Sive Morten
Special Consultant to the FPA
- Messages
- 18,624
Fundamentals
Gold market performance this week, as well as fundamental background that we have partially considered in our FX Report, suggest existing of driving factors that support gold. Beyond the general geopolitical situation, the "secondary" statistics in the US, such as consumer spending and confidence, real estate market, mortgage and student loans sphere shows some signs of weakness. As recent data, including NFP report do not totally incudes result of imposed sanctions, we suspect that situation should become more evident closer to the summer, maybe in May. Inversion of the US yield curve shows investors concern on long-term economy performance as well. This, in general supports our positive long-term view on gold market.
Market overview
Gold on Thursday was headed for its biggest quarterly gain since the pandemic-led surge in mid-2020 as concerns over soaring consumer prices and the Ukraine crisis bolstered bullion's safe-haven appeal. Data showed U.S. consumer spending slowed significantly in February, while price pressures continued to mount, with the largest annual spike in inflation since the early 1980s.
The Federal Reserve has hinted toward aggressive rate hikes this year to fight against soaring inflation, which investors fear could send the U.S. economy into a recession. A pullback in benchmark U.S. 10-year Treasury yields on Thursday also supported gold.
The widely tracked yield curve showing the difference between two- and 10-year U.S. Treasury yields bounced back to 4 basis points on Wednesday. It had briefly inverted to minus 0.03 of a basis point on Tuesday for the first time since September 2019.
Longer-dated yields falling below shorter ones indicate a lack of faith in future growth. A drop in 10-year yields below 2-year rates signals a recession.
Sebastien Galy, a senior macro strategist at Nordea Asset Management, said fixed income and equity markets are diverging in their outlooks and the split bears watching.
An inverted Treasury curve has in recent decades been followed by a recession within two years, including the 2020 downturn caused by the COVID-19 pandemic.
Recently central bankers have been taking a leaf out of the politicians’ playbook, in attempting to achieve their desired outcomes through words rather than deeds. Inflation began to rise early last year as the major economies reopened, and as continued elevated demand for goods created supply bottlenecks. Sharp increases in energy prices, particularly in Europe, will inevitably push headline inflation still further above target. Although policymakers in the developed economies no longer describe the overshoot as transitory, they continue to speak and act as if inflation will fall back largely of its own accord. Investors have bought into the story. Market pricing remains consistent with steady declines in headline inflation across most major economies through this year and into the next, with policy rates of interest remaining substantially negative after adjusting for inflation. Monetary policy, in other words, is expected to remain loose. Central bank credibility is expected to do almost all the work.
Lagarde said the inflation outlook was "fluid" as an ongoing war in Ukraine forced economists to constantly revise their economic forecasts. But she expected energy and food prices, which have scaled new highs since conflict started, to stabilise, albeit at high levels. As inflation in the euro zone speeds up, top European Central Bank officials have insisted the rise is temporary, with ECB Chief Economist Philip Lane describing high inflation as an imported shock that will fade away over time.
Words rather than deeds will continue to work their magic. But is this confidence justified?
There are certainly grounds for optimism. Medium- to long-term inflation expectations remain well anchored. They have risen, as we show in the chart below, but when the one-year ahead inflation expectations of US households last moved above 5% for a sustained period of time, five-year ahead inflation expectations of US households were also above 5%. They are currently around 3%; marginally above target, but no higher than they were through much of the 2010s, suggesting ‘fake it till you make it’ remains a credible strategy for now.
But can this state of affairs last? It is clear that households, investors, and economists alike have been getting their inflation forecasts wrong — systematically so. Since early last year, US inflation has surprised repeatedly on the upside. The longer forecasters continue to be surprised by higher-than-expected inflation, the more likely it becomes that they will change their minds about the process driving inflation. They may conclude, for example, that it has become more persistent, and medium- to long-term inflation expectations will start to rise. Such conclusions can rapidly become self-fulfilling.
Inflation in Fathom's central scenario, which we label ‘Extended transitory’ and assign a 70% weight, will remain higher for longer than we had forecast back in December, and policy rates of interest will need to rise by more. In this world a material policy tightening is necessary to bring inflation, and inflation expectations, back to target – and this is likely to trigger a correction in many asset markets and a recession in many countries. We have revised up our forecast for the US federal funds rate, and see close to an evens chance that it ends the year above 2.5%.
