Precious metals ran into selling pressure this morning in New York, as a raft of economic reports surprised to the upside. Faced with evidence of a robust economy on several fronts, markets have doubled the odds of a March rate hike by the Fed. This sent the dollar and bond yields higher while weighing on gold prices.
The sharp drop in gold prices sparked an equally sharp rise as bargain hunters swarmed the market. The end result was spot gold prices quickly rebounding to near unchanged. One contributor to gold's resilience was the dollar quickly giving back half of this morning's sudden surge. The dollar closed near a four-week high on Tuesday, riding the wave of rate hike speculation keyed by Fed Chair Janet Yellen's upbeat assessment of the US economy in her testimony before the Senate Banking Committee.
That positive outlook was reinforced this morning on several fronts, following higher than expected producer prices reported Tuesday. Consumer prices also jumped more than forecast, according to this morning's report, showing the fastest monthly rise in four years. The 0.6% increase was double economists' expectations, fueled in part by a 7.8% increase in gasoline prices. Core CPI (CPI - fuel and food) was up 0.3%.
The more interesting numbers for Fed watchers were the year on year gains. Base CPI rose 2.5% from last January, the highest rate of increase since March 2012. Core CPI saw a gain of 2.3% y/y. This is far above the 2% threshold that the Fed announced as its inflation target.
On a related note, retail sales in January were also higher than economists had expected. Consumers spent 0.4% more, against estimates of 0.1% growth. December's retail sales numbers were revised upward to 1.0% from 0.6%.
On the factory front, the Empire State Manufacturing Index came in nearly triple last month's print, 18.7 compared to 6.5. This is the highest reading for the index in 29 months.
Taken together, the markets are now pricing in much higher odds for a Fed rate hike in the near future. Odds of a rate hike next month have doubled since Tuesday, to 26.6%. The changes for May to be the next rate increase is a coin toss, while June has a 75% chance for seeing the next rise in benchmark interest rates.
While gold futures settled with a marginal 40 cent loss Tuesday, bargain hunting and a return of safe haven demand picked spot gold up from session lows to close $3.10 higher at $1,227.80. Gold prices were helped when Atlanta Federal Reserve President Dennis Lockhart walked back the hawkish tone of Yellen's testimony a bit, though the dollar and Treasuries were unaffected.
Analysts considered gold's ability to resist the pressure of a US dollar that surged to four-week highs as a positive sign for the yellow metal's performance going forward.
Silver ended with gains, even though Yellen's hawkish statements cost it the $18 level it had reached earlier in the morning. March silver futures settled seven cents higher at $17.89, while spot silver netted a gain of 13 cents to close at $17.93.
The platinum group metals continue to show strength overall in 2017. April platinum logged a minuscule $1.90 gain to help it close above $1000, at $1002.00. Spot platinum barely missed the same target, gaining $3.00 to close at $999.00. March palladium settled moderately higher at $781.00, while spot platinum rose $5.00 an ounce to end at $779.00. Both COMEX platinum and palladium have gained more than $98 an ounce so far this year, supported in part by forecasts of higher auto sales in the US and China.
Federal Reserve Chairwoman Janet Yellen battled the late-night resignation of National Security Advisor Mike Flynn for attention on Capitol Hill Tuesday. Markets were far more interested in what Yellen had to say, in spite of the news media focusing on the shakeup in the Trump White House. Her hawkish testimony before the Senate Banking Committee launched the dollar out of negative territory and to a four-week high, while weighing on Treasuries.
US bond prices were down for the fourth day in a row, which sent yields to their highest points in over a week. Yellen's announcement that it was better for the Fed to raise rates more quickly than too slowly was the main driver for bonds Tuesday. Some of the United State's largest creditors, including China and Japan, are dumping Treasuries at a torrid pace, unwilling to hold low-yield bonds as accelerating inflation looms.
Wall Street, especially financials, loved Yellen's economic outlook. Higher benchmark interest rates increases profits for banks and other lenders. Goldman Sachs, which has several alumni in the highest positions in the Trump Administration, saw its shares close at a new all-time high Tuesday.
Stocks began the day in the red Tuesday, but a combination of a hawkish Janet Yellen and a report that wholesale prices rose more than expected sent equities into positive territory by the early afternoon. Yellen could probably be credited with saving the current stock rally, which saw major indices close at record highs for the fourth day in a row.
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