Fed Watching Blues

American jobs data released today was better than expected and it again thrust the tapering of QE3 to the front burner, nudging away the immanent government "shutdown" threatened by right wing members of Congress. On the other hand, the overall economic growth of the U.S in the second quarter grew slightly more slowly than the consensus of economists had forecast. 

Whether the decline in weekly unemployment filings translates to actual jobs creation or if it is another sign that people are quitting the labor pool remains to be seen. And, regardless of the second quarter growth (2.5%), for the first six months of 2013 the world's largest economy has expanded only 1.8%.

The news functioned to push the dollar higher, which, as we know, pushes the price of gold lower. Dollar strength is accounting for about 1/3rd of today's decline in gold and almost all of the decline in silver.

(One aside that deserves mention... gold and crude oil seem to have become uncoupled. Prices are not moving in tandem right now.)

"The jobs data is decent, and worries about tapering are back," Bart Melek, the head of commodity strategies at TD Securities in Toronto, said. "The gold market has become very sensitive to U.S. data." 

Non-voting member (on the FOMC), Richmond Federal Reserve Bank president Jeffrey Lacker said that he supported faster tapering of the Fed's monthly bond-buying program (QE3) and said he is surprised it has not already begun. More crucially, Fed governor Jeremy Stein, who does vote on FOMC proceedings, said today that the FOMC's decision not to taper during last week's meeting was "a close call." These statements rattled the precious markets a bit. Additionally, a European Central Bank's executive board member said the ECB will maintain its expansive monetary policies. If the ECB holds its policies steady and the Fed tightens its stimulus, the dollar will rise against the euro and hurt precious prices.

The bogeyman peeking in the window of this mini economic party is the interest rate for mortgages. Absent real job growth and wage inflation, the rise in home values has been providing at least psychological support for decent - not great - consumer spending. This is a bit of a "feel good" aspect born of basic human behavior. But there is a grounding in reality. For people over, say, 50, seeing their homes regain value means that their retirement nest egg looks better, so they feel more comfortable not putting more money into savings or retirement accounts. Translated a different way, if your home 6 months ago was worth $300,000, it's now worth roughly $320,000. So you feel, rightly or wrongly, that you've earned $20k that can be spent on other things you want other than a cautious investment. 

If the mortgage interest rate stays high, though, you can't tap that newfound "wealth" through 

re-fi or home equity loans. When you couple that with the poor economic prospects of the Millennial demographic, eventually no one will be able to buy the home you're aching to sell.

"The tightening of financial conditions observed in recent months, if sustained, could slow the pace of improvement," the Fed said in its FOMC statement last week. Policy makers "decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."

Bloomberg expanded further:

"Fed officials on Sept. 18 reduced their forecasts for economic growth this year and next. They forecast GDP will expand 2 percent to 2.3 percent in 2013, down from a June projection of 2.3 percent to 2.6 percent growth. Business spending also may take time to pick up as fiscal uncertainty weighs on demand. Orders for goods such as computers and machinery rose less than forecast in August."

It used to be that young men sat around on Wall Street at lunch hour and watched the girls go by. Now they eat at their desks and watch the Fed. It's a restless age.

Wishing you as always good trading,