Two of the most highly anticipated economic news events for the month have now come and gone, and markets are still trying to make up their minds regarding the potential implications.
Last week, the Bank of Japan met regarding monetary policy while the U.S. Federal Reserve also held its monetary policy meeting and subsequent press conference.
The BoJ did take action this past week, although the action taken did not come in the form many were likely expecting. Many analysts were of the opinion that the Japanese Central Bank would likely take rates further into negative territory. The bank elected to go down a different path, however.
The BoJ, without getting into details, has now unveiled what is being dubbed “quantitative and qualitative monetary easing with yield curve control.” The BoJ has also committed itself to further easing until inflation overshoots the central bank’s two percent target.
The question likely now being asked by many is “Has the Bank of Japan simply run out of ammo?”
Of course, time will tell but concerns do seem to be mounting that the central bank is running out of bonds to buy-and that previous easing measures have proven ineffective.
The U.S. Fed, on the other hand, elected to hold rates steady although the vote was the closest it’s been in some time. The doves won by a vote of 7-3, although the central bank appears intent on hiking rates before the end of the year.
Perhaps more importantly, the Fed lowered its target Fed Funds rate from three percent to 2.9 percent, and reiterated that the pace of additional tightening would be very slow and incremental. At this point, a single rate hike is expected this year while two are expected next year.
The notion of sluggish global growth may keep central banks very accommodative for some time to come, and further easing measures are likely to be unveiled by several key central banks.
The initial reaction to last week’s central bank news by the gold market was positive. The bulls will need to see some follow through this week, however, to really regain upside momentum.
Investors will be watching the data stream closely in the coming weeks, and the Employment Situation Report for September could potentially make or break the Fed’s plans for a December rate hike.
Given the Fed’s lowered economic outlook and the notion of ongoing easing elsewhere, gold and precious metals could potentially see fresh new highs in the coming months.
Although stronger equities have likely been a significant roadblock to higher gold prices in recent months, stocks may be more deeply affected by a December rate hike than gold. The coming weeks will demonstrate if the gold market has already completely discounted a hike by the Fed, and if the idea of ongoing easing and slow growth is something the market can build on to put together a stronger long-term rise in prices.
Stocks have been showing some signs of weakness in recent trade, and any indications that the equity market bubble may be bursting could potentially drive significant capital inflows into gold, silver and other perceived safe haven assets.