Gold hits another all-time high on lower interest rates

Gold continues to glitter thanks to sharply declining bond yields, notably a major downward move in the real rate on 10-year TIPS. Other than for a 2% rally in the Russell 2,000, US equities were unchanged. The dollar lost another 1% today, making a 10% decline from its late 2022 high point.

TODAY’S MAJOR NEWS

Fed holds rates now, promises cuts next year

Wall Street traders read this as ‘rate hikes are over’, and Powell stated that the committee believes that we are at or close to interest rate peak. The Fed made no changes to interest rates or its accompanying policy statement, stating that “growth of economic activity has slowed from its strong pace of the third quarter,” versus previous wording of “economic activity expanded at a strong pace in the third quarter.”  The Fed will continue to shrink its balance sheet by $1.14 trillion per year, and its negative impact should not be overlooked.

The Fed expects us to get down to the 2% inflation mandate in 2026, and to do so with unemployment having a “four” handle instead of a “five” handle. It is trying to walk a very fine line that has little if any margin for error. It changed it statement on inflation, now saying that “(it) has eased over the past year but remains elevated.”

The Fed’s infamous dot plot graphic now calls for three rate cuts in 2024, followed by 4 more the following year. That graphic better represents the thinking of individual members more than the statement itself would suggest. It should also be noted that the dot plot graphics have been about as wrong as the market has been over the past couple of years, but that’s a discussion for another day.

Retail sales continue to be surprisingly strong

Today’s US retail sales numbers combine with last month’s jobs report to show a stronger economy than expected. Retail sales increased 4.1% year-on-year in November, the strongest annual growth since February, following a downwardly revised 2.2% gain in October.

• Retail sales rose 0.3% month-on-month in November, ahead of the expected 0.1% decline, and 0.2% decline in October
• Retail sales minus vehicles rose 0.2% month-on-month in November, ahead of the expected 0.1% decline, after being flat last month
• Retail sales minus vehicles and gas rose 0.6% month-on-month in November, ahead of the expected 0.1% rise, after being up 0.1% last month

exceeding analyst expectations that they would remain at the 0.1% gains posted the previous month.

Labor market remains robust

Unemployment claims data also showed a relatively healthy economy with a tight labor market.

• First time claims for unemployment benefits fell to 202,000 in the week ending December 9, less than the expected 223,000, but down from 221,000 the previous week
• The four-week moving average fell to 213,250 claims, down from 221,000 the previous week
• Continuing claims for the week ending December 2 increased 20,000 to 1.876 million, and the four-week moving average rose modestly to 1.874million

TODAY’S MAJOR MARKETS

Russell 2000 continues rally

• The Dow Jones, S&P 500, and NASDAQ were largely unchanged after yesterday’s rally, with the more cyclical Russell 2000 up another 2.0%
• The Nikkei 225 fell again, off 0.7% overnight, continuing recent weakness, while the FTSE 100 was up 1.3% and the DAX was unchanged
• The VIX, Wall Street’s fear index, rose marginally to 12.5

TIPS yields fall sharply, Dollar weakens

• 10-year TIPS index-linked yields saw another unprecedented 30 basis point fall in yield, to 1.71%
• 2- and 10-year yields were lower, at 4.39% and 3.94% respectively
• The dollar index fell 1.0% to 102.0
• Versus the dollar, the Euro and Sterling rose 1.1%, while the Yen was up 0.5%

Gold hits new highs, oil recovery continues

• Oil prices rallied rose 3.1% to $71.7 per barrel, continuing its recovery
• Gold prices hit another all-time high of $2,048 per ounce, up 2.5%, while Silver prices rose 6.4% to $24.4 per ounce
• The grain and oilseed sector was modestly higher
• Argentina reopened its export registry now that the new administration has changed its currency and tax policy, with significant new sales on the first day of the new policy.

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@stonex.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com