I Think She Will Raise Rates, I Think She Will Not

Like pulling the petals off a daisy, market participants and analysts have been oscillating back-and-forth, almost day by day, as to whether Janet Yellen, at the helm of the Federal Reserve, will initiate a last interest rate hike in 2017.

Over the last month or so, market analysts have been pulling off the “I think she will not” Petal from the Fed’s daisy. In fact, as of yesterday, according to the CME’s FedWatch tool, the odds of another quarter-point U.S. rate increase this year decreased to 47%, a 3% decline when compared with the odds of a month ago.

The Data Dependence of the Federal Reserve

The Fed has gone on record stating that all of their monetary policy decisions and changes are data dependent.  As the data changes, it also changes the probability of a rate hike. It also dramatically influences market sentiment. That is exactly what traders and investors are witnessing today as new data increases concerns that the Fed may, in fact, initiate one last rate hike this year. 

Today ADP released its private-sector jobs report. That report stated that 178,000 new jobs were added, which was marginally above analysts’ expectations. This report put a new shine on the potential numbers on Friday’s Labor Department jobs report for the month of July. Current estimates are that 180K new non-farm payroll jobs were added last month. If the actual numbers come in well above expectations, some analysts believe it will give the Federal Reserve the data necessary to approve another rate hike this year.

According to an article by Zacks Equity Research in NASDAQ today, “Friday's non-farm payroll estimate currently sits at 180K, and today's ADP read will not move this needle. We are essentially operating at what economists call "full employment," although wage growth remains stagnant overall, and thus business owners are actually having difficulty filling positions higher up the economic food chain. Should we see wage growth gain traction in the coming months - as well as policies long-promised regarding infrastructure and corporate tax reform - there is an opportunity for the U.S. to see a stronger labor market than perhaps any time in our readers' lifetimes.”

As far as gold is concerned, actions by the Federal Reserve in regards to their current Fed funds rate is a critical pillar of the outside forces influencing price changes. However, it is but one pillar found within a multitude of factors affecting the precious yellow metal.

Inasmuch as interest rates are a critical factor, strength or weakness in the U.S. dollar and geopolitical concerns remain the other primary pillars that market participants use to assess the future direction of gold. On a technical basis, the U.S. dollar has been in a freefall, losing approximately 10% the value over this last year. Add to this mix a volatile geopolitical landscape involving North Korea and, to some extent, Venezuela, and you have the potential for increased volatility and further upside potential for gold.

Wishing you as always, good trading,