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Gold's correction from the peak of 1388.1 continued as a surprising drop in US jobless claims eased QE expectations and lifted the dollar. The benchmark contract for gold plummeted to a 2-week low of 1318.2 before settling at 1325.6, down -1.38%. Crude oil has traded with high volatility with price fluctuating between 80 and 84 over the past few weeks. The front-month contract yesterday slipped to as low as 80.09 before recovering to 80.56 at close, down -2.40%.
Initial jobless claims fell -23K to 425K in the week ended October 16. The unexpected drop brought the 4-week average lower to 458K. Meanwhile, Conference Board's leading indicator climbed +0.3% m/m in September and Philly Fed Index improved to 1 in October from -0.7 a month ago. Investors worries these data would prolong the debate among Fed members on QE implementations. St Louis Fed President James Bullard said he saw 'small increments' of QE2 at the November meeting but no decisions was made. This suggests policymakers have not yet reached a consensus to announce further measures at the meeting 2 weeks later. Bullard also expressed his view on QE and he favored starting the program by buying $100B in long-term Treasury in November. Subsequent purchases will be based on economic development. Yet, he added that not much effect will be seen for a November move as the market has priced it in and long-term yields have fallen significantly.
Kansas Fed President Thomas Hoenig will speak on the US economic outlook today. Hoenig has voted 6 times against leaving the Fed funds rate at exceptionally low level for an extended period of time.
Hoenig believed that the current high levels of unemployment were caused by 'an extended period of exceptionally low rates earlier in the decade that contributed to the housing bubble and subsequent collapse and recession'. Holding rates artificially low would 'invite the development of new imbalances and undermine long-run growth'. He favored 'moving the federal funds rate upward, consistent with his views at past meetings that it approach 1 percent, before pausing to determine what further policy actions were needed'. Hoenig also disfavored the reinvestment of agency debt and agency MBS proceeds.
Wall Street opened higher but gains were pared after the FHFA said Fannie & Freddie might need a total of $363B from the government through 2013 should the housing market deteriorates further. Banking shares were pressured and benchmark indices were dragged into the red before recovering in late US session. DJIA and S&P edged +0.35% and +0.18% respectively at close.
Commodities crawled higher in Asian session today. Sideways trading is expected ahead of the G-20 meeting as a potential currency war remains a key factor affecting the financial market. Over the past week, global leaders have tried to ease currency tensions between advanced and emerging economies. US Treasury Secretary Timothy Geithner said the world's major currencies are 'roughly in alignment' and the US is not trying to devaluate its currency. He said the US 'would like countries to move toward a set of norms on exchange-rate policy'. Olli Rehn, European Union Economic and Monetary Affairs Commissioner, said the goal of the meeting 'is to agree on a policy on the coordination and rebalancing of global growth'.
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