Main menu

Why today's action is significant

From a macro perspective, here are charts of the three most important movers today.

To begin with, yields on Dec. '10 eurodollar futures rose 17 bps, as their price fell by an equal amount. That means the market raised its expectation of where the Fed funds rate will be at the end of next year by that much. Alternatively, you could say that the market accelerated its expected timetable for Fed tightening to begin. Either way, it means that the market interpreted the jobs data as evidence of a stronger-than-expected economy, and that in turn calls for the Fed to begin to reverse its liquidity injections sooner than expected.

Gold prices fell by about 4%. Just two days ago I cautioned that gold was approaching levels that made it highly vulnerable to any sign that the economy was stronger than expected. Bingo, here's the proof. The jobs data was definitely stronger than expected, and that in turn means that the Fed is much less likely to continue to be super-accommodative for a long time. It is thus no longer easy to be long gold. To be comfortable buying gold at these levels you have to be real sure that the Fed is going to make a massive inflation mistake. Thoughts along these lines likely forced the weak longs to cover.

The dollar jumped by 1.4%, because the rationale for selling the dollar (the Fed will keep rates at zero forever because the economy will be hopelessly weak forever, so you can sell the dollar with impunity) was seriously challenged today. The economy is doing better than expected and improving significantly on the margin. The Fed therefore looks to have been way to pessimistic about the economy's prospects, and the market takes its cue from the Fed. As a result, the market realized it had gone too far with the dollar "carry trade."

It's not clear whether today's action marks a clear turning point for these three variables, but I do think it marks at least the beginning of the end of the long gold and short dollar trades. The Fed is not going to tighten anytime soon, unless we see more good news that challenges the still-prevailing consensus that the U.S. economy is a basket case; undoubtedly there will be opportunities for gold to resume its rise and for the dollar to resume its fall in the next few months. But I think we have seen an important inflection point today. Buying gold and selling the dollar are no longer one-way, no-risk trades. They are highly speculative trades, and they depend heavily on the economy remaining weak and the Fed remaining on hold.

Filled Under:


Posting Komentar