- The rally in silver spot prices continued on Thursday, with XAG / USD matching the November high and eclipsing $ 26.00.
- Soft US data has exacerbated expectations of further Fed easing, depressed US yields and is supporting precious metals.
Silver Spot Prices (XAG / USD) are rising for the third day in a row on Thursday, with prices briefly coinciding with early November highs just above the $ 26.00 level. The XAG / USD is currently trading with gains of more than 2.5% on the day and is just above $ 26.00.
Real yields tumble as soft US data exacerbates expectations of further Fed easing
US housing data for November was recently released, showing that building permits rose to an all-time high of 1,639 million (their highest level in more than a decade) and housing starts increased to 1,547 million ( almost back to pre-pandemic levels around 1.6 million) obscure the weakness that is being seen in other parts of the US economy. In fact, most analysts would agree that the ultra-low interest rate environment advocated by the Fed is behind the current housing boom, as low rates make mortgages more affordable. Additionally, it could be argued that the demographic of U.S. citizens who can afford to buy a home in the first place has been much less affected by the impact of the pandemic than those at the bottom of the income scale, thus that, by some metrics, the housing market is actually better than before the pandemic.
Either way, the US economic weakness that is not showing up in the housing market was shown in its entirety in a much higher than expected number of initial jobless claims for the week ending December 12. and in disappointing manufacturing figures from the Philadelphia Fed. Starting with the first, 885,000 Americans claimed unemployment insurance benefits last week, well above expectations for an increase to 800,000, showing how badly the American job market is suffering right now amid rising prevalence. of Covid-19 in the country and the strictest economic restrictions.
Meanwhile, the Philadelphia Fed manufacturing index fell from 44.3 in November to 11.1 in December, well below expectations for a drop to 20.0. The internal aspects of the report were also unpleasant, with employment down to 8.5 from 27.2, New Orders down to 2.3 from 37.9 and Prices Paid down to 27.1 from 38.9.
The bad data mix triggered a rally in the US bond markets, probably due to the anticipation that this bad data will prompt the Fed to act in January. In fact, Fed Chairman Jerome Powell wanted to emphasize in the press conference after the Fed meeting on Thursday that the Fed has the flexibility to do more if necessary and if economic conditions warrant further action. Therefore, bond markets appear to be betting on more QE in January, or at least an adjustment in the bank’s current buying composition to include longer-duration bonds.
As a result, yields have fallen; US 10-year nominal yields have fallen below 0.90% again and 10-year TIPS yields (the real 10-year US yield) plunged to lows below -1.06%, their highest level. low since September 3. Keep in mind that falling real returns make underperforming assets like precious metals look like a comparatively better investment, so when real returns fall this underpins silver.
Markets Bet Fed Action Will Spur Inflation
More interestingly, Thursday’s poor economic data (the Philadelphia Fed and jobless claims data anyway) did not cause inflation expectations to drop. In fact, the opposite happened; Before the data, the 10-year equilibrium inflation expectations were just below 1.91% and after the data they had risen above 1.92%. This implies that, rather than the market seeing short-term economic weakness as a detriment to inflation expectations over the next 10 years, markets see the bad data as an increased likelihood that the Fed will intervene more. stimuli (probably in January), which will end up increasing long-term inflationary pressures.
Remember that precious metals like gold and silver are considered a hedge against inflation, so if markets are betting that bad data will prompt the Fed to take action that will increase inflation, this should support precious metals.
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