Gold spikes as as ‘epic’ miss in April jobs report eases worries about a Fed rate hike

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Gold prices picked up Friday.

  • Gold prices climbed to their highest since early February on Friday following the April US jobs report.
  • The gain of 266,000 jobs was well below expectations of 1 million jobs being added to payrolls.
  • The data miss pushed Treasury yields lower, make gold more attractive to buy.
  • See more stories on Insider’s business page.

Gold prices jumped Friday after the weak US monthly jobs report tamped down expectations of an interest-rate hike by the Federal Reserve, making the metal more attractive to investors looking to buy.

Gold jumped as much as 1.5% to $1,842.59, the highest price since February 10. The surge was set off after the Labor Department said nonfarm payrolls grew by 266,000 last month, well below the estimated gain of 1 million from a Bloomberg survey of economists. Payrolls increased for a fourth consecutive month but the print was the smallest since September.

The poor jobs showing sparked questions about the strength of the US economy’s recovery from the COVID-19 pandemic and supported the view that the Federal Reserve will keep holding its benchmark interest rates near zero.

“You’re going to see that the labor-market recovery is likely to take a lot longer than anyone was anticipating and that will push off some people’s rate-hike expectations a little bit and that’s positive for gold,” Ed Moya, senior market analyst at Oanda, told Insider.

Investors swooped into the bond market after the data, driving yields lower. The 10-year Treasury yield sank to an intraday low of 1.4710% from 1.5610% on Thursday. Lower rates can brighten the appeal of gold as the metal offers no yield.

“This jobs print was a miss of epic proportions and yields reacted with a pretty sharp decline,” Sean Bandazian, an investment analyst at Cornerstone Wealth, told Insider, noting that what has moved gold historically is the level of real interest rates. Real yield refers to the level of the 10-year yield rate minus the rate of inflation.

“The real rate backed down to where it was in February and gold, given its inverse correlation, almost perfectly has moved up to where it was [three months ago],” said Bandazian.

“Gold is 45% correlated with the 10-year Treasury bond. As fears of a Fed tapering recede after the weak employment report … gold is moving higher,” wrote Jay Hatfield, founder and CEO of Infrastructure Capital Advisors.

The 10-year yield, meanwhile, pared its loss. It’s possible that the “excessive reaction this morning” in the bond market triggered stops on the short side of the 10-year bond after the yield dropped below 1.5%, said Bandazian.

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The Fed needs to convince stock investors that their rate hike expectations are priced in ‘too aggressively’, Barclays says

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  • The Federal Reserve will hold its two-day meeting on March 16 and 17.
  • The Fed has work in relaying its message that pricing of rate-hike expectations is too aggressive, says Barclays.
  • Large-cap tech and growth stocks may continue to see underperformance, the bank’s head of US stock trading says.
  • Visit the Business section of Insider for more stories.

The Federal Reserve will likely keep working to convince equity investors that expectations are being priced in “too aggressively” for when the central bank will start raising interest rates and how fast those changes will occur, according to the US head of stock trading at Barclays.

The Fed’s two-day meeting starting on March 16 will be held at a time of notable rotations in equity markets, spurred in part the quick rise in borrowing rates this year as tracked by some Treasury yields. Yields have pushed higher in part as investors anticipate a rise in inflation as the US economy recovers from the COVID-19 health crisis.

As yields climb, so do expectations for when the Fed will start raising its benchmark interest rate which currently sits at a range of 0%-0.25%.

Growth in the world’s largest economy is a supportive factor for stocks, and rising rates to reflect growth “shouldn’t be a headwind for equities,” said Michael Lewis, head of US cash equities trading at Barclays, during the bank’s teleconference about inflation on Tuesday.

But “the velocity of the move in rates that we saw, or the rate of change in the move that we saw, spooked equity investors,” he said.

Lewis said he recalled at the start of 2021 seeing about 31.5 basis points of rate hikes priced into year-end 2023, “and then we went almost to above 90 in just a handful of weeks. That’s a massive move in terms of what people are expecting the Fed to do, what the market is pricing in,” he said. “And if you are going to get hikes to that degree and velocity and in that timeframe, that is negative for equities.”

