martes, 4 de noviembre de 2014

martes, noviembre 04, 2014
Markets Misreading Of Fed Statement Is Opportunity In Gold
             
 
 
 
Summary
  • The markets misread changes to the FOMC’s October statement as hawkish, focusing only on changes to language concerning the labor market.
  • The statement contained dovish additions regarding inflation expectations and shifts in votes toward a more dovish stance.
  • The sell-off in gold following the statement release offers a buying opportunity before markets price-in a more dovish Fed.

The markets misread Federal Reserve policy intentions this week believing hikes in the federal fund rate will occur sooner than previously expected. This expectation led to a hammering of gold prices and the SPDR Gold Trust ETF (NYSEARCA:GLD). This unwarranted decline offers a buying opportunity in GLD.

The Misinterpretation

To best understand where Federal Reserve policy is heading, market participants closely compare each FOMC meeting statement with the previous meeting's release. In the opening paragraph of this week's October statement changes were made concerning the labor market outlook. In September, the statement contained dovish opening language on labor markets:
On balance, a range of labor market indicators suggests that there remains significant underutilization of labor resources.
The October verbiage takes a more hawkish stance:
On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing.
For clarity, the primary change is the removal of the word "significant" and the addition of the word "diminishing." This change is read by the markets as an indication that the Fed plans to raise interest rates sooner than previously anticipated. The implication being that a more robust jobs market requires a less accommodative stance.

Somewhat missed by the markets was a greater emphasis on inflation being below the Committee's 2% target. Inflation levels below the target rate provide the Fed cover to keep the federal funds rate near 0 percent for longer and lower the magnitude and frequency of any rate hikes after liftoff in the rate. Specific changes to the inflation language in the opening two paragraphs came primarily from two additions:

Market-based measures of inflation compensation have declined somewhat…
and
Inflation in the near term will likely be held down by lower energy prices and other factors.

Additionally, few commentators point out that the September release showed two members voting against the policy stance because they desired a more hawkish statement. No such votes were present at the October meeting. In fact, the only vote against the October statement was on grounds that it was too hawkish. In September President Fisher voted against the policy because he believed improved conditions would warrant an earlier reduction in accommodation than Committee guidance suggested. Similarly, President Plosser objected to guidance because it did not reflect economic progress toward the Committee's goals. Following is the more dovish language concerning the votes in the October statement:
Voting against the action was Narayana Kocherlakota, who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level.

 The Sell High Buy Low Moment

GLD Chart
GLD data by YCharts

The monetary metals are poised to outshine equities when market expectations shift toward the aforementioned later, slower increase in the federal funds rate. This is especially true if there is a corresponding economic weakness (see: "Gold And Silver Shine When Data Dependent Fed Caves"). Any weakness would be a drag on equities and further entrench the Fed's accommodation policies that support hard assets. The monetary metals historically perform well in this negative real rate environment.

GLD Price Chart

With gold and silver already down on fears of impending rate hikes, this week's declines based on the misreading of Fed intentions offer a buying opportunity in precious metals. Look for confirmation of this thesis from Fed participants in November public appearances and at the more robust December FOMC meeting. Specifically look for the Fed's lowering of the 2015 year-end target rate, which is currently 1.25-1.5 percent.

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