The recent CPI and retail sales reports, which were released on Friday when the markets were closed, may have brought in a new wave of dovishness to the markets: These reports – mostly the CPI that showed an unexpected drop in both core CPI and headline CPI – are likely to help drive back down treasury yields and pull up gold and silver prices. And all awhile France’s elections on this coming Sunday could shake up markets in the off chance – but not totally implausible – that both Mélenchon and Le Pen rise to the second round; this unlikely and unexpected scenario will shake up markets and could boost demand for bullion in the immediate aftermath. But let’s not get ahead of ourselves too soon. Let’s look at what’s up ahead this week for precious metals.
So now that the markets aren’t so certain that the Fed will move as fast in raising rates as it did in few weeks back, the chances of a rate hike in June have crashed: As of Friday, the implied probability for a June hike has tumbled to 44%; and there is now a chance of only 36% for two hikes by December.
This shift following the disappointing CPI report that showed a fall in core CPI of 0.1% month over month – the first drop since January 2010 – the markets are likely to look for more clues as to whether inflation isn’t returning or this data point was just a one off.
This report along with the drop in retail sales – also disappointingly unexpected – will contribute to the market sentiment boosting the demand for bullion.
Considering there aren’t major economic reports come out of the U.S. – mostly housing starts and Philly fed – the markets are likely to shift their attention to the upcoming French elections (and assuming there won’t be any major headlines coming out of the White House). According to the recent polls, the likely candidates to advance to the second round are Le Pen and Macron. And if so, Macron is expected to win by a hefty margin in the second round. But again, the race is tightening and this could mean that following the first round elections on Sunday the markets could shake up if there is the unlikely outcome of Le Pen and Mélenchon. In such a case, the flight out of the Euro will likely to start on Monday; this will also include a rise in demand for precious metals. In case, there aren’t any surprises, there might be a modest pull back for gold and silver because there are still growing concerns over the progress of the U.S. economy, the ongoing low inflation environment, and decline in LT treasury yields.
Keep in mind that recent fall in yields isn’t solely due to the disappointing economic reports; this could also be due to the slow realization that perhaps Trump won’t deliver on his promises of tax cuts and infrastructure spending – two issues that should have helped boost inflation and raise the deficit, which in turn, will also lead to higher LT yields.
So what’s next?
Gold and silver are gaining strength on account of recent drop in LT yields, concerns over the progress of the U.S. economy, lower outlook for the Fed’s rate hike trajectory, the upcoming French elections and realization that perhaps the U.S. won’t get, at least this year, any fiscal stimulus. If these factors continue to play a role in reviving the “risk off” sentiment in the markets, this could mean a further gain in gold and silver prices.
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