All Eyes on Powell Again - David Brady (22/08/2019)

August 22, 2019

U.S. and global economic data have been deteriorating for several months now. The Fed confirmed as much last month with their first interest rate cut in ten years. President Trump followed suit with his suggestion of temporary tax cuts to boost the economy at the same time he sharply criticized the Fed for not cutting rates by a larger amount. Hardly what you would expect in the midst of a strong economy . Although the market believes more interest rate cuts are necessary to stave off recession, the Fed appears to want to remain patient on that front.

The FOMC minutes revealed that the Fed remains deeply divided on the need for further rate cuts in the near future. Philly Fed president Patrick Harker said today that he doesn't see any need for further rate cuts at this time, citing strong labor markets and recent improvements in inflation data. The Fed's Esther George also said it was not time for accommodation, as the labor market remains strong. Unsurprisingly, the economic slowdown is being attributed to the ongoing trade war and not the Fed’s policies.

What the minnows at the Fed say matters little compared to what Powell has to say tomorrow. If he is dovish and leaves the door open for another imminent rate cut, then markets will be relieved, at least in the short term. If he is surprisingly hawkish, then all but the dollar will likely be heading south. I believe he will be non-committal and stick to the script of a strong economy and labor market, slowly rising inflation, and risks posed by the ongoing trade war. This alone could disappoint markets already pricing in multiple rate cuts ahead. The comments by Harker and George are likely attempts to temper expectations ahead of Friday, in order to reduce the risk of a sharp drop post Powell’s comments. I am not optimistic that they will succeed.

It’s clear that the precious metals and miners are waiting to see what Powell has to say. After steep rallies almost straight up, they have all been going sideways for the past two weeks. The ranges are as follows:

· Gold: 1490-1546

· Silver: 16.50-17.50

· GDX: 27.80-30.00

Unfortunately, this doesn’t tell us much about the next direction for metals and miners, and we have to rely on the levels to break one way or the other. But we do know that this period of consolidation has reduced the extreme overbought and bullish conditions in each, making room for another leg higher. At the same time, Commercials are as short Gold as they were at previous major peaks in 2016, 2012, 2011, 2008, and 2006, and metals and miners could just keep falling for now, especially if expectations for rate cuts and QE are tempered “in the short term”.

That said, unless we get a deflationary scare and the bottom falls out from under stocks, I don’t see anything other than a temporary further drop in metals and miners that should be bought. Key supports levels are as follows:

• Gold: 1400, 1300.
• Silver: 16.50, 15.90.
• GDX: 26.00

It remains my belief that QE and a far weaker dollar are inevitable and that the rallies in Gold, Silver, and the miners have a long way to go on the upside. The only question is whether we have further to fall first before we head higher again. Powell will provide us with a hint tomorrow.