The global economic environment appears to be entering a situation that will afford the Fed the opportunity to raise the fed funds target rate in June. I do not think this situation represents a secular turn in prospects for U.S. or global economic activity, though. It appears to be a kind of parting of the storm that will allow the Fed to move at the June 15 FOMC meeting.
I don't have a high degree of conviction that the Fed will do so at this point, but I think it's better than a 50/50 chance if some of the recent U.S. and global trends continue, which I'll discuss momentarily.
There are obviously many capital market implications of a Fed rate hike in June, but in this column I'll limit the discussion to the U.S. dollar, gold and the gold miners.
In the U.S., there is evidence of both wage and price pressures from April that will supply support and rationale for a June rate hike.
I discussed the wage pressures issue in the column, "Employment Report: A Tale of Two Economies Creating a Fed Headache."
The Atlanta Fed Wage Growth Tracker has since offered a similar take, showing that wage growth, at 3.5% annually, is at its highest level since 2009.
It's also three-tenths of a percentage point above the level of last December when the Fed last raised the target rate.
Yesterday, the Bureau of Labor Statistics report on the consumer price index (CPI) offered a similar situation for price inflation.
Although the Fed uses its own price inflation measure, the personal consumption expenditures (PCE), it's probable that it will affirm the CPI measures.
The FOMC has been increasingly focused on foreign economic activity over the past year, though, with stated concerns about the impact on U.S. exports.
On April 28, the Bank of Japan (BOJ) unexpectedly refrained from providing further monetary stimulus. That allowed the yen to appreciate, the dollar to depreciate against it, and pushed gold prices up by about $40; from the $1,260-per-ounce range to the $1,300 range.
The BOJ's restraint will be short-lived, but its next policy meeting doesn't conclude until the day after the FOMC meeting.
The Japanese economy rebounded out of recession during the first quarter, though, and the BOJ will likely punt on more stimulus at that meeting.
The temporary sidelining of the BOJ relieves some of the currency pressure on the dollar, and as a result some of the concern about U.S. exports; which in turn supports the Fed taking advantage of this window to raise rates in June.
The British "Brexit" vote is on June 5, and it appears probable now that the decision will be to remain in the EU. That too will relieve upward pressure on the dollar. It's a fluid situation, though, and should be monitored.
If they vote to leave, it's most probable that the Fed will punt on rates 10 days later.
Also on June 5 is the Swiss vote on the referendum to institute a "universal basic income."
It appears now that the Swiss will vote down the referendum at this time, which removes some potential upward pressure on the dollar that would likely result from the referendum passing. That too is supportive of a Fed rate hike in June.
This too, however, will be a temporary situation as it is most probable that the adoption of a "basic income guarantee" will begin to occur in several countries.
I discussed this in the column, "The Basic Income Guarantee Is Coming."
The European Central Bank (ECB) next meets on June 2, and it looks like it too will refrain from providing more stimulus at that meeting.
That too will be a temporary window and supports a Fed rate hike in June.
Although there are many other issues to consider, the trend in the U.S. and globally is that a temporary phase of economic calm with fewer variables to contend with is affording the Fed the opportunity to hike in June.
If the trend continues over the next month, there should be upward pressure on the dollar, which will be reflected in declining gold prices and an even greater correction in the gold mining stocks.
None of this changes the secular trend toward higher gold prices I wrote about in the column, "Why Gold Is the Only Place to Hide."
It should, however, provide an excellent temporary dip and thus buying opportunity in gold and the miners.
The easiest way to play the metal is through the SPDR Gold Shares (GLD), and the easiest way to play miners is through the VanEck Vectors Gold Miners ETF (GDX).
