How US monetary policy will keep gold and commodity prices rising

Just when everyone thought that things were looking grim for the global economy, along comes the US.

America’s payrolls swelled by 287,000 jobs in June – that was roughly 100,000 more than analysts had expected, and it made May’s feeble jobs growth look like a fluke.

From an economic point of view, it’s a much-needed shaft of light.

But for investors? That’s a little trickier…

The US jobs rebound

The addition of 287,000 jobs in June is a massive leap from the utterly feeble 11,000 added in May (that was revised down from the original figure).

Admittedly, the unemployment rate rose from 4.7% to 4.9%. But that’s mainly because the participation rate – the number of people actually looking for a job – bounced back sharply too. Wage growth rose at an annual rate of 2.6%, its highest reading so far this year.

It’s worth remembering that it was the woeful May figure that helped to persuade the US Federal Reserve to keep interest rates on hold at its last meeting in June. That, and the fear of what might happen if Britain voted to leave the European Union (which of course, we did, just after the Fed meeting).

But  a near-300,000 payrolls report does sweep away many of the concerns about the US economy running out of steam. In short, says Capital Economics: “There is little evidence here of the sustained deterioration in labour market conditions that many feared – or hoped – would keep the Fed on hold.”

Higher interest rates would normally be negative news for stocks, and definitely for bonds. So how come, right now, both US bonds and US stocks are at or near record levels? That’s not something that normally happens. Indeed, according to Bloomberg, on Friday the world saw a new first for US investors. “At no time in history have government bonds and US equities… ended the same trading session this close to their respective records.”

This is odd. Because if economic growth is looking healthy, then, all else being equal, that should be good news for stocks. A growing economy means more people in work and more spending and more profits to be made. But technically, it should also mean rising inflationary pressures and thus interest rates, so it shouldn’t be good news for bonds.

So what’s going on?

It seems that investors were relieved to see that the US is still potentially quite healthy, as the jobs report suggests. That’s one reason for stockmarkets to remain buoyant.

Yet they seem equally convinced that this buoyancy in the economy won’t result in rising interest rates or inflation. Hence the near-record low bond yields (which means record-high bond prices).

It boils down to a couple of things. Firstly, as Capital Economics notes, investors see this “as a Goldilocks scenario. Whereas the strong gain in employment added to recent evidence that the US economy has found its feet again, investors still see very little chance that the Fed will resume interest rate hikes any time soon.”

So all’s well – we get decent growth and low rates too. For now.

Secondly, investors want exposure to a solid economy, and the US is one of the few on the market at the moment. The US dollar is not as strong as it was, but remains attractive relative to most other currencies.

And US bond yields – despite being at record lows – still look pretty generous compared to the likes of those in Japan and the eurozone. So if you’re looking for somewhere “safe” to park your cash, then US Treasuries at least still offer a positive yield, with the potential for currency appreciation thrown in.

Keep a close eye on Japan

Of course, Goldilocks only gets to have fun for so long before the three bears come and spoil it all. So what could go wrong and what should you be watching out for?

I suspect that the biggest risk is not Brexit, nor the Fed spoiling the party. Instead, it’s inflation returning and being tolerated by the Fed for far longer than is sensible.

One scenario that makes sense of most of the things that are happening – rising equities, strengthening bonds, and rising gold prices – is that we’ll see inflationary pressures mounting, but that the Fed will do nothing about it, and indeed, will be happy to continue to repress interest rates.

That being the case, it also makes sense that commodities and emerging markets will continue to rebound for the foreseeable future.

And I’d keep a close eye on Japan. In a world where the Fed is keen to repress the dollar, that puts pressure on Abenomics. The Japanese prime minister has just claimed victory in Sunday’s election for the Japanese upper house. He can use that as a platform to argue that his economic policies have support and that he should continue with them.

Coincidentally enough, ex-Fed chief and “helicopter money” enthusiast Ben Bernanke popped into the Bank of Japan today.

I wonder what they were chatting about?


Leave a Reply

Your email address will not be published. Required fields are marked *