Yellen Will Be Coming Round The Mountain When She Comes

Since the middle of March, everyone has been lazily floating along, opening an eye occasionally to take a peek at the news generated by comments from various presidents of regional Federal Reserve banks.

Well, on Tuesday, the bell tolls and we all have to sit up and pay attention. Actually we have to pay attention today because that is exactly what is driving the markets. How do we know this?

Crude oil with its 8.00% rise this week is clearly not driving markets. Europe was down across the board today but in New York the Dow held on to very modest gains and the S&P 500 is treading water slightly on the downside. The NASDAQ was off 0.90% mostly on bad reports about Microsoft and Alphabet, which we discussed yesterday. So it seems that oil and U.S. equities are still decoupled or almost decoupled from one another.

The sharper decline in the London FTSE is due to fear concerning the so-called Brexit or UK exit from the EU in some form or another. President Obama put a distinctly un-rosy flush on it, saying, in short, that it would be disastrous not just for the British but for the world economy.

Back to the Fed. We are predicting a distinctly dovish meeting, which will naturally contain other pieties and encomiums that will furnish all sorts of escape hatches (excuses), should Fed tactics stop working.

Employment is steady to strong and wages are considerably stronger (in the rearview mirror). But!!! Inflation is lagging and other major economic regions are going slow, idling, or in reverse. Credit is still tight. The U.S. congress is offloading its fiscal responsibilities onto the monetary shoulders of the Fed. And so forth.

The European Central Bank lowered its interest rate outlook yesterday and confirmed it today. That creates a de facto rise in U.S. interest rates. Curiously, real (not spread-driven) rates on the 10-year U.S. Treasury bond rose to their highest levels since late March.

The U.S. dollar correspondingly rose and that was just piling on when it came to gold prices. The stronger dollar brought gold down about half a percent while regular trading was knocking it back about 1.25%.

The regular trading in gold was governed by fear of a Federal Reserve rate hike, which would be one of the most surprising moves in the Fed’s recent history. Another fact, not to be discounted, especially since this is Friday, is profit taking. Yesterday (Thursday, April 21), gold hit a five-week high.

Silver’s rally, based on optimism over a modest improvement in China’s manufacturing sector, had been pushing gold along with it in a rare case of little sister helping out big. That rally showed some fatigue today as Asia headed into the weekend. Like everyone else traders wanted to take some cash out of their positions.

Summing up, we don’t have a classic risk-on day. Equities and commodities had mixed days. Base metals continued stronger. Farm commodities kept on their downturn.

A couple of things to look for next week: 1) continued earnings reports – bright and shiny news will drive the equities up; 2) the general tone of the Fed after-FOMC statement – anything unusual? 3) Crude and its devilish friends.

Wishing you as always, good trading,