Gold Consolidates Ahead Of Jackson Hole
Peter Grant | Aug 19, 2014 03:16PM ET
Gold gave back earlier gains as better than expected U.S. housing data lifted stocks, yields and the dollar. Despite persistent geopolitical tensions underpinning the market, the yellow metal slipped back below $1300, keeping the overall tone consolidative.
U.S. housing starts surged 15.7% in July to an annual pace of 1.093 million, above expectations of 965k, versus an upward revised 945k in June. The print was just shy of the cycle high set in November 2013 at a 1.105 million pace. This may have dragged forward expectations of the first Fed rate hike, as evidenced by Treasuries retraced earlier gains and the dollar jumped to fresh eleven-month highs against a basket of currencies.
However, inflation slowed in July to +0.1% m/m, versus +0.3% in June. Core inflation came in below expectations. This leaves the annual pace of CPI at 2.0% and core at 1.9%.
The market will be watching the KC Fed’s Jackson Hole Summit for any new policy queues. Fed chair Yellen is scheduled to speak on Friday and is expected to reiterate why she still sees slack in the labor market, despite recent drops in the jobless rate.
It seems like it behooves the Fed to continue fomenting uncertainty about when ‘lift-off’ will come. After all, rates remain suppressed, stocks remain buoyant and volatility remains near historic lows. What’s not to love, from a central banking perspective? It can’t last indefinitely though; and I’m sure the Fed knows it.
A survey of economists conducted by The Wall Street Journal reveals that the vast majority of respondents fear that the Fed would be too slow in raising rates. History shows that the Fed is indeed more reactionary than proactive.
For example: It is the Fed’s stated goal to generate 2.0% PCE inflation. They’ve pushed hard to reach that goal, to the tune of a $4 trillion balance sheet, and yet the PCE price index was 1.6% y/y in June. That was the 26th consecutive month below the 2.0% target.
Even though there’s no sense that a move above the 2.0% target is imminent, Ms. Yellen has already indicated that she’d be willing to tolerate a period of above-target inflation. Despite the massive expansion of the money supply (and by extension, the Fed’s balance sheet) the velocity of money continues to hit record lows.
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The velocity of M2 is a mere 1.531 as of Q2, compared to the pre-crisis peak of 2.000 and a 1997 cycle high of 2.200. So, despite a boat-load of new dollars in the system, those dollars are turning over at an ever-slower rate. If inflation expectations where to suddenly become ‘unanchored,’ the velocity of those trillions of dollar could accelerate rapidly and the Fed would find itself “behind the curve” once again.
I liken it to the Fed trying to break into a china shop: They push against the door harder and harder, and when it finally gives way, they don’t stop on the threshold (inflation target). But rather, they go crashing into the shop, wreaking all-sorts of havoc.
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