While equity futures are modestly higher compared to Friday’s early 9:15 am close, where only a short, 45 minute long bloodbath was allowed on Good Friday after the worst jobs report in two years, the one asset class that has moved the most by far this evening is gold, which has spiked by 1.5% and is on the verge of breaking out above the resistance level that has proven a tractor beam to any momentum breakout over the past 2 months.
If gold rises above $1225 overnight, or rather if the trading desk under the supervision of Benoit Gilson, the BIS’ “head of FX and gold” allows the price of paper gold to reach that level, a huge short squeeze will be imminent because, as a reminder, in addition to the EUR, gold shorts are also at a record high.
As for the reason why gold is surging off the bat, the main reason cited by trading desks is what Goldman announced late on Friday and what Zero Hedge reported first, namely Goldman’s economic team strong hint to the Federal Reserve that “believe that the right policy would be to put hikes on hold for now.“
This is the punchline from Goldman’s 180 degree turn on its “above consensus” growth forecast for the US economy:
Simultaneous shocks are more likely to do the trick. Exhibit 5 provides an example of what could raise the confidence score above 75%, a likelihood one might consider to qualify as “reasonable confidence.” The chart shows the marginal impact on the confidence score of a combination of shocks. A ½pp improvement in the growth outlook would raise the confidence score by 8bp, a ½pp pick-up in wage growth on top of that would raise the confidence score by another 4pp and an additional ¼pp shock to inflation expectations would be enough to boost the confidence score for the combined scenario to over 75%.
It Is Hard to Be Confident
The FRB/US model is a helpful tool for analyzing the uncertainty around the inflation outlook, but it comes with a number of caveats. Inflation expectations, for example, play a very important role in determining inflation 2-3 years ahead, resulting in relatively minor roles for recent news on payrolls or actual inflation. Our analysis is therefore best seen as an illustration of the issues involved.
The analysis suggests that it is hard to be “reasonably confident” in the inflation outlook given current economic conditions, unless several inflation drivers rise at the same time. We therefore do not have much confidence in the inflation outlook and believe that the right policy would be to put hikes on hold for now.
One can assume that the BIS gold selling division will be very busy when the Fed trial balloons not only an end to rate hikes, but leaks the first hint that QE4 is just around the corner.
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