Don’t bet that the Fed will come to the rescue

It was another week that precious metals traded mixed and the next week might show the same behavior – at least ahead of the US labor market report. Unlike in March, the FOMC statement had no negative impact on precious metals, in particular on gold. However, gold bulls should not be too sure that the Fed would come to their rescue.

The hope dies last. This is not only the message of Pandora’s Box, but also describes the behavior of the bulls in the US Treasury and other financial markets. The FOMC members have revised up their forecasts for US GDP growth and core PCE inflation in this year and for 2013. The majority still expects that the first rate hike would not take place before 2014. However, the range of forecasts for the Fed Funds target rate has also moved up. This should already be a warning signal that the majority of the FOMC voting members are not inclined to implement a more expansionary monetary policy.

But this had been faded out in the cognition of traders and investors in financial markets. They just focused on the standard phrase of the FOMC, which had been repeated by Fed chairman Bernanke at the press conference. This standard sentence is “the FOMC is ready to act if needed”. However, what traders and investors overlook completely is the if-clause in this statement. It is conditional on a situation that further monetary stimulus would be required. Against the backdrop of forecasts for US GDP growth and inflation being revised upwards, this is currently not at the horizon as far as the eye could see.

The initial jobless claims remained at an elevated level. However, the seasonal unadjusted data – the raw figures – showed a decline of jobless claims. We have pointed out already that moving holidays like Easter could have a significant impact. Seasonal adjustment procedures could even distort the underlying trend instead of reducing the noise. Thus, the current labor market data is not providing a clear signal for the majority of the FOMC voting members to embark on QE3.

The advanced estimate of US GDP growth in the first quarter of 2012 came in lower than expected. However, private consumption grew stronger than total GDP. Even as it was at the expense of a decline in the saving ratio of the private sector, this is a positive sign as the consumer is still spending despite the weaker consumer confidence. Fed chairman Bernanke often emphasized that the pick-up in headline inflation rates would be transitory due to the rise of crude oil prices. The discrepancy between the core and the headline inflation rate supported his view. However, now the Fed’s favorite inflation gauge, the core PCE deflator, has risen above 2.1% yoy. It is widely assumed that the Fed has an implicit inflation target for the PCE deflator of 2.0%. We do not expect that one quarter of core inflation about this level would induce the FOMC to shift the direction of monetary policy. However, the hawks within the FOMC would stress that inflation risks have increased. Therefore, the core PCE deflator provides another reason for the FOMC to adopt a wait-and-see attitude. Furthermore, the standard phrase of being ready to act when needed is open for both directions. Further increases of the core PCE could also induce the FOMC to increase the Fed Funds target rate earlier than currently indicated. Nevertheless, this appears currently as a remote possibility only.

For the time being, it appears that financial markets have a clear preference for the safe haven of government notes and bonds issued by the US Treasury and Germany. As long as the risk appetite of investors remains low, it seems that precious metals would have difficulties to enter a new upward trend. Therefore, we expect the precious metals to remain in a trading range. However, this all could change very rapidly next Friday with the release of the US labor market report.