The trading action at opening time in New York this morning was dominated by nervousness in the wake of the large decline in the Dow on Wednesday. That drop was, in turn, precipitated by the poor showings in the ISM’s manufacturing and the ADP’s private payrolls figures. Global benchmark indices fell to one-week lows yesterday as apprehensions that the global economic recovery is struggling through an unexpected (by many) “air pocket.”
Despite certain economists’ assertions that this phenomenon is but a “run-of-the-mill, mid-cycle breather,” investors remain spooked by the prospects of yet another serious global economic contraction. The “risk-on” trade morphed into “no risk, thanks” faster than the negative headlines were being bolded on Wednesday. When the “risk-off” leaning becomes the comforting attitude to adopt, there is normally one beleaguered asset that tends to benefit from the shift; the good old greenback.
Markewatch’s Jim Lowell sums it up as follows: “When Calamity Jane comes to town, I don’t think there’s a better bet than the greenback. Say what you will, the technical trading charts suggest that what pulls the dollar’s trigger best is a marketplace shoot ‘em up that leaves all customers looking for a table to dive under. I have been a longstanding dollar bull, which is a kind way of saying I have been poked in the eye more than once by that call.” Join the poked-eye club, Mr. Lowell. Someone here is a “member emeritus” of it.
Thus, and quite understandably, the metals’ trade (as well as a host of other speculators) was keenly focused on the day’s release of US initial jobless claims numbers as well as tomorrow’s overall US employment statistics courtesy of the Labor Department. Fortunately for certain markets at least, the level of unemployment claims filing did manage a small (but smaller than hoped-for) decline (to 422,000 for the latest reporting week) while the four-week average of such filings dropped by 14,000 to its lowest level in more than a month; it ran at the 425,500 level.
The Labor Department’s fresh data did not initially appear to help the US dollar too much (it remained 0.45 lower, at 74.36 on the trade-weighted index) but the consensus was that the euro’s momentary strength was more of an impact factor at this juncture. The common currency received an additional psychological lift in the wake of a tough-talking Mr. Trichet this morning. The ECB President’s call to “arms” included urgings for significantly tougher fiscal interventions to take place in the eurozone as well as for the advent of a central finance ministry intended to look after Europe’s fiscal issues.
At this point, such an agency would immediately be given quite a “to-do list” to be sure. Just last night, Moody’s Investor Services reshuffled the alphabet soup lettering related to Greece’s sovereign rating to Caa1 from B1 and also assigned it a “negative” outlook. Moody’s concluded the game of ratings Scrabble with the caveat that Greece’s present “risks imply at least an even chance of default over the rating horizon.”
The souring set of US economic statistical data that hit the market this week (and quite literally the Dow on Wednesday) immediately raised the choir of “QE3! QE3!” chants to decibel levels last heard in October of 2010 when the “3” digit was still a “2” appended to the “QE.” Strategist Neil McKinnon at VTB Capital however, feels that “there are sufficient political headwinds to prevent a move to QE3, though I think the Fed has little choice but to proceed cautiously and normalize policy very gradually, in order to avoid unwanted volatility in markets."
On the other hand, MarketWatch’s David Callaway advises investor folk not to “hold their breath” as QE3 has…sailed away already. Mr. Callaway spells it out quite bluntly: “Investors would be wrong to hope Bernanke will ride to the rescue again with a third round of quantitative easing, or QE3, by buying Treasury bonds in bulk. Of course, the Fed will keep buying in some format, but the massive program itself will end this month and we’ll be on our own…The increased volatility will also help arrest declines in the dollar, particularly if Europe plays its usual role this summer of scaring investors about Greece and a possible collapse of the euro. That’s not great for commodities, particularly gold. But it might help prevent the gold brigade from driving prices too high too fast.”
Against this background of mixed, lukewarm-to-not-so-hot global financial news, the metals markets opened with slightly indecisive steps this morning in New York. Spot gold traded virtually unchanged at $1,539.00 the ounce as the dollar narrowed its losses after the Labor Department report and Dow futures showed signs of trending higher. Crude oil remained fairly static but was scraping along just pennies from the century mark, which it still appeared to threaten to breach.
Spot silver fell four cents to open neat the $36.78 bid-side level following yesterday’s late afternoon swoon that was shaping up to remove nearly $2 from its value in what has now become an almost commonplace event; intra-day mega-swings that would have stopped speculative hearts just a year or two ago. It was relatively easy to divine why silver fell out of bed in the wake of the somewhat alarming US manufacturing activity figures.
As we reported in yesterday’s article, slowdowns of variable proportions in the economies of Australia, China, India and in the eurozone appear to be shaping up at this juncture. Platinum gained $2 to open at $1,821.00 while palladium showed an equal rise to reach $771.00 the ounce. As was largely expected, the sales figures for US auto sales for last month were definitely not worth sending postcards home about.
Toyota Motor led the decline in the amount of iron that was moved off dealer lots in the USA. Its sales fell by a whopping 33% on the month. In part, the fact that there wasn’t much out there on those lots to offer for sale, contributed to the dismal statistics. High gas prices (averaging $3.90/gal.) did not help matters either for would-be US auto shoppers.
However, South Korea’s rising auto-star, Kia Motors, bucked the trend and chalked up a 53% spike in US deliveries. Its new Optima sedan apparently fit the bill quite nicely for many a US buyer unable to get a hold of a Prius or a Camry. May’s situation is however seen as the nadir for Japan’s auto sales in the US in the wake of the Sendai quake. Rebounds are almost certain to come as the summer wears on and fall’s new models begin to roll into showrooms.
Finally today, back to Fed-related talk. Make that, Fed-originated talk. Plus, a bit of myth-busting 101 while on the topic, as well.
The US central bank’s San Francisco-arm President John Williams (replacing Janet Yellen) spoke to a group of educators yesterday. He “educated” them on the fact that – contrary to 99.99% of popular perception – the massive expansion on bank reserves is “very unlikely to create an inflation problem down the road.” While some might call this “pure fantasy” and continue to expect the materialization of Harare-on-the-Hudson inflation scenarios, Mr. Williams did explain the mystery to his audience of professionals.
It is most valuable to note that Mr. Williams’ assertions are based on facts and figures that utterly demolish recently heard Armageddon-ish arguments from the hyperinflation camps. “A lot of the anxiety in response to Fed policies is misplaced. Despite all the headlines proclaiming that the Fed is printing huge amounts of money" one of the broader measures of the nation's money stock, referred to as M2, "has grown at a 5 1/2% annual rate on average. That's only slightly above the 5% growth rate of the preceding 20 years."
Mr. Williams remarked that “much of the textbook understanding of money creation and central banking is no longer operative.” Most significantly, he noted that we live "in a world where the Fed pays interest on bank reserves, traditional theories that tell of a mechanical link between reserves, money supply and ultimately inflation no longer hold." In other words, the “lethal weapon” that paying interest on reserves represents – a relatively new power for the Fed – is so effective that it allows the Fed to exercise a degree of control over such reserves that is far higher than common wisdom perceives.
At the end of the day, that tool, combined with an eventual tightening of monetary policy will ensure that A) reserves do not “flow” into the economy creating inflationary pressures beyond desirable targets and B) that inflation – to whatever extent it does materialize – will not be Weimar Republic- or Zimbabwe-like in nature. Not by a long-shot.
Until tomorrow, the world orbits around the same old themes: The dollar, the Fed, the economy, and – most of all – expectations (right or wrong). Plus ca change…..
Jon Nadler is a Senior Metals Analyst at Kitco Metals Inc. North America