Our mean path for US inflation is close to market pricing, though higher than the median forecast of economists responding to the Reuters Poll. We see around a one-in-four chance of double-digit inflation in the US later this year. Events in Ukraine have strengthened our conviction that inflation will rise further from here, globally, and have given renewed impetus to inflation-sensitive assets. We favour exposure to silver over gold or copper, as it remains relatively undervalued. We will look for signs that liquidity has troughed, perhaps during the second half of this year, before becoming more bullish on risk assets. Nevertheless, there are some opportunities in developed Europe, with German and Italian equities appearing cheap relative to the Euro Stoxx 600. Whilst central banker’s confidence they can handle inflation without recourse to drastic action is likely justified, risks (and opportunities) remain.
CFTC Data
This week we see massive contraction of gold positions by investors. Open interest has dropped for almost 10% and this is not because of speculators. Spreading positions and hedgers have triggered massive gold exposure contraction. SPDR fund reserves also has dropped slightly but not as significant.
Another hot topic in nowadays is reversed US yield curve. Partially we've discussed this phenomenon in our FX report and here we provide Pimco opinion on this subject, which also suggest that this is more sign of caution rather than unavoidable recession. Still, our suggestion is chances for recession still stands high.
The curve itself is a graph of the relationship between Treasury yields and time to maturity. It usually slopes upward, from left to right, indicating investors demand more compensation to own longer-term bonds – to offset the risk that economic growth or inflation may accelerate over time. The curve has a track record for foreshadowing recessions when it inverts, meaning when shorter-dated yields move above longer-dated ones. Lately, inversions have appeared between various points along the curve, spurring investors to ask whether these are omens of a recession.
That’s a complicated question in the current economic cycle, which saw a sudden downturn in 2020 and a rapid rebound fueled by unprecedented central-bank stimulus.
A yield curve inversion should never be dismissed just because the backdrop has changed. That said, the curve’s signal may be less clear than in the past.
Curve flattening often occurs later in a cycle when central banks raise short-term policy rates to restrain growth and inflation. Short-term yields can rise to reflect these hikes, while long-term rates may fall as expectations for inflation and growth moderate. This time, the flattening occurred quickly and well ahead of the first Fed hike. Inflation could continue to overshoot expectations, which could spur the Fed to further accelerate its hiking pace.
The most important curve to follow is likely the forward curve, a market-based measure that incorporates existing – or spot – rates as well as implied rates further down the road. The forward curve uses all known information and can be more relevant than a spot curve, which doesn’t incorporate expected changes in short-term rates. The forward curve is now sharply inverted.
Does this mean a recession is imminent? No, but it is a risk to monitor. The global economy and policymakers are confronted with a supply shock that is negative for growth and will tend to push up inflation further. Most central banks seem determined to opt for fighting inflation over supporting growth. This raises the risk of a hard landing down the road. PIMCO is calling for above-trend growth and a gradual easing of inflation pressures from higher peaks in developed market economies. However, the risks of higher inflation and lower growth have increased, along with the risk of recession in 2023.
The current shape of the yield curve underscores why investors need to be flexible. Simple bond math – which factors in price, yield, and reinvestment rate – suggests that investors aren’t picking up enough extra yield when buying long-dated Treasuries today. At recent levels, not only does a two-year Treasury offer a similar yield to a 30-year bond, but it provides the opportunity to make a reinvestment decision in two years rather than waiting another 28.
We now appear firmly in the late stage of the economic cycle, with underlying growth momentum still strong but increasingly vulnerable to downside risk. We will tend to emphasize keeping powder dry in an effort to take advantage of dislocations in markets as they arise.
The bottom line
Last week we've made adjustment to our long - term strategy. It suggests some more pressure on the gold market in nearest term, 3-4 months, at least until summer but with the more evidence of the US economy weakness closer to the autumn and rising demand for the gold. This week stands absolutely in a row of this vision. NFP and other statistics that we've got looks good, especially because it reflects Feb and mid-March data that doesn't include yet results of drastic changes in geopolitics and global economy. This fruits are still ahead. Second is, big run of the capital out from EU provides external support to the US economy and disguises problems, which should last at least 2-3 months more. Besides, EU is just gets started to see first results of the sanctions. US has more tools to increase this burden if needed.
Indirect signs support our view that not everything stands good in the US economy. While we see that employment is dropping, NFP looks good and inflation stagnates (although at high level) - we see consumption drop, rising debt serving burden on households' budget and downside tick on the real estate market. Forecast for inflation is rising, making Fed to react more aggressively. We agree that reversed yield curve is not necessary the harbinger of recession, but it definitely tells about investors' uncertainty in the future and their unsure that Fed activity puts the US on the economy growth path.
