Two of the most highly anticipated economic news events for the month have now come and gone, and markets are still trying to make up their minds regarding the potential implications.

 

Last week, the Bank of Japan met regarding monetary policy while the U.S. Federal Reserve also held its monetary policy meeting and subsequent press conference.

 

The BoJ did take action this past week, although the action taken did not come in the form many were likely expecting. Many analysts were of the opinion that the Japanese Central Bank would likely take rates further into negative territory. The bank elected to go down a different path, however.

 

The BoJ, without getting into details, has now unveiled what is being dubbed “quantitative and qualitative monetary easing with yield curve control.”  The BoJ has also committed itself to further easing until inflation overshoots the central bank’s two percent target.

 

The question likely now being asked by many is “Has the Bank of Japan simply run out of ammo?”

 

Of course, time will tell but concerns do seem to be mounting that the central bank is running out of bonds to buy-and that previous easing measures have proven ineffective.

 

The U.S. Fed, on the other hand, elected to hold rates steady although the vote was the closest it’s been in some time.  The doves won by a vote of 7-3, although the central bank appears intent on hiking rates before the end of the year.

 

Perhaps more importantly, the Fed lowered its target Fed Funds rate from three percent to 2.9 percent, and reiterated that the pace of additional tightening would be very slow and incremental. At this point, a single rate hike is expected this year while two are expected next year.

 

The notion of sluggish global growth may keep central banks very accommodative for some time to come, and further easing measures are likely to be unveiled by several key central banks.

 

The initial reaction to last week’s central bank news by the gold market was positive. The bulls will need to see some follow through this week, however, to really regain upside momentum.

 

Investors will be watching the data stream closely in the coming weeks, and the Employment Situation Report for September could potentially make or break the Fed’s plans for a December rate hike.

 

Given the Fed’s lowered economic outlook and the notion of ongoing easing elsewhere, gold and precious metals could potentially see fresh new highs in the coming months.

 

Although stronger equities have likely been a significant roadblock to higher gold prices in recent months, stocks may be more deeply affected by a December rate hike than gold. The coming weeks will demonstrate if the gold market has already completely discounted a hike by the Fed, and if the idea of ongoing easing and slow growth is something the market can build on to put together a stronger long-term rise in prices.

 

Stocks have been showing some signs of weakness in recent trade, and any indications that the equity market bubble may be bursting could potentially drive significant capital inflows into gold, silver and other perceived safe haven assets. 

Stock investors sure didn’t like what they were hearing on Friday. The broad market S&P 500 declined by nearly 2.5 percent, while the Dow Jones Industrial Average was hammered for a loss of over 390 points. Friday’s losses were the worst seen since June 24th in the immediate aftermath of the Brexit vote.

 

While there is certainly a combination of factors at play, hawkish commentary from Fed officials is not doing the stock or bond markets any favors.

 

On Friday, Boston Fed President Eric Rosengren (who is a voter on this year’s interest rate setting board) said the central bank could resume gradual rate increases as economic risks are more in balance.

 

His comments drove buying in the dollar, while the yield on the benchmark 10-year Treasury note jumped to pre-Brexit levels. Crude oil got hammered while gold and silver declined as well-albeit only modestly.

 

It would seem pretty clear that the Fed is perhaps sending a shot across the bow, and that investors should ready themselves for another rate hike. Judging by market action on Friday, stock investors do not appear too pleased with the idea of higher rates.

 

Markets are still only pricing in a small chance of a September rate hike, with Fed Funds futures currently showing about a 24 percent chance of a hike this month. December Fed Funds futures, on the other hand, are pricing in about a 58 percent chance of a hike.

 

All of this could potentially change, however, based on the data stream and other factors. For now, however, the central bank appears to be pretty intent on tightening before the end of the year.

 

Interestingly, gold and silver did not see the aggressive type of selling seen in equities on Friday. In fact, one might argue that these markets have already discounted another hike by the Fed.

 

Although some might consider rising rates a roadblock to higher gold prices, we believe gold could rise substantially from current levels even with incremental rate increases. There are two primary reasons behind this view:

 

1. Rates are not likely to rise substantially anytime soon.
2. The Fed could potentially raise rates only to cut them again later.

 

 

This week may bring with it more clues about the timing of the next hike, and investors as well as the Fed will have some key pieces of data to scrutinize. Retail sales and manufacturing data could potentially influence the central bank, while weekly jobless claims may also play a role.

 

The Fed may, however, focus on the jobs data for September before making a decision. The non-farm payrolls data for August was not a disaster but not exactly stellar either, and the Fed could prefer to see another strong number before tightening again.

 

Stocks, bonds and precious metals may start the week off on the defensive, and any strong economic data or hawkish rhetoric may exacerbate selling in these asset classes. On the other hand, any dovish commentary or significant misses on data could potentially alleviate some rate hike fears.

 

Several Fed officials are speaking Monday, and their commentary could potentially set the tone for the week.