The NFP report came better than expected – 235K jobs added in February – enough to clear the path for the Fed to raise rates in the upcoming meeting that will conclude on Wednesday. This news, however, doesn’t vote well for gold and silver prices as they lost another 2% and 4.6%, respectively, over the past week; and bullion is likely to experience additional losses in the near term if the FOMC signals of more hikes to come in the coming months. Let’s examine what are the possible outcomes for the upcoming FOMC meeting and their implications on gold and silver.
Currently, the market expects the FOMC to raise rates this week – the implied probability for a March hike was 93% on Friday; the big question what’s next for the Fed and how will it impact gold and silver. So what are the likely scenarios?
- Raising rates but no substantial changes in the dot plot or economic outlook; this is a likely possibility, which some may consider it a “dovish hike”: I.e. the FOMC acknowledges that there is still uncertainty in the markets – especially from the fiscal side – and as such the FOMC is still on course to raise 3 times this year; in this case, the reaction might not be too harsh on gold and silver and there could even be a recovery in the coming days or weeks (assuming all things being equal). But bullion prices are still likely to take a hit following this decision mainly if long term interest rates edge up and the USD gains more momentum;
- Raising rates and revising up the dot plot; in this case, which is less likely that the first scenario but also plausible, the markets could take a hit not only in bullion but also in equities and bonds. This implies the FOMC expects more inflation to pick up; and if this rise in the dot plot doesn’t include an increase in the growth rate of the economy, then it means the Fed anticipates more inflation without higher growth – not a great sign for the state of the economy. Nonetheless, in the coming days this scenario is more likely to raise the downside risk on bullion prices than the first scenario does.
- Raising rates but revising down the dot plot or no rate hike; these scenarios are unlikely to occur and could bring back market volatility; in both cases, the FOMC’s credibility could also be somewhat damaged; therefore, the FOMC isn’t likely to move on this path unless there is a major change or geopolitical event to warrant such a deviation from the current course.
This analysis doesn’t cover all possibly scenarios but gives a good starting point to the main possibilities that could unfold this week. The BOE and BOJ will also decide on their rates – but aren’t expected to make any major changes – and in terms of economic data we have retail sales, JOLTS, and CPI reports in the U.S. that will take the back seat for the FOMC’s rate decision. But they could feed into the narrative of the FOMC’s decision: Strong economic data could push towards stronger dollar and lower precious metals prices if the FOMC’s meeting is perceived more hawkish; or weaker economic data and dovish hike – the economy is improving but the uncertainty remains. In either case, these data points could augment the market reaction or counter some of the impact the FOMC’s rate decision will have on the markets.
The markets are already on board of the FOMC raising rates this week. And the reaction could be the same as it was back in December: A plunge in prices right after the decision is made followed by a slow recovery; this will partly depend on how the markets see the FOMC is likely to move forward; if the conclusion of this meeting will be the Fed might raise rates 4 times this year in total, this could result in a much harsher impact on bullion prices. But if the FOMC only raises rates with little changes to outlook (economy and dot plot) this could lead to a short term adverse impact on bullion, which, in turn, could eventually lead to a recovery — especially if LT treasury rates remain close to the 2.5% bench mark.
For further reading see:
- March Hike, Macron and Mario Draghi –MM #136
- Fed Refocus as Monetary Matters Once Again — MM #135
- Oil Upside and Euro Underperformance — MM #134
- U.S. NFP: 227K Higher Than Expected But Wages Grew by Only 2.5%