Finally, when all this stuff happens on a background of geopolitical uncertainty, possible escalation and negative surprises - it keeps investors in tension, doesn't let them to relax and forces them to keep exposure on gold market. And real interest rates are still negative, which is major driving factor for the gold market performance in long-term.
Technicals
Monthly
Monthly trend remains bullish, while price is coiling around YPR1. Recent pullback is not something outstanding as price shows proper reaction on too fast acceleration and monthly Overbought area. In fact, the grabber failure here is a reasonable result, as its appearing in current conditions could be looking curious.
With the new as fundamental as geopolitical background, we suggest that downside gold potential is limited now and price should stay between the pivots.
Weekly
Trend stands bullish here as well and market has completed the minimal reaction on the butterfly pattern, showing 3/8 pullback. Last week we've discussed large "Evening star" pattern, that suggests compounded shape of the retracement, which means a kind of AB-CD shape on lower time frame, and deeper target. Despite long term bullish context, we're not hurry up with long entry by far. This week price was not able to start downside continuation as we've got few drivers that has triggered deep upside bounce on intraday charts, including ruble gas payments. Let's see, whether something changes on coming week. Market has drop below the current lows to confirm current setup. Otherwise, situation could drastically chart, although cross-market analysis doesn't support it yet. Long-term TIPS yield is coiling around zero, while we expect downside action on EUR that suggests some strength in the US dollar.
Daily
Trend here remains bearish, suggesting that downside pullback is not finished yet. As last week, this week we keep watching on market performance and whether it stands above the recent lows. The fact that market re-tested the same support with W&R action has provided bullish impulse and, as market still stands above these lows - short term intraday bullish setup is still valid. Daily chart now provides no additional information:
Intraday
On 4H chart we still have the divergence, mentioned last week. While we've got bullish grabber on Friday but it was not able to trigger upward action because of positive NFP data pressure. Thus, as K-support area is broken on 1H chart, we intend to watch for 1912 area first and see what response follows. Scalp traders also could watch over it to consider long entry setup. If gold fails to stay above 1912 - it means destruction of short-term bullish context and opening way to 1850$ next downside target.
Gold market performance this week, as well as fundamental background that we have partially considered in our FX Report, suggest existing of driving factors that support gold. Beyond the general geopolitical situation, the "secondary" statistics in the US, such as consumer spending and confidence, real estate market, mortgage and student loans sphere shows some signs of weakness. As recent data, including NFP report do not totally incudes result of imposed sanctions, we suspect that situation should become more evident closer to the summer, maybe in May. Inversion of the US yield curve shows investors concern on long-term economy performance as well. This, in general supports our positive long-term view on gold market.
Market overview
Gold on Thursday was headed for its biggest quarterly gain since the pandemic-led surge in mid-2020 as concerns over soaring consumer prices and the Ukraine crisis bolstered bullion's safe-haven appeal. Data showed U.S. consumer spending slowed significantly in February, while price pressures continued to mount, with the largest annual spike in inflation since the early 1980s.
The Federal Reserve has hinted toward aggressive rate hikes this year to fight against soaring inflation, which investors fear could send the U.S. economy into a recession. A pullback in benchmark U.S. 10-year Treasury yields on Thursday also supported gold.
The widely tracked yield curve showing the difference between two- and 10-year U.S. Treasury yields bounced back to 4 basis points on Wednesday. It had briefly inverted to minus 0.03 of a basis point on Tuesday for the first time since September 2019.
Longer-dated yields falling below shorter ones indicate a lack of faith in future growth. A drop in 10-year yields below 2-year rates signals a recession.
Sebastien Galy, a senior macro strategist at Nordea Asset Management, said fixed income and equity markets are diverging in their outlooks and the split bears watching.
An inverted Treasury curve has in recent decades been followed by a recession within two years, including the 2020 downturn caused by the COVID-19 pandemic.
Recently central bankers have been taking a leaf out of the politicians’ playbook, in attempting to achieve their desired outcomes through words rather than deeds. Inflation began to rise early last year as the major economies reopened, and as continued elevated demand for goods created supply bottlenecks. Sharp increases in energy prices, particularly in Europe, will inevitably push headline inflation still further above target. Although policymakers in the developed economies no longer describe the overshoot as transitory, they continue to speak and act as if inflation will fall back largely of its own accord. Investors have bought into the story. Market pricing remains consistent with steady declines in headline inflation across most major economies through this year and into the next, with policy rates of interest remaining substantially negative after adjusting for inflation. Monetary policy, in other words, is expected to remain loose. Central bank credibility is expected to do almost all the work.
