Financial markets learned with certainty yesterday that the Fed can no longer be regarded as wrestling with the idea of whether to exit from stimulus, but, rather, as to when and not as much as to how to do so. In parsing the FOMC’s minutes which were recorded during its April 26-27 gathering, Fed watchers ascertained that the US central bank’s policy making members are basically nearing an agreement on the steps they will take to drain the bathtub of liquidity in which many a speculator has been enjoying a very fun-laden bubble bath for some time now.
While financial markets learned that ticker tapes are moved by scribbles found in the Fed’s meeting minutes, the world at large this week learned that the rich/famous/powerful can reliably be counted upon to eventually reveal (not by choice, mind you) that they are driven by the heady pheromones of sex/money/drugs and that sooner or later they exhibit such tendencies with a regularity that puts Swiss watches to shame. Messrs. DSK and Arnold only add to the growing list of hitherto iconic figures that are now becoming material for late night talk shows.
In the wake of the release of the Fed’s meeting minutes it was reported by Reuters that “U.S. interest rates futures fell as the Federal Reserve's record of its April meeting raised some concerns that it might tighten monetary policy sooner than previously thought.” The unwinding of the $2.6 trillion large securities portfolio and the timing thereof have been the subjects of intense debates both within and without the Fed and they have intensified as we approach the termination date of QE2 in six weeks’ time. Some Fed members are not totally sold on the soundness of the US’ economic recovery while others do not buy the idea that current inflationary manifestations are of a lasting nature.
In any case, market betting is now focusing on whether Fed action on rates comes in 2011 or perhaps a few weeks into 2012. Talk of QE 2-point-anything has died down to but a trickle, and even that is now only visible in the ever-hopeful hard money newsletter niche. What kind of “black swan” it might take to bring about such a fresh accommodation on the part of the Fed remains a mystery shrouded within an enigma.
Overall, it appears that most FOMC meeting participants did agree that shrinking the presently swollen Fed balance sheet prior to actually hiking interest rates might be the sequence that is more desirable. Mr. Bernanke did however specify during his April press conference that followed the Fed meeting that, if inflation turns more than pesky and shows signs of hanging around, well, then “there’s no substitute for action.” No need to guess the type of “action” he was referring to…
Since that time, and probably much to Mr. B’s relief, crude oil (upon whose price much of the inflation chatter was based upon in April) has dipped to under the century mark and other commodities have fallen in value as well. However, as reflected in a recent statement he made, at least one Fed member feels that the US central bank ought to drop its current “core inflation” focus as the metric by which to judge the elevation or lack thereof in prices in the real world. St. Louis Fed President James Bullard would prefer that the Fed adopt a broader view and look at headline inflation and somehow take into account those two more volatile components (food and energy) that are part of the overall inflationary picture.
Once again sounding the alarm on $100 crude, the International Energy Agency said this morning that sky-high black gold threatens to undo the emergent global economic rebound. The IEA showed “serious concern” that the oily bubble that has been growing since last fall is pressing the world’s households and businesses to the proverbial wall and that it is adding unwelcome…energy to the world’s inflationary patterns. The agency urged producers to turn their production spigots even higher, and it basically gave the upcoming June 8 OPEC meeting its top-of-the-list agenda discussion item this morning. Note that the IEA does not normally make such “judgmental” statements on prices, if any at all.
Speaking of black gold, we learned from our vigilant market observer friend Ned Schimdt the other day that the world’s largest commodity fund lost $400 million (not a misprint) in bets on oil gone awry during the week that ended on May 6. FOUR hundred MILLION. What did the management at Clive Capital (the firm in question) have to say about that wipe-out? “We are at a loss to explain what has caused crude oil markets to be annihilated.” Pinocchio would be proud; very, very proud. That line is a doozy.
Spot gold dealings opened near the $1,491 mark in New York this morning, losing about $6 per ounce while the rest of the complex showed marginal gains at the start of the Thursday trading session. Elliott Wave updates issues late yesterday still indicate that if gold can manage a push towards higher than the $1,500 level (one which, thus far, has proven to be a bit of a problem to break above) one might even see the yellow metal trade as high as $1,540 or so prior to once again heading to lower (near $1,400) levels.
Silver gained 15 cents in the early minutes of trading and was quoted at $35.15 the ounce while participants still exhibited a good dose of nervousness and tentative buy/sell patterns. As is the possible case with gold, the white metal might itself be able to stage a rebound, perhaps to as high a value zone as the $39 to $42 area prior to resuming its tilt towards the mid $20s in due course.
Platinum and palladium started off with mixed results this morning, as the former was stalled at $1,765.00 per ounce and the latter fell $1 to the $731.00 mark. No change in rhodium for a change; it remained quoted at the $1,900.00 per troy ounce bid level. Analysts at StandardBank (SA) still continue to see “value” in platinum near $1,700 and in palladium near $700 and are still targeting $1,900 and $900 respectively (by Q4) for the two noble metals.
Japanese automotive industry reports reveal a quite unbalanced recovery in the demand for autocatalysts and the related offtake for platinum-group metals (PGMs). The reports show disparities between, for example, production of cars by Toyota and by Nissan. The aftermath of the March quake continues to produce mixed results for that country’s automakers. Toyota, for example, is not really expected to resume full output until Q4 of this year.
This morning’s announcement that Japan has basically fallen into a fresh recession (GDP shrank by a much-worse-than-expected 3.7% in Q1) did not make for encouraging news for PGM speculators. The world’s third largest economy has been in and out of recession in the period since early 2008 and has shown seven periods of contraction (the worst of which was in early 2009) versus five periods of expansion.
The Wall Street Journal reports that “weakness in Japan's economy is in contrast to many other countries, which are moving toward ending stimulus policies adopted during the global financial crisis as their economies recover. In the first quarter, GDP in the 17-member euro bloc rose an annualized 3.3%, while that of the U.S. grew an annualized 1.8%.”
US jobless claims fell to 409,000 in the latest reporting period, says the US Labor Department. Most economists had only anticipated a decline to roughly 424,000 filings. However, the four-week average is hovering near the 439,000 mark – the highest since last November and the total number of folks receiving some type of state or federal benefit is near 7.94 million even after dropping by 47,000+ during the week of April 30.
Meanwhile, back at the Capitol Hill “ranch” the US budget talks appear to have stalled as the “Gang of Six” (senators) dawdled on coming up with concrete plans to rein in deficits. The wrangling has prompted Treasury Secretary Geithner to issue a blunt warning about the fact that the debt ceiling – due to be reached on Aug. 2 – not being raised is “not an option.” Them’s fightin’ words. In essence, Mr. Geithner said that words such as “we can’t bridge the gap between what actually needs to happen and what people will allow to happen” (uttered by Sen. Coburn on Tuesday) were no more than lies and political mumbo-jumbo and that protecting the US’ creditworthiness is no matter to be taken lightly.
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America