What exactly can we learn from Fed Chair Janet Yellen's speech entitled “Current Conditions and the Outlook for the U.S. Economy” at the World Affairs Council of Philadelphia on Monday?
On The heels of Friday's terrible May jobs report the Fed Chair dismissed the disappointing nonfarm payrolls saying, “one should never attach too much significance to any single monthly report”. Moreover, Yellen said that although the labor-market report was disappointing, “further gradual increases in the federal funds rate are likely to be appropriate and most conducive” to meeting the Fed’s objectives.
On the other hand, Yellen didn't give a timeline for changing interest rates, dropping her last ‘coming months’ promise given during a speech at Harvard University. Clearly she is more dovish now than in May. Indeed, as she pointed out: “the monthly labor-market report is an important economic indicator and so we will need to watch labor-market developments carefully”. For us, it means that the Fed will not hike interest rates in June, as it would like to see another job-market report to determine whether the markedly reduced pace of hiring in April and May is a harbinger of a persistent slowdown in the broader economy or if payroll gains move up toward the solid pace they maintained earlier this year and in 2015. Similarly, Yellen noted: “monetary policy is not on a preset course and significant shifts in the outlook for the economy would necessitate corresponding shifts in the appropriate path of policy”. The terrible job reports of the two last months may be such "significant shifts" in the outlook for the economy.
Investors seem like minded as the odds of an interest-rates hike in June remain unchanged at just 3.8 percent, while the odds of a July hike have declined. Thus, the report should be rather positive for gold. Indeed, the metal's price ended Monday's U.S. session slightly higher.
The key takeaway is that Yellen tried to dismiss the terrible jobs data. However, she dropped her ‘coming months’ promise, making the Fed Chair sound more dovish than in recent months. That's good news for gold, which has recently been under downward pressure due to Yellen’s hawkish stance and the elevated odds of an interest rate hike in June or July.