- Silver is lower on Wednesday as traders continue to digest the impact of the recent US bond yield rally.
- XAG/USD remains supported above the $27.00 level, however, despite strong US data.
Spot silver prices (XAG/USD) are seeing further downside on Wednesday, as traders continue to digest the impact that the recent sell-off in US government debt markets (that has caused yields to spike) is going to have on precious metals markets. Perhaps somewhat surprisingly, spot silver prices have not seen much of a lasting reaction to significantly stronger than expected data out of the US at 13:30GMT; XAG/USD continues to hold onto the $27.00 level (for now), though is not much above lows of the day closer to $26.90 and is well below Asia Pacific session highs in the $27.40s.
US bond markets descend into choppiness
US government bond markets are choppy on Wednesday in wake of Tuesday’s sharp sell-off. 10-year yields have pulled back from session highs above 1.32% and are now back under 1.30%. Long-end yields have seen a larger pullback, with the 30-year yield down more than 3bps on the day to 2.055%. Meanwhile, real yields are also a little lower, with the most pronounced drop being seen in the 30-year TIPS yield, which has dropped back towards -0.14% from session highs above -0.08%.
The slight drop in real yields on the day does not seem to have provided much support for precious metals markets as, on the week, they are still sharply higher. As talk of a new “taper tantrum” hots up, silver and gold traders may be concerned that the recent move higher in nominal and real yields has further room to run yet.
Hot US data rocks sentiment
Stocks and crude oil market sentiment has taken a knock in recent trade in wake of significantly firmer than expected US Retail Sales and Producer Price Inflation reports for January. Starting with the former; headline retail sales was up 5.3% MoM in January, way more than expectations for a MoM growth rate of 1.1%. The YoY rate rose to 7.4%, up from 2.5% in December. Clearly the impact of the latest round of fiscal stimulus, which included a $600 cheque for each adult American citizen, was much more positive on consumer spending than anticipated. Economic reopening as Covid-19 cases dropped in many parts of the US also seems to have helped.
The Core and Control measures of retail sales growth in January were even stronger than the headline figure. The latter of these is an important component in GDP growth calculations and, as a result, economists will be rethinking calls for negative US economic growth in the first quarter of 2021. While the MoM rate of retail sales growth should ease back in the coming months as the positive impulse of stimulus cheques wanes, excess savings and the return of pent-up demand ought to keep consumer spending strongly supported.
Turning to Producer Price Inflation; that was also sharply higher in January. Producer Prices grew at a MoM pace of 1.3%, pushing the YoY rate of price growth to 1.7%. The steep rise in prices in January is expected to followed by another rise in February that will reflect the recent steep rise in carbon-based energy. Wednesday’s data may serve as adding further fuel behind the recent rise in US bond yields if it boosts expectations for Fed monetary policy tightening down the line.
In sum, Wednesday’s strong data is likely a taste of what’s to come throughout 2021; i.e. consumer spending continuing to roar higher amid stimulus and economic reopening and higher inflation. This is unlikely to be a particularly positive combination for precious metals markets, which seem to perform better when the economy is struggling and central banks have to actively step in with money supply expansion as a means of stimulus.
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