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

October 29, 2015 - 4:01pm

 by Gary Wagner

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

Sentiment Indicator:

Gold Forecast: Proper Action

Yesterday we sent out a trade alert recommending the initiation of long position in gold at 1158. Part and parcel of that trade recommendation was to place a protective stop just below 1149. Stops were hit this morning, closing out the trade.

Long gold at 1158, covered position at 1148, for a net loss of $10 on the trade

 

Gold Market Forecast

Gold prices have absolutely been under pressure since reaching in intraday high of 1191. Based on our technical studies we believe that that price point concluded an impulse third wave. What followed was a corrective wave four for which we originally anticipated a termination point or conclusion at approximately 1149, a 38% retracement of the most recent rally.

That was not to be the case as gold prices dramatically drove through that particular price point. Today's report will look at our current level of support, which we peg at 1133, and base our strategy upon that price point

Trending Markets: Proper Action

Yesterday we sent out a trade alert recommending the initiation of a long position in the Standard & Poor's 500 vis-à-vis the E-mini.

Maintain current long at 2068 (current 2085)
Maintain stop at 2050

Trending Markets Forecast

Over the last couple of weeks we have been looking to see if the rally in the US equities markets would move into a protracted upside move. We based confirmation of such an extended rally on the 200-day moving average.

Late last week the Standard & Poor's 500 traded above the 200-day moving average for the first time since the August correction. Although Monday and Tuesday of this week unfolded as slightly corrective days, the S&P 500's price maintained above the 200-day moving average.

After the conclusion of yesterday's FOMC meeting the criteria that was necessary to trigger a buy signal was evident, and we initiated a buy.

Today's report will detail our upside target current strategy.