an interest rate hike by the Fed. However, when a September hike failed to materialize, markets began assuming that the first rate increase would be next March, at the earliest.
Yellen's announcement that December was still on the table, and the #2 and #3 Fed officials backing her up, caught markets unprepared.
Analysts now put the odds of a December hike at nearly 60%, compared to 25% last week.
Gold, after hitting a four-week low yesterday, is firming around the $1107 mark. $1,100 is a big psychological line in the sand. A sustained breach of that level would lead to a large amount of technical selling.
The big winner is the U.S. dollar. The greenback has soared on rate hike fears, and was helped today when the Bank of England pushed back expectations of a rate hike to perhaps late 2016. This makes the Fed the ONLY central bank thinking of tightening, rather than loosening, monetary policy. The stronger dollar is weighing on all commodities, which are usually traded in dollars.
Bye Bye, Bonds
Global bond yields hit a seven-week high after Yellen's remarks, as Fed fears counteracted local economic conditions. The yield on the 10-year Treasury note was above 2.24% this morning, also seven-week high. Even mortgage rates are higher today on expectations of Fed tightening. Investors are dumping bonds ahead of the December FOMC meeting, to avoid taking a loss if interest rates rise.
If speculators were hoping that an increase in first-time jobless claims would help stop the fall in stocks and bonds, they were disappointed. Even though jobless claims jumped by 16,000 (the largest weekly jump since February) to a two-month high of 276,000, markets didn't see it as bad enough to stop the Yellen Effect.
If anything will force the Fed to abandon a December rate hike, it will be poor numbers from the non-farm payrolls report tomorrow. The ADP Private Sector Payrolls report this week said that 182,000 new jobs were added to the economy last month. While the ADP report does not count government jobs, it is considered a good indicator of non-farm payroll numbers. This number was good enough that Fed fears remained high.
Tomorrow's non-farm payrolls report from the government will perhaps be the biggest news event before the December FOMC meeting. Look for a good print to basically cement the market's expectations for a December hike. Good numbers may serve to push gold to test the $1,100 mark. If that breaks, the $1,087 is the next major support.
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.