Friday morning saw a swift selloff of precious metals as investors continue to anticipate improving economic performance and higher interest rates in the U.S. The gold price slipped about 0.7% in early trading, falling below $1,230/oz. Spot silver was mostly flat, hovering around $17.70/oz. Platinum and palladium each lost ground, as well.
Although Wall St opened mixed this morning, two factors were largely driving action on the markets: the most recent data from the Institute for Supply Management (ISM) and continued rate hike speculation fueled by optimistic comments from the Fed.
The ISM non-manufacturing index, which measures economic growth in the services sector, registered at 57.6 in February, a solid jump from January's 56.5 reading. (A reading above 50.0 represents economic expansion.) This was the highest the index has reached since October 2015, and the gains were made virtually across the board.
Fed In Full Force
The mouthpieces for the Federal Reserve have been echoing this improving outlook for the economy—which strengthens the case for higher interest rates. Expectations that the Fed will raise its benchmark fed funds rate at the March FOMC meeting have been on the rise, especially given the slew of recent comments by prominent members of the Federal Reserve Board. Right now, the implied odds of a March rate hike have leaped to above 75%.
San Francisco Fed President John Williams and New York Fed President Bill Dudley have been talking up higher interest rates of late, helping to move the needle of public sentiment further in the direction of "time-to-hike." Their comments have been seconded by Fed Vice Chair Stanley Fischer as well as one of the most notorious doves on the Fed, Lael Brainard (pictured, left).
While this hardly removes all possibility of risk aversion becoming a strong factor later this year, it is still a cause for optimism.
“Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path,” Brainard said on Wednesday in a speech given at Harvard University. In other words, she sees an imminent end to the era of ultra-low interest rates.
The global markets will be listening closely for more clues when Fed Chair Janet Yellen gives a speech in Chicago at 1 pm EST.
Across the Atlantic, economic sentiment in Europe and especially the U.K. has been moving the opposite direction. Setting aside the looming euro crisis for the moment, the British economy seems to be slowing down amid ongoing uncertainty over how Brexit will play out.
Not only has the prospect of doing business in the U.K. (especially in the financial sector) taken a severe hit due to the Brexit upheaval, the most recent data show that the growth of services and manufacturing in the country slumped to their lowest in six months. This send the pound sterling tumbling to $1.22. The higher cost of providing such services has accompanied the weaker sterling. This has spurred speculation that the Bank of England will respond with even more accommodation just when the U.S. appears prepared to do the opposite.
The dollar initially got a lift on Friday, but slipped 0.3% by 11 am EST. The DXY index stood at 101.9. At the same time, the improving outlook in the U.S. hit the bond market as traders dump Treasurys with the expectation that rates will be higher in the near future. The 10-year Treasury yield rose to 2.48%.
Stocks in Asia were lower overnight. Crude oil prices rose about 0.5% Friday morning after getting smacked lower this week. WTI crude futures traded just shy of $53 per barrel.
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.