Lagarde said the inflation outlook was "fluid" as an ongoing war in Ukraine forced economists to constantly revise their economic forecasts. But she expected energy and food prices, which have scaled new highs since conflict started, to stabilise, albeit at high levels. As inflation in the euro zone speeds up, top European Central Bank officials have insisted the rise is temporary, with ECB Chief Economist Philip Lane describing high inflation as an imported shock that will fade away over time.
Words rather than deeds will continue to work their magic. But is this confidence justified?
There are certainly grounds for optimism. Medium- to long-term inflation expectations remain well anchored. They have risen, as we show in the chart below, but when the one-year ahead inflation expectations of US households last moved above 5% for a sustained period of time, five-year ahead inflation expectations of US households were also above 5%. They are currently around 3%; marginally above target, but no higher than they were through much of the 2010s, suggesting ‘fake it till you make it’ remains a credible strategy for now.
But can this state of affairs last? It is clear that households, investors, and economists alike have been getting their inflation forecasts wrong — systematically so. Since early last year, US inflation has surprised repeatedly on the upside. The longer forecasters continue to be surprised by higher-than-expected inflation, the more likely it becomes that they will change their minds about the process driving inflation. They may conclude, for example, that it has become more persistent, and medium- to long-term inflation expectations will start to rise. Such conclusions can rapidly become self-fulfilling.
Inflation in Fathom's central scenario, which we label ‘Extended transitory’ and assign a 70% weight, will remain higher for longer than we had forecast back in December, and policy rates of interest will need to rise by more. In this world a material policy tightening is necessary to bring inflation, and inflation expectations, back to target – and this is likely to trigger a correction in many asset markets and a recession in many countries. We have revised up our forecast for the US federal funds rate, and see close to an evens chance that it ends the year above 2.5%.
Our mean path for US inflation is close to market pricing, though higher than the median forecast of economists responding to the Reuters Poll. We see around a one-in-four chance of double-digit inflation in the US later this year. Events in Ukraine have strengthened our conviction that inflation will rise further from here, globally, and have given renewed impetus to inflation-sensitive assets. We favour exposure to silver over gold or copper, as it remains relatively undervalued. We will look for signs that liquidity has troughed, perhaps during the second half of this year, before becoming more bullish on risk assets. Nevertheless, there are some opportunities in developed Europe, with German and Italian equities appearing cheap relative to the Euro Stoxx 600. Whilst central banker’s confidence they can handle inflation without recourse to drastic action is likely justified, risks (and opportunities) remain.
CFTC Data
This week we see massive contraction of gold positions by investors. Open interest has dropped for almost 10% and this is not because of speculators. Spreading positions and hedgers have triggered massive gold exposure contraction. SPDR fund reserves also has dropped slightly but not as significant.
Another hot topic in nowadays is reversed US yield curve. Partially we've discussed this phenomenon in our FX report and here we provide Pimco opinion on this subject, which also suggest that this is more sign of caution rather than unavoidable recession. Still, our suggestion is chances for recession still stands high.
The curve itself is a graph of the relationship between Treasury yields and time to maturity. It usually slopes upward, from left to right, indicating investors demand more compensation to own longer-term bonds – to offset the risk that economic growth or inflation may accelerate over time. The curve has a track record for foreshadowing recessions when it inverts, meaning when shorter-dated yields move above longer-dated ones. Lately, inversions have appeared between various points along the curve, spurring investors to ask whether these are omens of a recession.
That’s a complicated question in the current economic cycle, which saw a sudden downturn in 2020 and a rapid rebound fueled by unprecedented central-bank stimulus.
A yield curve inversion should never be dismissed just because the backdrop has changed. That said, the curve’s signal may be less clear than in the past.
Curve flattening often occurs later in a cycle when central banks raise short-term policy rates to restrain growth and inflation. Short-term yields can rise to reflect these hikes, while long-term rates may fall as expectations for inflation and growth moderate. This time, the flattening occurred quickly and well ahead of the first Fed hike. Inflation could continue to overshoot expectations, which could spur the Fed to further accelerate its hiking pace.
The most important curve to follow is likely the forward curve, a market-based measure that incorporates existing – or spot – rates as well as implied rates further down the road. The forward curve uses all known information and can be more relevant than a spot curve, which doesn’t incorporate expected changes in short-term rates. The forward curve is now sharply inverted.
Does this mean a recession is imminent? No, but it is a risk to monitor. The global economy and policymakers are confronted with a supply shock that is negative for growth and will tend to push up inflation further. Most central banks seem determined to opt for fighting inflation over supporting growth. This raises the risk of a hard landing down the road. PIMCO is calling for above-trend growth and a gradual easing of inflation pressures from higher peaks in developed market economies. However, the risks of higher inflation and lower growth have increased, along with the risk of recession in 2023.
The current shape of the yield curve underscores why investors need to be flexible. Simple bond math – which factors in price, yield, and reinvestment rate – suggests that investors aren’t picking up enough extra yield when buying long-dated Treasuries today. At recent levels, not only does a two-year Treasury offer a similar yield to a 30-year bond, but it provides the opportunity to make a reinvestment decision in two years rather than waiting another 28.
We now appear firmly in the late stage of the economic cycle, with underlying growth momentum still strong but increasingly vulnerable to downside risk. We will tend to emphasize keeping powder dry in an effort to take advantage of dislocations in markets as they arise.
The bottom line
Last week we've made adjustment to our long - term strategy. It suggests some more pressure on the gold market in nearest term, 3-4 months, at least until summer but with the more evidence of the US economy weakness closer to the autumn and rising demand for the gold. This week stands absolutely in a row of this vision. NFP and other statistics that we've got looks good, especially because it reflects Feb and mid-March data that doesn't include yet results of drastic changes in geopolitics and global economy. This fruits are still ahead. Second is, big run of the capital out from EU provides external support to the US economy and disguises problems, which should last at least 2-3 months more. Besides, EU is just gets started to see first results of the sanctions. US has more tools to increase this burden if needed.
Indirect signs support our view that not everything stands good in the US economy. While we see that employment is dropping, NFP looks good and inflation stagnates (although at high level) - we see consumption drop, rising debt serving burden on households' budget and downside tick on the real estate market. Forecast for inflation is rising, making Fed to react more aggressively. We agree that reversed yield curve is not necessary the harbinger of recession, but it definitely tells about investors' uncertainty in the future and their unsure that Fed activity puts the US on the economy growth path.
Finally, when all this stuff happens on a background of geopolitical uncertainty, possible escalation and negative surprises - it keeps investors in tension, doesn't let them to relax and forces them to keep exposure on gold market. And real interest rates are still negative, which is major driving factor for the gold market performance in long-term.
Technicals
Monthly
Monthly trend remains bullish, while price is coiling around YPR1. Recent pullback is not something outstanding as price shows proper reaction on too fast acceleration and monthly Overbought area. In fact, the grabber failure here is a reasonable result, as its appearing in current conditions could be looking curious.
With the new as fundamental as geopolitical background, we suggest that downside gold potential is limited now and price should stay between the pivots.
Weekly
Trend stands bullish here as well and market has completed the minimal reaction on the butterfly pattern, showing 3/8 pullback. Last week we've discussed large "Evening star" pattern, that suggests compounded shape of the retracement, which means a kind of AB-CD shape on lower time frame, and deeper target. Despite long term bullish context, we're not hurry up with long entry by far. This week price was not able to start downside continuation as we've got few drivers that has triggered deep upside bounce on intraday charts, including ruble gas payments. Let's see, whether something changes on coming week. Market has drop below the current lows to confirm current setup. Otherwise, situation could drastically chart, although cross-market analysis doesn't support it yet. Long-term TIPS yield is coiling around zero, while we expect downside action on EUR that suggests some strength in the US dollar.
Daily
Trend here remains bearish, suggesting that downside pullback is not finished yet. As last week, this week we keep watching on market performance and whether it stands above the recent lows. The fact that market re-tested the same support with W&R action has provided bullish impulse and, as market still stands above these lows - short term intraday bullish setup is still valid. Daily chart now provides no additional information:
Intraday
On 4H chart we still have the divergence, mentioned last week. While we've got bullish grabber on Friday but it was not able to trigger upward action because of positive NFP data pressure. Thus, as K-support area is broken on 1H chart, we intend to watch for 1912 area first and see what response follows. Scalp traders also could watch over it to consider long entry setup. If gold fails to stay above 1912 - it means destruction of short-term bullish context and opening way to 1850$ next downside target.
