Fed Chairman Ben Bernanke does his best impression of a one-handed economist. On one hand Ben sends gold and stocks soaring by saying that a premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further! But on the other hand he gave the impression that the Fed could start "tapering" off bond purchases after the next couple of Fed meetings! In like a dove and out like a hawk, sending gold and stocks on a wild ride. After a classic pop gold then dropped as the stock market traders were left scratching their collective heads. Of course after the Fed minutes, they gave into the outside market pressure. It seems some Fed officials want to reduce QE as early as the June meeting if the economic data received by that time showed evidence of sufficiently strong and sustained growth.
So the Fed is trying to separate bond buying and mortgage-backed security buying from monetary policy, or in other words, funds rate at a target of zero while traders see them as one and the same. Like I said before, the Fed changing its amount in bond buying is like lowering and raising interest rates in a negative rate environment. Later in the day the Fed minutes added to the reversal when one Fed member dared to suggest that the amount of purchases could be changed at the next FOMC meeting.
Oh yeah, Ben Bernanke also bragged about the central bank's track record on fighting inflation. Take that Angola, Mexico and Argentina!
The flip flop caused some much needed volatility as gold soared and dropped like a rock! Yet despite the drop today it is rebounding as U.S. stocks look a little less appealing with more uncertainty. Copper also got crushed, but perhaps more on the Chinese manufacturing data in the world's largest copper consumer. Reuters news reports "China's factory activity shrank for the first time in seven months in May as new orders fell, a preliminary survey of purchasing managers showed, adding to concerns that a recovery in the world's second-largest economy is sputtering. The flash HSBC Purchasing Managers' Index for May fell to 49.6, slipping under the 50-point level demarcating expansion from contraction for the first since October. The final HSBC PMI stood at 50.4 in April. A sub-index measuring overall new orders dropped to 49.5, the lowest reading since September, suggesting China's domestic economy is not strong enough to offset soft external demand. "
Of course that does not bode well for crude demand! I told you we were getting close to a top. But while the market focuses of the possibility of softening demand because of the Fed and China there was one area where demand actually improved! That was gasoline! Despite the recent run-up in price, implied demand from the Energy Information Administration actually rose. That was the one bright spot in an otherwise mostly bearish inventory report.
The EIA reported that gasoline demand increased by 449,000 barrels, 8.79 million barrels a day, giving hope that we could see demand actually out perform some predictions over this Memorial Day weekend.