To tighten or not to tighten, that appears to be the question…
After a relatively quiet week from a data perspective, investors are left pondering whether or not the Fed will raise interest rates again in September or December. While much of the U.S. economic data has painted a picture of ongoing improvement in activity, there are still several areas of concern both domestic and foreign.
The highlight of the past week was undoubtedly Wednesday’s FOMC meeting minutes. The committee elected to hold rates steady-at least for now-and did not give any real concrete idea of when the next hike may take place.
The FOMC seemed considerably more upbeat about the economy, and described household spending as “growing strongly,” and referred to the labor market as “strengthening.” The housing sector appears to be viewed as a mild positive, but the factory sector may be characterized as mixed.
While expectations for a rate hike at the latest meeting were almost non-existent, odds of a September or December hike have been trending higher. While the Fed does see some significant improvement, it also seems very leery of raising rates prematurely. In fact, it seems as if one or two sharply downbeat economic reports could be the difference maker at this point. Any significant misses could potentially keep the central bank on hold until early 2017.
The upcoming trading week will feature some key economic releases, but may be on the quiet side as many investors take last minute vacations before summer’s end. Markets could find themselves simply drifting until more robust trading volumes return.
Gold had a tight trading range once again this past week, and was held to a range of just over $20 per ounce. The market could be gearing up for a significant upside breakout or downside breakdown, and the longer prices stay sideways the more significant the move may be. It would seem that many precious metals investors are awaiting more clarity from the Fed before taking a position.
The recent dip in gold may be bought again by bargain hunters, and for now the bulls still seem to have the advantage. That could change quickly, however, if the current dip becomes a larger correction. Gold ended last week on a sour note, falling by $11 per ounce as some profit taking likely took place and as sell stops were triggered. The market could find itself on the defensive to begin this week in the absence of any fresh bullish inputs.
Gold investors will also continue to watch the dollar index, which has been on its heels lately. The recent slide in the dollar would seem to indicate that many investors do not believe another rate hike will come in 2016, and that even if the Fed did hike, the pace of further hikes is likely to be very slow and incremental.
Gold may remain well-supported for the foreseeable future even if the central bank does tighten. Ongoing easing measures in many areas of the world along with the spread of negative interest rates may keep interest in gold strong, and any signs of economic weakness or a top in stocks could fuel a sharp rally in gold from current levels.