(Kitco News) - The market majority no longer expects another hike in U.S. interest rates in March by the U.S. Federal Open Market Committee, which analysts say is supportive for gold prices.
At one time, the market expected the Fed to hike interest rates by another 25 basis points. Policymakers upped rates in mid-December for the first time in nearly a decade.
However, as of an early-Thursday research note, Commerzbank analysts reported that the Federal funds futures were factoring in a 22% probability of another Fed rate hike in March. The market expects almost no chance of another hike when the central bank meets next week.
Scaled-back Fed expectations are due to the combination of the collapse in global equities so far this year and recent weakness in U.S. economic data, observers said. Since the start of the year, the S&P 500 index is down 8%.
“There is also a bit of disappointment on the economic front in the United States, where economic numbers are coming in below expectations,” said Bart Melek, head of commodities strategy with TD Securities. “That has the market pricing out the probability of continued tightening (of interest) rates in the United States….Volatility in equity markets and weakness on the economic front, to me, suggests that gold could have a better run still.”
Whereas the December jobs report released at the start of this month was strong, most data since has not. On Friday, the government reported that retail sales in the U.S. decreased by 0.1%, with sales excluding autos also down 0.1%. On Wednesday, the market got reports showing that the Consumer Price Index dipped 0.1% and housing starts fell 2.5% last month. Then on Thursday, the Philadelphia Fed’s January business survey remained in contraction territory at minus 3.5, although this was up from December, and weekly jobless claims rose by 10,000 to a seven-month high of 293,000.
“We’re also looking at some of the worst (corporate) earnings in quite some time,” said Frank Lesh, broker and futures analyst with FuturePath Trading. “So we’re looking at slowing economies; just how slow we don’t know as of yet….With this economic weakness, we’ve seen people moving into the gold.”
Whereas the market has largely removed expectations for a rate hike in March, this still will hinge on coming economic data, Lesh continued.
“Right now, we’re getting some weaker data,” he continued. “That supports gold.”
Lower rates help gold several ways. This holds back the U.S. dollar, and a weaker dollar tends to support gold due to their inverse relationship. Also, lower rates means a lower so-called “opportunity cost” of holding a non-yield-bearing asset such as gold, since investors are not missing out on lost interest earnings.
Charles Nedoss, senior market strategist with LaSalle Futures Group, pointed out that comments from European Central Bank President Mario Draghi Thursday hinted at what a lot of central bankers might be thinking – weak commodity prices just might be signaling deflation.
“I think the chance of them (Fed policymakers) doing three hikes this year are getting smaller and smaller,” Nedoss said.
Still, while others commented that reduced rate-hike expectations bode well for gold, Nedoss was more cautious, expressing disappointment that the metal has not risen even more than it has lately. Gold is up 3% so far for the year, but may have been held back from further gains by general commodity-market weakness, Nedoss said.
“Right now, gold has had every positive fundamental thrown at it that you can possibly have and it just hasn’t responded,” he said.
By Allen Sykora of Kitco News; asykora@kitco.com
