Gold Prices Down As Hope for Interest Rate Hike Grows

Financial markets are pricing in a 50 percent probability that the Fed will increase its main interest rate to 0.25 percent or even 0.50 percent from the current 0.125 percent on December 16, according to data compiled by CME group. For years everyone has been anticipating a liftoff in interest rates and the dollar has rallied as a result. However, the yellow metal ended with a monthly gain of 2.4% despite a more than $28-an-ounce tumble on Thursday that followed a policy statement from the Fed. This is one of the most watched indicators of labor-market health, and it will be one of the key factors in the decision by the Federal Reserve to raise interest rates.

“The Fed wanted a 50-50 outlook for December so mission accomplished”, said Jim Caron, a portfolio manager at Morgan Stanley Investment Management in New York. Speaking of which, last Friday we learned that U.S. GDP growth rose by 1.5% in the third quarter, which marked a sharp slowdown for the 3.9% GDP growth we saw in the second quarter, so the first USA economic data released after the Fed’s latest statement shows that the broadest measure of overall USA economic momentum is already on the wane.

Willams, who is a voting member of Fed’s policy setting panel, felt the central bank needs to fully understand the “low neutral interest rates”, which are considered a warning sign of possible changes in the economy.

The Fed started this currency war in 2009, when it began its Quantitative Easing program, and it’s not likely to sit idly by as US exports take a beating from the dollar’s rally.

Canadian mortgage borrowers are well advised to keep an eye on the Fed because Canadian and USA bond yields have always been highly correlated, even more so over the past several years.

First up, we had the European Central Bank surprising markets by giving a strong signal that it is working on providing additional monetary stimulus sooner rather than later, including a possible cut to the deposit rate. That means that our fixed mortgage rates, which are priced on GoC bond yields, are likely to rise in sympathy with US rates.

Sweden’s krona had appreciated more than 5 per cent against a trade-weighted basket of currencies over the past six months, Bloomberg said, hampering its efforts to lift exports and import much needed inflation.

The problem is that after almost seven years of near zero percent interest rates, the labor market is still underperforming, and (official) inflation metrics have not met the Fed’s target of 2 percent annually. Earlier the two-year yield touched 0.736 percent, the highest in more than month.

Five-year variable-rate mortgages are still being offered in the prime minus 0.65% to prime minus 0.75% range, but the most deeply discounted versions are now less widely available and may not be around for much longer. As always, forewarned is forearmed.