The gold market is higher in early action Tuesday after starting the day off on a weaker note. Spot prices are up some $15 per ounce and are now back above the key $1750 level. The bulls have been reawakened today as some weaker-than-expected economic data could be changing market opinions about the Fed and its plans for interest rates. The latest piece of data, Flash PMI, fell more than expected and follows a weaker-than-expected new home sales figure.
Both weak data points could point to recession on the horizon, if the economy is not in one already. Fears of a recession may be guiding market action today. If more data is released and is weaker-than-expected, the markets could assume that a recession is increasingly likely. These fears have the potential to affect the Fed and its decisions regarding monetary policy. With still a few more weeks until the FOMC meets again, markets could see heightened volatility and possibly even some major selling of the data stream remains on the weak side.
The Fed will be together this week in Jackson Hole, Wyoming at the annual Fed symposium. While nothing new is expected from the Fed at this point in time, Chairman Jerome Powell is scheduled to deliver a speech Friday at the conclusion. Powell could provide some meaningful clues about the central bank’s plans and thought process going forward. The symposium has, in the past, provided investors with useful tips on the bank’s plans and outlook.
Regardless of what the Fed does or does not do next month, the economy is at risk for recession. While many were of the opinion that the Fed may begin to pivot away from the inflation fight next month, the Fed may do just the opposite. Powell has said that the Fed believes inflation to be the greatest risk to the economy. Not allowing inflation to become entrenched has been a priority for the Fed, and it may be unlikely to change its tune any time soon. Having already backed itself into a large corner, the Fed may now do what it can to preserve what little, if any, credibility it has left. Doing so means the Fed is unlikely to suddenly change its plans or to reverse course.
Odds are good that the Fed will hike rates at least a couple more times before assessing its actions and its options. This could coincide with the central bank thinking about a course reversal early next year. Perhaps one or two more aggressive rate hikes will prove to be more than markets can bear. If stocks and risk assets really begin to slide, one has to wonder if the Fed will be just as willing to stick it out and continue hiking while also shrinking its balance sheet.
Gold may remain in neutral until more is known about the Fed’s plans. The key areas of $1800 and $1700 remain in play. Whichever side is penetrated first, on a closing basis, could be the side of the market that sees price action for months to come.