- Spot silver prices continue to trade close to $26.00 as markets look ahead to Wednesday’s FOMC rate decision.
- Precious metals have shrugged off a rally in US government bond yields.
Spot silver (XAG/USD) markets have picked up where they left things off on Tuesday, with spot prices continuing to consolidate close to the $26.00 level ahead of Wednesday’s key FOMC meeting. On the day, prices are currently modestly higher, with XAG/USD recovered from a brief dip under the $25.80s to current levels almost bang on $26.00.
Driving the day
A pre-US market open spike higher in US government bond yields surprisingly did not have too bad of a negative impact on precious metal prices; at present 10-year yields are above 1.66% (highest levels since February 2020), more than 4bps higher on the session and the 2s10s spread (the difference between 2 and 10-year government bond yields, a proxy for treasury curve steepness) has surged back above 150bps, fresh cycle highs. No specific news of themes seemed to drive the move higher in US government bond yields over the last few hours, with traders putting it down to “pre-FOMC nerves” as US market participants arrived at their desks.
There are a few reasons why the recent move high in US government bond yields to fresh cycle highs might not be weighing on precious metals like silver; firstly, traders are likely still trying to keep their powder dry ahead of Wednesday’s FOMC meeting, which could send markets in either direction. Secondly and perhaps, more importantly, is the fact that though, yes, real yields are a little higher this morning (the 10-year TIPS is about 3bps to just over -0.65%), they remain well below highs set at the end of February (which for the 10-year TIPS is -0.528%) and have not even moved back to challenge March highs yet (which for the 10-year TIPS is around -0.6%).
That means the recent rise in nominal bond yields to fresh cycle highs is being driven by rising inflation expectations; since the start of the month, 10-year break-evens are up nearly 20bps from around 2.10% to above 2.30%. 5-year break-evens have seen an even more dramatic surge and are now above 2.55%, having started the year around 2.0%. Remember that precious metals are seen as a hedge against inflation, so higher inflation expectations is likely to be supportive to silver (and gold) prices.
Looking ahead, Wednesday’s release of the FOMC’s latest monetary policy decision, statement, updated dot-plot and new economic forecasts at 18:00GMT, followed by the post-meeting press conference with Fed Chair Jerome Powell at 18:30GMT will of course be the main event of the day.
Fed Preview
The FOMC is expected to hold interest rates at their zero-lower band (0.0-0.25%) and the rate of asset purchases steady at $120B per month (of which $80B are US government bonds).
The Fed statement and Fed Chair Jerome Powell’s remarks in the press conference are likely to stick to the usual dovish tone; i.e. no rate hikes until the bank has met its updated dual mandate (i.e. full employment and inflation that is moderately and sustainably above 2.0%), something which the Fed is likely to reiterate is still a long way off, and no tapering of asset purchases until substantial further progress has been made towards its dual mandate (something which Powell is also likely to say is a long way off).
The Fed will be releasing new economic projections which will be more closely scrutinised than usual; officials have been talking about how they expect inflation to pick up in the short-run and the updated inflation forecasts will formalise such expectations. The updated dot-plot is also of note; markets have brought forward their expectations of the first Fed hike as soon as late-2022/early-2023, despite the Fed’s old dot plot not forecasting any hikes through to 2024. Maybe the new dot plot might foresee a hike in 2023 (if not, that would be dovish).
Meanwhile, traders will also be on the lookout for any more information of if, when, and how the Fed might respond to further increases in US government bond yields, as well as any hints as to the conditions the Fed might want to see before tapering asset purchases – more information on the former is more likely than on the latter, as the Fed will likely want to avoid causing yields to move higher.
A few technical factors are also worth considering; bank SLF relief (which means they do not have to hold capital reserves for their treasury holdings) is set to expire this month and the Fed needs to decide whether to extend this. If not, this could cause some market problems as banks rush to meet their new, higher capital requirements. Some desks also think the bank might tweak the Interest of Excess Reserves Rate (IOER), which is a tool the bank uses to keep the Federal Funds rate within its target band – if they do, they will insist that this does not constitute a tweak to monetary policy, rather just a technical adjustment to maintain policy.
Share
