A U_S_ banknote that is digitally warped by Ruslan Lytvyn via Shutterstock
The dollar index (DXY00) was unchanged on Thursday. The dollar finished little changed on Thursday but found support on better-than-expected US economic news. Weekly jobless claims unexpectedly fell to a 3.5-month low, a sign of labor market strength, while Q3 nonfarm productivity rose more than expected and Q3 unit labor costs unexpectedly declined, which are positive inflation developments. Also, weakness in stocks on Thursday spurred some liquidity demand for the dollar. In addition, hawkish comments on Thursday from Cleveland Fed President Beth Hammack were positive for the dollar when she said restrictive interest rates are needed to cool inflation. Finally, Thursday’s +2% increase in WTI crude oil prices has pushed inflation expectations higher, a hawkish factor for Fed policy.
However, the dollar gave up all its gains Thursday amid lower T-note yields, which weakened the dollar’s interest rate differentials. The dollar is also under pressure from concerns that the Democrats’ sweep of Congress in the US midterm elections will lead to political gridlock and tougher tech regulation that could curtail foreign demand for US assets.
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US weekly initial unemployment claims unexpectedly fell -6,000 to a 3.5-month low of 189,000, showing a stronger labor market than expectations of an increase to 196,000.
US Q3 nonfarm productivity rose 3.6%, better than expectations of 2.7%. Q3 unit labor costs unexpectedly fell -0.7%, weaker than expectations of a +0.4% increase.
Cleveland Fed President Beth Hammack said inflation has moved in the wrong direction since March and “I expect that monetary policy will need to move to a restrictive stance to bring inflation back to 2% in a timely manner.”
The markets are now pricing in a 68% chance of a +25 bp rate hike at the FOMC’s next meeting on December 8-9.
EUR/USD (^EURUSD) fell by -0.05% on Thursday. Crude oil prices rose by more than +2% on Thursday, which is negative for the Eurozone economy and the euro, as Europe imports most of its energy.
Euro losses were limited Thursday after Eurozone Sep PPI rose the most in 3.5 years, a hawkish factor for ECB policy. Also, hawkish comments on Thursday from ECB Governing Council member Ante Zigman boosted the euro when he said he sees a “rather big chance” of a December rate hike by the ECB.
Eurozone Sep PPI rose +11.1% y/y, stronger than expectations of +10.6% y/y and the largest pace of increase in 3.5 years.
German Sep factory orders rose +4.4% m/m, the largest increase in 6 months but slightly weaker than expectations of +4.5% m/m.
ECB Governing Council member Ante Zigman said, “Inflation has continued to rise in October, and we can say there’s a rather big chance of an ECB interest rate increase in December.”
The markets are now pricing in a 78% chance of a +25 bp rate hike at the ECB’s next policy meeting on December 17.
USD/JPY (^USDJPY) fell by -0.34% on Thursday. The yen moved higher Thursday, drawing safe-haven demand after the Nikkei Stock Index fell 1.79%. Lower T-note yields on Thursday also supported the yen.
However, yen gains were limited due to today’s downward revision to the Japan Oct S&P services PMI. Also, Thursday’s +2% increase in crude oil prices is negative for Japan’s economy and the yen, as Japan imports more than 90% of its energy.
The market is pricing in a 79% chance of a +25 bp BOJ rate hike at its next meeting on December 18.
December COMEX gold (GCZ26) closed up +40.50 (+0.99%) on Thursday, and December COMEX silver (SIZ26) closed up +0.094 (+0.18%).
Precious metals prices settled higher on Thursday, with gold posting a 2-week high. Thursday’s stock slump boosted safe-haven demand for precious metals. Precious metals also have carryover support from Tuesday’s US midterm election results, where the Democratic sweep of Congress could restrain President Trump’s fiscal agenda, which could weigh on the dollar and T-note yields and boost demand for precious metals as a store of value.
Precious metals fell back from their best level on Thursday after the BOE raised interest rates by 25 bp. Also, hawkish comments on Thursday from Cleveland Fed President Beth Hammack weighed on precious metals when she said restrictive interest rates are needed to cool inflation. In addition, Thursday’s +2% increase in crude oil prices boosts inflation expectations and could persuade the world’s central banks to tighten monetary policy, a bearish factor for precious metals.
Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4.25-year high on October 21, although those holdings have since backed off. Long holdings in silver ETFs rose to a 7.75-month high on Tuesday.
Strong central bank demand for gold is supporting gold prices, after recent news showed that bullion held in China’s PBOC reserves rose by 740,000 ounces to 77.47 million troy ounces in September, the largest increase in three years and the twenty-third consecutive month the PBOC boosted its gold reserves. However, Russia’s central bank, the sixth-largest central-bank gold holder, said on October 20 that it reduced its gold reserves to a 7-year low of 72.8 million ounces as of October 1.
On the date of publication, Rich Asplund did not directly have a position in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
