Christmas rally start early
Looks like stock Christmas rally has already begun (although some would argue it never stopped). The World MSCI has now hit the highest level since March. While VIX index has declined to near historical lows (EURUSD 1 month volatility and US treasury yields are also falling last week’s spike). The catalyst was growing expectations for consumer spending for the holiday season starting with “Black Friday. ” In addition fed Chair Yellen over nigh warned that tightening policy via interest rates to quickly could keep consumer inflation from reaching 2% target. This dovish comment further indicate that risk of steeper policy path is skewed to the downside and gave stocks a boost as policy will likely stay loose for longer.
Yellen went on to say that removing accommodation too slowly could increase the risk of an strong labor market. However, this comment is already in line with Fed think. The flattening of the yields curve has not helped the USD as the curve suggest that expectations for Fed Fund rate has peaked. The market has already fully-priced in a December Fed rate hike and now is waiting for a new chair (likely Jerome Powell) gets sworn in. As for today trading volume have already decelerated as despite US data heavy calendar of durable goods orders, U-Michigan consumer sentiment, jobless claims and FOMC Minutes American traders are focused on Thanksgiving and the rest of the world could see some downtime.
Gold prices are holding strong
The precious metal is pushing higher. Later last week, Gold challenged $1300 before bouncing lower. The momentum is largely bullish, which underpins global uncertainties. In particular geopolitical uncertainties are strong for the future.
We also believe that inflation is back and will push the commodity prices towards new high. One indicator that we follow, the NY Fed’s UIG inflation is showing consumer prices data growth slightly below 3%. In the same time we see most central banks loading up on Gold, such as the PBoC, Russia and China.
The Fed is very cautious by increasing rates and we maintain that the strategy is to kill the massive debt with inflation which is why we should see gold going higher in the medium-term. $1300 is an easy target. Yet, the dollar may further weaken as following this thinking, the Fed should not raise rates much. The central bank is anyway stuck with its current monetary policy as it cannot raise rates as it would trigger a bond bubble burst. The Fed knows perfectly what they do and the mixed signals they usually send are there to let the time to inflation to develop.
