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Concerns of Fed Taper Reemerge on Sentiment and ISM Beats

by Peter A. Grant

May 31, AM
(from USAGOLD.com) --

Gold is once again in retreat, weighed by month-end position squaring and the reemergence of expectations that the Fed will start removing accommodations. A bounce in the dollar and firmer stocks are weighing on the yellow metal as well.

It was a better than expected upward revision to the University of Michigan consumer sentiment index for May, along with a solid Chicago ISM print that reignited the Fed tapering talk. The market was awful quick to dismiss data from earlier in the morning that showed personal income was worse than expected in April and PCE fell 0.2%, also below expectations.

The PCE price index is just 0.7% y/y (core 1.1% y/y), well below the Fed's target of 2.0%. A week from today the May employment data will be released. Median expectations for nonfarm payrolls are a weak +165k jobs, while the jobless rate is expected to hold steady at 7.5%. This is still not anywhere close to territory where the Fed would seriously consider the removal of accommodation. I've spent a great deal of time on this topic in recent weeks, so I won't belabor the point further.

In an interview on CNBC yesterday, former OMB director under President Reagan, told Rick Santelli "the market is entirely rigged. It’s not honest. It all trades the Fed…How can that possibly lead to rational behavior?" Today is just the latest example of that irrationality.

Of course no conversation about irrational markets is complete without mentioning the famous quote from John Maynard Keyenes: "Markets can remain irrational a lot longer than you and I can remain solvent."

With that duty complete, I would suggest to you that we may well be in for a protracted period of irrationality. However, the longer the period lasts, the more likely the return to rationality will be violent in nature. With gold still in the lower half of its range, now strikes me as a pretty good time to be building one's hedges, or adding to existing hedges.

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Concerns of Fed Taper Reemerge on Sentiment and ISM Beats