Intraday Market Thoughts

Gold up on Fed's Inflation Tilt

by Adam Button
Oct 18, 2018 15:42

USD and gold resume gains on a combination of the hawkish tilt in yesterday's release of the FOMC minutes and today's set of data beats in jobless claims and Philly Fed index. Gold, Aussie and Kiwi are the main outperformers vs USD with the yellow metal favoured by an upward tilt in inflation assessment from the Fed. That is also propping gold during equity sellloffs, which was not the case in Jan-Feb. UK retail sales fell by more than expected but GBP continues to hold alongside the 1.3080 support on emerging talks of an extended transition period post-Brexit. Both metals' Premium trades are in progress.

Gold up on Fed's Inflation Tilt - Performance 18 Oct 2018 (Chart 1)

The Fed minutes added to the debate about where US rates are headed. A number of Fed officials saw the need to hike above the long-run level, which is pegged at the 3.4% median in the dot plot. There was also increasing talk of financial risks from leveraged loans, loosening of standards and non-bank loans.

On inflation risks, three members now see them tilted to the upside compared to one previously. None see them tiled to the downside.

USD/JPY rose to 112.73 but has pulled towards 112.40s as stocks fell on Thursday.

We cautioned that moves on the Minutes tend to fade but this time they may have put bond yields back into focus as 10s rose 4 bps to 3.20% with all the move coming after the Minutes. The market undoubtedly remains sensitive to bonds and the past few days of calm could easily be upended by another similar-sized move. So far, yields face interim resistance at 3.21%. Note that the 200-month moving average is being tested for the 1st time since March 1989. 

Late in the day, the Treasury released its semi-annual FX report and once again refrained from naming anyone a currency manipulator. They warned that recent yuan weakness will likely increase the bilateral trade deficit but also said PBOC direct intervention has been limited this year.

However there was some significant escalation in rhetoric including warnings not to allow further yuan weakness, which the Treasury said it will be watching closely. That tone could weigh on Chinese markets in the day ahead.

Aussie remains on a high note despite falling equities after Aussie unemployment fell to 5.0% from 5.3% and the bulk of the pullback in job creation was from part-time jobs.

Act Exp Prev GMT
Retail Sales (m/m)
-0.8% -0.4% 0.4% Oct 18 8:30
Employment Change
5.6K 15.2K 44.6K Oct 18 0:30

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