What The Fed Knows That You Don’t And Why It Matters For December And Beyond

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What the U.S. Federal Reserve sees in an apparently weak Q3 GDP report is entirely different from what currency traders and equities traders think they are seeing. (It’s possible that precious metals traders got it right.)

Within the soft 1.5% growth there is a curious anomaly. If you exclude the effect that over-inflated inventories had on GDP growth, the American economy is still growing at 3%.

Alrighty – taking this component or that is a tad artificial but it is a time-honored custom. We pick on inventories because they were swelled by over optimism as opposed to a slowing in consumer demand. Manufacturers and retailers thought purchasing by business and consumers was going to be stronger, especially overseas.

There should be a quick re-balancing of stockpiles, which will bring them more in line with demand as the holiday season approaches. Already, underlying industrial figures are telling us that factory production will soon stabilize, eliminating a source of weakness.

“The headline is not indicative of how solidly the U.S. is growing,” said Gennadiy Goldberg, U.S. rates strategist in New York with TD Securities, who correctly projected the third-quarter gain. “The domestic drivers in consumption are quite strong.”

The Fed, of course, knew this long before we did, and analyzed it correctly, a good reason that Chairwoman Janet Yellen seems to have hinted that a rate hike is possible in December.

That sent gold plummeting, as the opportunity cost of holding gold rises in relation to interest rates. That makes gold less attractive for buyers who may migrate into government or other bonds/paper.

Unemployment claims remained very steady (up 1000 last week), keeping the figure of roughly 260,000 new claims near their lowest since 1973. If we account for the large discrepancy between the population 42 years ago and population today, the new claims data are remarkably low. (How good today’s jobs are is another issue altogether.)

Moreover, the claims number was substantially below what expert consensus had predicted. The Fed has its eye on this.

Gold was off almost $9.00 in spit of a nearly $4.00 boost given it by a mushy U.S. dollar.

Palladium is still taking a beating, hitting $669 per ounce today, off its October 9th highs of $710. At 3:45 in New York, palladium is off 1.75%.

We’re going to steer away from fundamentals commentary on the S&P 500 today. There are too many moving parts and any view of stocks absolutely requires technical analysis. (The GDP and unemployment claims are joined by other factors like a slowdown in purchases of existing homes and of course, the continuing pricing crisis in crude oil.)

West Texas Intermediate crude is up off its lows of the day as is Brent North Sea. It should also be noted that the two crudes are also off their highs. However, the recovery has helped equities struggle toward a neutral day.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer