If Fed Chair Kevin Warsh is looking for measures of inflation expectations that lean more to the benign end of the spectrum, he might consider the 1-year inflation swap rate. It was 1.71% on Wednesday, the lowest since 2024 and down from over 3.5% a few months ago. Importantly, it is below the Fed's 2% medium-term inflation target. The 2-year swap rate got as low as 2.07%.
These markets are noisy and there are questions over liquidity, so they aren't the most accurate barometer of inflation expectations (are there any good ones?). But with oil prices down 20% in two weeks, markets are removing a huge slice of the near-term inflation premium that had built up over most of July. Comfort for the Fed?
Gold had its best day on Wednesday in six months, rising 4.5% and moving further away from the $4,000/oz level. Unlike oil or other precious metals lately, gold tends not to move this much — this was one of bullion's biggest one-day rises since the GFC. What gives?
There is no obvious 'fundamental' catalyst, although a softening dollar and lower bond yields always help. Demand from China recently has been strong too. But perhaps the good old big round number - $4,000 - sparked some activity. Gold has flirted with a clean break below this level for weeks but failed. Reuters/LSEG charts show gold's last 'close' below $4,000 was in November, despite a few intraday dips below since June. You can only hold a position for so long.
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