Financial markets are trading with a lack of conviction in the Thursday European afternoon, due to the lack of US market participants on account of market closures there for the Thanksgiving holiday. Conforming to the broadly subdued tone, spot silver (XAG/USD) prices have been going sideways for the majority of Thursday’s session within a $23.50-70 range. Volumes and volatility seem unlikely to pick up too substantially on Friday, given that US markets shut early and, as a result, many US market participants will have taken the opportunity to get in a long-weekend holiday.
If XAG/USD does close down around current levels, that would have marked a roughly 4.0% decline on the week. The primary driver of this weakness has been 1) a stronger US dollar (the DXY is up about 0.7% on the week) and 2) higher real yields. The US 5-year TIPS rose about 9bps to just under -1.70% 10-year TIPS rose more than 10bps to above -1.0%. Driving the gains was a combination of further strong US macro data which supports the case for an accelerated monetary tightening timeline, as well as further indications from Fed members that they are increasingly open to accelerate monetary tightening.
One of the highlights this week with regards to the Fed were comments from San Fransico Fed President Mary Daly on Tuesday saying she was open to a faster QE taper and earlier rate hikes, subject to the data. The minutes of the 3 November FOMC meeting, released on Wednesday, was another highlight and underlined the hawkish shift occurring within the Fed even prior to the release of the hot October inflation Consumer Price Inflation report.
Markets are now increasingly positioning themselves for a hawkish Fed shift. Goldman Sachs on Thursday said they expect the Fed to double the pace of its QE taper to $30B per month from January, meaning the QE taper would be complete by the end of Q1 2022. Moreover, the bank now sees the Fed hiking the Fed funds target range three times (by 25bps each time) in 2022, starting in June. Money markets seem to agree.
The Chicago Board of Trade (CBoT) 30-day Fed funds interest rate future for next June now trades at 99.68, nearly 10 points below where it ended last week. That implies a 25bps rate hike in June is nearly fully priced. The December Fed funds future, by comparison, trades around 99.27 and is also down about 10 points on the week, implying (roughly) 65bps of tightening by the end of 2022.
Some analysts suggested on Thursday that the scope for a further hawkish shift in the market’s expectations for Fed monetary policy in 2022 is now fairly limited. This implies the dollar may struggle to gain further ground. In such a scenario, precious metals like silver may be offered a chance to recoup recently lost ground. Short-term silver bulls would target a move back towards recent highs in the $25.40s.