Treasury Prices Enter Upward Trend, Gold Follows
After the Federal Reserve's minutes release the market consensus seemed to be that the Fed was turning a hawkish cheek. Most of the minutes release focused on the skepticism over quantitative easing measures' continued efficacy and the possibility of varying their printing rate. Media outlets like Bloomberg and others instantly touted the report as signaling that the Fed would be lowering their purchase rate. The threat of slowing purchases of bonds weighed on the Treasury market immediately following the release. Gold, best measured through SPDR Gold Trust ETF (GLD), suffered a similar fate, as Treasury yields are deep drivers of the gold price.
See how Treasury prices, as represented by the 10yr T-note front month future, dropped in the immediate aftermath of the minutes release:
Gold Prices and Treasury Prices Deeply Correlated Today
In the last 12hrs the gold market and longer term Treasury market have been deeply correlated:
Why did Treasuries Reverse?
Treasury prices have reversed yesterday's trend and have been on the rise throughout the day. The question is then, are Treasury prices being lifted by doubts over the Fed's hawkish shift or simply because money is leaving the market?
The S&P500, best measured by SPDR S&P 500 ETF (SPY), has perpetually fallen since the Fed minutes were released yet Treasury prices fell as well initially. This means investors must have gone into cash before entering the Treasury market:
The question remains, however, what is driving people into Treasuries? If the belief is that the Fed is going to stimulate further then why did stock prices lose their buoyancy?
The moves in today's market seem to indicate economic fears are reentering the picture. Investors are shying away from the stock market, cozying up to gold and Treasuries as a measure of risk aversion, while still believing the Fed is behind the curve in trying to tame these risks.
The Fed's Stimulus Certainty is a Matter of When not If
Sooner or later a clear picture of the Fed's desires will emerge. Economic releases between now and the Fed's March 20th policy statement and conference will be big drivers of the market's expectations over Fed policy. A nudge in the direction of continued Fed stimulus came in today as the Consumer Price Index (CPI) was released, indicating a 0% change for January, less than the 0.1% expectation. Remember, a tamer inflation outlook gets the Fed more comfortable with stimulus measures and empowers the FOMC's doves. The big release to sway markets on the direction of Fed policy, however, will be February's employment data. Anything but a strong payrolls number is likely to liven bets of Fed stimulus significantly.
There are additional headwinds weighing on the U.S. economy that are likely to show up in near term economic figures as well. The payroll tax cut expiring is likely going to substantively impact consumer spending. As will the billions in sequestration (automatic fiscal spending cuts) should Congress not postpone these measures yet again. In any case the uncertainty over the issue, as was the case with the fiscal cliff of 2012, will weigh down on markets.
Fed Stimulus Surprise Means Higher Gold
Increased bets on Fed stimulus means higher precious metal prices as markets have not factored in the effect of a Fed with conviction to continue stimulating. Expect prices to mostly rise into the Fed's next meeting, as the economic environment begins to persuade investors to bid down real yields and increase bets of Fed stimulus.