Here’s the news of the week – and how we see it here at McAlvany Wealth Management:

“Don’t Call it a Comeback” … When Conditions Necessitate Cutting Rates Again

ECB’s president Mario Draghi was compelled to cut the bank’s main refinancing rate by 0.25% to a record low 0.25%. He did so in response to an unfavorable US dollar/euro exchange rate that began wreaking havoc upon eurozone exports and consumer spending. A fall in Germany’s industrial output (-0.9%) and eurozone retail sales (-0.6%) for September reinforced that decision, the total effect of which provided for another round of dollar strength and euro and gold weakness (despite which, mining stocks showed some strength). Stocks displayed considerable volatility, but in the end suffered only slight losses. The dollar index finished just below resistance levels, while gold found support at 1,280, settling in around 1,287 by the close Friday. US GDP of 2.8% and non-farm payrolls that exceeded expectations provided additional fuel to the dollar’s rise – based upon the idea that tapering is sure to commence as early as December.

As usual, the US data had fleas. The GDP data was helped by a sizeable rise in inventories. Considered in isolation, that isn’t necessarily bad, but when taken in the context of consumer spending growth of 1.5% – the slowest pace in 3½ years – 4th quarter profits may be jeopardized by unexpected discounts. Non-farm payrolls of 204,000 (better than the 120,000 expected) included hires in preparation for the holiday season. The unemployment rate held flat at 7.3%, yet the participation rate fell again, to an all-time low of 62.8% – ergo there was no real improvement in jobs for October.

US interest rates rose or remained portentously high, this time in response to the jobs report, and certainly to the chagrin of US policy makers whose record interventions have been intended to produce the opposite effect. Insofar as rates continue to betray the bidding of Fed influence, tapering, in our opinion will simply not be forthcoming any time soon. That said, when one pits the net effect of Fed money printing ($85.0 billion/mo.) against that of a small rate cut of 0.25% in Europe, we feel the dollar/euro trade will soon experience a reversal in favor of the euro once again. Aside from an expected chorus of Fed officials singing praise to the economy and uttering tapering speculation in the up-coming week, that trend could get underway at any time. For the duration, the precious metals are poised to consolidate in and around support ($1,285 on the chart), before an expected resumption of the upward trend can be had.

Best regards,

David Burgess
VP Investment Management