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Bad News is Good News for US Ahead of FOMC


US Manufacturing plunges to 11-month lows, S&P 500 up 15 points.

Christopher-LemieuxSMBullion.Directory precious metals analysis 16 December, 2014
By Christopher Lemieux
Senior FX and Commodities Analyst at FX Analytics

The world is in turmoil. Both West Texas Intermediate (WTI) and Brent crude sink to five year lows, bringing with it a bit of contagion as debt spreads continue to blow wider (in and out of the energy sector). The utter collapse of the ruble sparked a 650 bps jump in interest rates, issued by the Russian central bank – and it is not working. Brokerages are halting all USDRUB trades, and the fear of another 1998 Russian disaster is festering. There was a militant hostage situation in Sydney, Australia on Monday and a Taliban school strike that killed over 120 people that followed.

All of this global turmoil, both economic and geopolitical, sparks excitement because it leads one to believe the Federal Reserve will remain cautious and leave policy as is. Eurodollar traders are beginning to price in a interest rate hike further out than expected, and the US dollar has been volatile.

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The data-dependent Fed now can look at today’s US manufacturing PMI, which plunged to 11-month lows. The Fed can boast about a stronger US economy, but the US manufacturing PMI has now declined in four straight months. The index printed 53. 7 opposed to the 55.2 general consensus.

Markit has continued to warn that the drop inn US PMI data will signal slower growth in the fourth quarter, and it will likely begin to hit employment. The unwinding of expansion is “a warning light to policymakers that the fourth quarter is likely to see a weakening in the pace of economic growth, which is starting to hit hiring,” said Markit. This can be troubling since manufacturing jobs tend to pay much higher rates then the analyst-fawned service sector.

Chain store sales increased by 1.1 percent, nearly have of the previous month. Building permits collapsed, contracting over five percent in November. This was deeper than the 3.4 percent decline economists were expecting and over 100 percent turnaround from the previous month. Housing starts also contract 1.6 percent versus economist expectations of a 2.1 percent increase. Last month’s print was 1.7 percent. A complete 180 from the previous month.

Every data point today, for the US, was a complete miss. But the halting of ruble trading (a large concern for the broader markets) has caused panic buying in risk assets. S&P 500 futures are up almost thirty handles, and the USDJPY risk-proxy is up 150 pips from session lows.

The US 10-year is approaching two percent, while the 30-year bond drops as well. The yen has been seeing demand, while Japanese debt yields increase. Gold has been flirting with $1,200 per toz. as some speculate the Russian central bank selling in order to stop the complete collapse of the ruble.

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