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  • Spot silver has slipped on Friday back towards $25.00 amid a pickup in US government bond yields.
  • The latest PPI report was hotter than expected and adds upside risk to next week’s CPI report, says ING.

Spot silver (XAG/USD) prices have been on the back foot for the majority of Friday’s session, dropping all the way from close to $25.50 to just above the $25.00 mark, with some buying interest seemingly coming in to save the day at the big figure, which happens to also coincide with spot silver’s 200-day moving average (which currently resides at $24.96). The precious metal  trades with losses of about 1.4% or slightly less than 40 cents, with a similar drop being seen in spot gold of about 1.0%.

Driving the day

US government bond yields have been picking up, particularly in the belly (5-year yields are up 5bps and 10-year yields up 3.5bps to back above 1.65%), and this, coupled with a pickup in USD, has been weighing on precious metals prices. However, no particular macro catalyst seems behind the move. Fed Chair Jerome Powell largely stuck to the script in his remarks on Thursday, as did Vice Chair Richard Clarida more recently on Friday. Comments from the Fed’s number one and two came in wake of a just as dovish as expected FOMC minutes releases on Wednesday (the minutes were for the 16-17 March FOMC meeting). In other words, the message from the Fed remains consistently dovish and most would not attribute this as a reason why yields are higher on Friday.

Bond yields did not show too much of a reaction to a much hotter than expected US Producer Price Inflation (PPI) report for the month of March, having already posted most of the day’s gains prior to the release. For reference, the YoY rate of PPI was 4.2% in March (its highest since September 2011), a jump of 1.4% from February and well above expectations for a reading of 3.8%. The Core PPI was also higher than expected, rising to 3.1% YoY from 2.5% in February, above expectations for a 2.7% reading.

According to ING, the latest PPI report adds upside risk to next week’s Consumer Price Inflation (CPI) report (also for the month of March). They expect CPI to come in at 2.4% YoY in March, but then to rise towards 4.0% over the summer “as prices in a vibrant, re-opened, stimulus fuelled economy contrast starkly with those of twelve months before when the economy was largely in lockdown”. The bank disagrees with the Fed, who thinks that inflation will then moderate; “we think that pandemic-related scarring and supply constraints will keep inflation elevated for longer than they do”. ING conclude that “inflation could stay closer to 3% for much of the next couple of years and in an environment of strong growth and rapid job creation it adds to our sense that risks are increasingly skewed towards a late 2022 rate hike rather than 2024 as the Fed currently favours”.

So then, perhaps there ought to have been a little more of a hawkish reaction in bond markets (and precious metals markets) than there was. If CPI does come in much higher-than-expected next week, as ING seems to think is likely, then this could add further reason for bond yields to move higher. This could well up further downwards pressure on the likes of silver and upwards pressure on the buck.