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After weeks of chatter about an imminent rate increase from the Federal Reserve, last Friday's jobs report has kicked the immediate prospects of one further down the road. The market had looked for 164,000 new jobs in growth and instead saw a very anemic and disappointing only 38,000. If this was the first weak economic data results, maybe the Fed could shrug it off. The truth is that April's job report results were not impressive either, and these were further revised down as part of the May report. Inflation is at a stand still too. All of this indicates an economic engine that has stalled out for the present.
Fed's Response to the Terrible U.S. Jobs Report
The Fed Chair Janet Yellen tried to put a positive spin on things at first. According to her speech Monday, interest rates are still likely because in the U.S. positive economic forces are greater than the negative ones. She did admit that the weak jobs report needs to be watched. It is important to note that Yellen did not mention the phrase “in the coming months” in these latest comments. Only a few weeks ago Yellen had specifically stated that the Fed should be ready to raise its interest rate in the upcoming months. Clearly the May job report has given the Fed pause for thought on their interest rate raising plans. In the wake of the report and Yellen's reaction, all of the leading major Wall Street banks projected there will be no June rate increase according to a poll from Reuters. Even before her remarks, the CME Fed Watch tool demonstrated a rate hike probability of only 6% for June and a not substantially higher 37% for July.
This just goes to show you that economic data is unpredictable as Yellen admitted. She announced that one of the important themes for her comments is that the outlook surrounding the economy is fraught with inevitable uncertainty. She stated, “the uncertainties are sizable, and progress toward our goals and… the appropriate stance of monetary policy will depend on how those uncertainties evolve.” In other words, the Fed is still keen on raising interest rates at some point later in the year. The employment report did not change that. It has instead altered the time frame and path to the interest rate increase. As one example, CIBC Capital Markets of Toronto anticipates a rate increase from the Fed at their September meeting.
How Gold Reacted to the Report
Gold reacted powerfully to the anemic jobs report and its implications on Friday as you might expect. The yellow metal rose 2.8% on the day as imminent expectations of a rate increase suffered a severe blow. The reasons that gold moves so strongly in anticipation of rate increases or delays has to do with two factors. Higher rates mean competing assets' interest yields go up and create an opportunity cost for holding gold which does not offer a yield of its own. The dollar climbs higher in response to supporting interest rate talk and moves. Gold is generally priced in U.S. dollars and tends to move inversely to the greenback. When interest rate expectations drop like this, the dollar loses some strength and gold usually gets a boost.
Physical Gold Backed Exchange Traded Funds Reach Highest Inventories in Nearly 3 Years
Despite all of the gyrations in price and the significant gold pullback in the month of May, physical gold holdings continue to grow in the gold backed exchange traded funds. Friday saw the SPDR Gold Trust GLD increase its gold inventory to the highest amount since back in October of 2013. This GLD is the largest physical gold backed ETF in the world, making it the best barometer for how longer term investors are investing in the yellow metal.
Euro Area Grows Faster than Expected as Extraordinary Stimulus Continues
Greater growth than expected in the Euro area also emerged this week. The 19 Euro countries area economy grew at its fastest rate in a year. The European Central Bank now predicts that growth will slow for the second quarter and interest rates will potentially remain negative. Gold is supported by the unusual stimulus measures the ECB maintains and just opted to not decrease last week. The bank will continue to buy asset purchases and keep negative interest rates in an effort to increase inflation. The EuroZone still suffers from economies in the periphery with weak economic indicators as with Spain's 25% unemployment and Greece's abysmal growth.
Germany meanwhile showed its highest levels of business sentiment for five months in May. This means that the biggest and most important economy in Europe is still growing strong. This is reflected in the ECB's improved growth forecasts for the block. They have raised the 2016 forecasts to 1.6% and the 2017 estimate to 1.7% while cutting the 2018 estimate to 1.7%. There continue to be downside risks to the Euro area including the United Kingdom's June 23rd Brexit referendum, slower progress with needed structural reforms, and lower prospects from emerging markets like China.