Gold eked out a new low for the week in overseas trading, but more weak U.S. data provided some support, leaving the intraday tone consolidative. Firmer stocks, despite the bad data, may be diminishing the appeal of gold as a safe haven somewhat.
Despite the FOMC affirming it’s commitment to the taper in the minutes of the January meeting that were released yesterday, stocks seem to have reacquired the ‘bad news is good news’ mentality, at least temporarily.
Initial jobless claims fell 3k to 336k last week. While that was in line with expectations, it was not indicative in any way of an improving jobs market. While Markit PMI was a beat, the Philly Fed index was a huge miss. The headline number plunged to -6.3 in February on expectations of 10.0, versus 9.4 in January.
The jobs component of the index fell to fell to 4.8 from 10.0 in January, which has already resulted in some negative revisions to February nonfarm payrolls expectations. I suppose there is a chance that another bad NFP print could prompt Yellen to push for reconsideration of tapering when she presides over her first meeting as chair in March.
LEI for January came in at +0.3%, also in line with expectations. CPI rose a scant 0.1% in January, seemingly justifying all the references to ‘inflation’ — or more precisely the lack there-of — in the FOMC minutes.
While the annual pace of inflation ticked higher to 1.6%, that’s still well below the Fed’s target. However, the cost of shelter component was +2.6% y/y in January. Energy was +2.1% y/y. While food price inflation was up just 1.1% y/y, a MarketWatch piece this morning said that ground beef prices rose 5% in 2013 and prices for both steak and ground beef could rise another 10 – 15% this year.
Nonetheless, negative price risks remain a paramount concern. And not just with the Fed. The IMF warned yesterday that “A new risk stems from very low inflation in the euro area, where long-term inflation expectations might drift down, raising deflation risks in the event of a serious adverse shock to activity.”
A New York Times article defined deflation as “a pernicious and self-reinforcing phenomenon that debilitates economies.” It is the greatest fear of policymakers (outside of the Bundesbank). “If inflation is the genie, then deflation is the ogre that must be fought decisively,” said the IMF’s Christine Lagarde recently.
However, one has to wonder if the world’s major central banks are pushing on a rope. Trillions in liquidity have been pumped into the global economy in recent years and deflation is now the big risk?
You’d think that might prompt policymakers to rethink their tactics. The Fed may be doing that to some degree with the taper, given their acknowledgement of the declining efficacy of QE. However, the more likely scenario is that they’ll simply push all that much harder on the rope.
Case in point: “In the euro area, more monetary easing is needed to raise the prospects of achieving the ECB’s inflation objective,” said the IMF. They urged the ECB to consider “further rate cuts, including mildly negative deposit rates, to support demand and reduce fragmentation.”
I encourage you to read Michael J. Kosares’ recent piece, Gold as a deflation hedge
If the central banks continue to push on that rope, they might avert the deflation, but disinflation, stagflation or hyperinflation may well be the result. Kosares (and gold) have you covered in those cases as well:
- Part Two: Gold as a disinflation hedge
- Part Three: Gold as a stagflation hedge
- Part Four: Gold as hyperinflation hedge
Mr. Kosares ultimately summed in all up last week in Part Five: Gold as the portfolio choice for all seasons, saying, “History shows that gold, better than any other asset, protects the portfolio against the range of ultra-negative economic scenarios, such so-called black swan, or outlier, events as deflation, chronic disinflation, runaway stagflation or hyperinflation.”