However, “if you look at the dot-plot, there’s no liftoff expected through 2023, it’s in 2024,” he said. The dot-plot is the Fed’s way of signaling its interest-rate outlook.

“So the real job…is for the Fed to walk people off that cliff,” he said, adding that a lot of the central bank’s commentary so far “hasn’t been successful in convincing the markets that they are pricing in these expectations a little too aggressively.”

Lewis expects the Fed “will find a way to walk that back”, including discussing at next week’s meeting its preferred inflation measure, the PCE price index. That index “is a good 30 to 40 [basis points] lower” than the consumer price index. Also, the Fed can discuss near-term inflation versus longer-term inflation, he said.

Looking ahead, Lewis said he expects investors to continue to see large-cap tech and growth stocks underperform over the course of the next 12 to 18 months in favor of more cyclical-type stocks.

“But given the velocity and the rate of change that we’ve seen in the rates market …counterintuitively over the next week or two if you see a bounce in equity markets, it’s going to be led by growth and tech,” because of their recent and steep selloffs, he said.

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Monetary stimulus will remain in place well into economic recovery, Fed Chair Powell says

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  • Federal Reserve Chairman Jerome Powell reiterated Thursday that the central bank is far from tapering its asset purchases or raising interest rates.
  • “Now is not the time to be talking about an exit” from easy monetary policy, the central bank chief said in a virtual discussion.
  • The comments come after various Fed officials suggested that inflation could pick up faster than expected and, in turn, prompt an early rate hike.
  • Powell rebuffed fears of an unexpected policy shift, noting the central bank will notify the public “well in advance” if it is considering changes to its policy stance.
  • Visit Business Insider’s homepage for more stories.

Those worrying the Federal Reserve will prematurely rein in monetary stimulus have little to fear, Fed Chairman Jerome Powell said Thursday.

As COVID-19 vaccines roll out across the country, investors and economists have looked to Fed officials for any hints as to when its extremely accommodative policy stance could reach its conclusion. The central bank is currently buying $120 billion worth of Treasurys and mortgage-backed securities each month to ease market functioning, and its benchmark interest rate remains near zero to encourage borrowing.

An unexpected reversal from such easy monetary conditions risks spooking financial markets and cutting into the country’s bounce-back. Powell emphasized on Thursday that the central bank remains far from adjusting monetary conditions and that markets need not worry about a surprise policy shift.

“Now is not the time to be talking about an exit,” the central bank chief said in a virtual discussion hosted by Princeton University. “I think that is another lesson of the global financial crisis, is be careful not to exit too early. And by the way, try not to talk about exit all the time if you’re not sending that signal.”

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The messaging mirrors past statements from Fed policymakers. Early in the pandemic, Powell told reporters the central bank wasn’t “thinking about thinking about” lifting interest rates. The Federal Open Market Committee noted last month that changes to its policy stance won’t arrive until “substantial forward progress” toward its inflation and employment objectives is made.

Still, recent commentary from some officials has stoked some fears that the Fed could cut down on the pace of its asset purchases sooner than expected. Kansas City Fed President Esther George said Tuesday that inflation could reach the Fed’s target “more quickly than some might expect” if the economy’s hardest hit sectors quickly recover.

A swifter-than-expected rebound could prompt an interest-rate hike as early as mid-2022 Atlanta Fed President Raphael Bostic said Monday. The projection stands in contrast with the FOMC’s general expectation for rates to remain near zero through 2023.

Powell reassured that, when the Fed starts considering a more hawkish stance, messaging will come well before action is taken. Treasury yields responded in kind, with the 10-year yield climbing nearly 4 basis points to 1.127 and the 30-year yield rising about 6 basis points to 1.874.

“We’ll communicate very clearly to the public and we’ll do so, by the way, well in advance of active consideration of beginning a gradual taper of asset purchases,” the Fed chair said.

Read more: Morgan Stanley says to buy these 26 economically sensitive stocks poised to outperform as oil prices spike 10% by year-end

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