Gold Laughs At Loose Rate Powell

McAlvany Weekly Commentary

Bond Yields Rise As Powell Cuts Rates Gold Rises As Powell Ignores Inflation Zelenskyy Campaigns For Harris With U.S. Assets "But the mantra kept on being uttered, "we're data dependent," but we knew this last week. Supercore is not suggesting an end to inflation. Tightness in the labor market is not either. And while supply chain contributions to inflation pressures are diminished, you still have geopolitical concerns and rumblings of trade conflict, which keep the likelihood of an inflationary rebound pretty darn high because you don't move away from those supply chain issues when you've got those kinds of things. Again, trade conflict, geopolitical concerns, these circle us back around to supply chain issues, and again, just an inflationary rebound." - David McAlvany Kevin: Welcome to the McAlvany Weekly Commentary. I'm Kevin Orrick, along with David McAlvany. David, let's just try this for a second. All right, so Jerome Powell, Kamala Harris, and Zelensky of Ukraine walk into a bar. They buy everybody drinks, and they say, "Hey, the economy is great, but we're still going to lower the interest rate 50 basis points." Now, you've got long bond in there. David: You had me at free beer. Yay! Kevin: You've got Mr. Long Bond there, and at first he snickers, and then you've got Mr. Gold there, and he snickers and then he bursts into laughter with tears. That's what we saw last week. Gold is hitting all-time highs. The long bond said, "Huh, yeah, you may be buying us free beer, but yeah, interest rates are going up, buddy. Not down." David: Exactly. Exactly. Well, there was a contrast, a very interesting contrast if you look at what happened in the U.S. bond market versus the Chinese bond market a few days later. This week, the PBOC offered support to the Chinese economy in the form of, number one, reduced bank reserve requirements. That gives extra liquidity to be loaned out into the economy to stimulate growth. Kevin: Right. David: And a policy interest rate cut to stimulate growth as well. Chinese 10-year Treasury reached near 2%. Kevin: That's amazing. Aren't we paying double that? I mean, why do Americans have to pay 4% interest? David: Well, that is a good question, because the U.S. 10-year Treasury has often been referred to as the benchmark for the risk-free rate, but it's double that of the Chinese. But the behavior of the Chinese bond was telling. They lowered rates, and lo and behold, the bond market, those yields go lower as well. And monetary policy loosening. Kevin: Does that mean they have credibility where we don't? David: You had TLT, which is an exchange-traded fund, a measure of U.S. long bonds. It's had its fifth day in a row of increasing yields. At least for now, the PBOC has more market credibility than the Fed, and that's tough to swallow. The U.S. government bond market has done its own thing with yields moving higher, and that's the twos, fives, 10s and 30-year, even while the Fed last week dropped rates 50 basis points. Kevin: So that bond market, Mr. Bond is not buying it. He's snickering and then laughing and interest rates are going up. David: It's the opposite of what most market practitioners would assume. This is an incredible market. The Fed says it's time to loosen financial conditions, and the market, the bond market particularly, contradicts that with the response of, "we'll maintain tighter financial conditions if you won't." There is a credibility standoff between the FOMC and Mr. Bond. So data dependency died last week. Actually, data dependency died a bunch of years ago. Kevin: Yeah, they stopped looking at the numbers and just started looking at the politics. David: But the mantra kept on being uttered, "we're data dependent," but we knew this last week. Supercore is not suggesting an end to inflation. Tightness in the labor market is not either. And while supply chain contributions to inflation pressures are diminished,