Sive Morten
Special Consultant to the FPA
- Messages
- 18,639
Fundamentals
This week investors were watching for the Easter holidays, as week was short and only two major events - CPI report and ECB meeting. While ECB rare makes any meaning to the gold, CPI numbers seem important and Gold market also has shown the reaction on it. But, despite that we see stability in recent CPI data - this is just a visuality of stability. Any statistics has noise and can't moving consistently in one direction. This time, with nominal higher CPI but lower core CPI we suggest no changes in fundamental reasons but mostly statistical effect on the data.
Market overview
Gold advanced more than 1% on Tuesday as Treasury yields eased after U.S. inflation data largely met expectations, reducing the likelihood of long-term aggressive policy tightening by the Federal Reserve. The benchmark 10-year U.S. Treasury yield slipped after data showed inflation accelerated in March, but less than many market participants had expected.
The consumer price index jumped 1.2% last month, the biggest monthly gain since September 2005. The CPI advanced 0.8% in February. An 18.3% surge in gasoline prices, the largest since June 2009, accounted for more than half the increase in the CPI. Gasoline prices at the pump on average soared to an all-time high of $4.33 per gallon in March, according to AAA.
Federal Reserve Governor Lael Brainard said the combined effort of trimming its balance sheet and a series of rate hikes would help bring down inflation, adding a moderation in "core goods" inflation, excluding energy and food prices, is a "welcome" signal.
Optimism among fund managers over global economic growth has hit an all-time low while concerns of possible stagflation have risen to the highest since August 2008, a monthly survey by investment bank BoFA Securities showed on Tuesday. Asked about their expectations for global growth in the coming months, a net 71% of survey respondents were pessimistic about prospects, the most since the survey records began in the early 1990s.
The European edition of the survey found investors continuing to cut their European growth projections, with a net 81% of survey respondents expecting the region's economy to weaken over the coming year compared with 69% in the March edition.
Allocations to commodities jumped to a record 38%, with investments into oil and commodities zipping up the charts to become the top most "crowded trade". Though fund manager holdings of cash - traditionally an indicator of investor caution - eased to 5.5% in the April edition of the survey from 5.9% in the previous month, prospects of a global recession remain the top "tail risk" for global markets, the survey found.
Participants in the survey expect the U.S. Federal Reserve to raise interest rates by as many as seven times in the current cycle, compared with four times in the previous edition, with a majority of investors expecting inflation to soften over the next 12 months.
President Vladimir Putin said on Tuesday peace talks with Ukraine had hit a dead end, using his first public comments on the conflict in more than a week to vow his troops would win and to goad the West for failing to bring Moscow to heel. Addressing the war in public Putin promised that Russia would achieve all of its "noble" aims in Ukraine. In the strongest signal to date that the war will grind on for longer, Putin said Kyiv had derailed peace talks by staging what he said were fake claims of Russian war crimes and by demanding security guarantees to cover the whole of Ukraine.
U.S. import prices accelerated by the most in 11 years in March. Import prices jumped 2.6% last month, the largest rise since April 2011, after increasing 1.6% in February, the Labor Department said on Thursday. In the 12 months through March, prices raced 12.5%, the largest gain since September 2011, after advancing 11.3% in February. Economists polled by Reuters had forecast import prices, which exclude tariffs, increasing 2.3%.
Excluding fuel and food, import prices accelerated 1.2%. These so-called core import prices increased 0.7% in February. They jumped 7.1% on a year-on-year basis in March. The report also showed export prices soared 4.5% in March, the largest since the monthly series started in January 1989, after advancing 3.0% in February.
Retail sales rose 0.5% last month. Data for February was revised higher to show sales increasing 0.8% instead of 0.3% as previously reported. Economists polled by Reuters had forecast retail sales climbing 0.6%, with estimates ranging from as low as a 0.3% decline to as high as 2.2% jump. Excluding gasoline, retail sales fell 0.3%. Soaring prices are reducing consumers' purchasing power, but rising wages are helping to blunt some of the hit. Consumers also accumulated more than $2 trillion in excess savings during the COVID-19 pandemic.
Gold eased on Thursday after the dollar strengthened and yields rose as investors geared up for U.S. interest rate hikes, but safe-haven demand triggered by the Ukraine crisis and mounting inflation kept bullion on track for a weekly gain. While central banks the world over are racing to tame surging inflation, the European Central Bank on Thursday stuck to its plans to dial back stimulus this year, a move seen as less aggressive in the face of soaring inflation.
The global economy is facing increasing headwinds. In January, the IMF revised down its forecast for global growth this year by 0.5 percentage points, to 4.4%. In Fathom’s most recent central scenario, issued in March, economic activity stagnates later this year in a number of major economies. This reflects a combination of tighter monetary policy and a reduction in the supply of energy, particularly in Europe. We expect to see global growth of around 3.5% this year. Given developments since January it seems possible that the IMF will also revise down its forecasts:
Global trade is currently above its trend, but it may soften a little this year. Now a combination of slower growth and a greater focus on supply chain resilience, both for economic and geopolitical reasons, which is likely to lead to some movement of supply chains closer to home, are set to slow trade somewhat.
Fears that this period of materially above-target inflation will become embedded into expectations of higher future inflation, and become sustained, have led a number of central banks to rein in their monetary accommodation. Fathom’s own analysis shows that, over the past 30 years or so, US monetary policymakers have typically begun to tighten when inflation has been just over 2% and the real rate of interest has been just under 3%. When the federal reserve made its move last month, inflation was 7.9% and the real rate of interest was minus 7.6%.
The rise in government debt-to-GDP was more modest in emerging markets, but is also very high by historic standards. Amid modest recoveries in many emerging countries, financing government borrowing could become much trickier as the Fed’s tightening cycle gathers steam.
After the strong post-pandemic rebound in global economic activity in 2021, growth is likely to slow substantially this year, as monetary policy is tightened to combat rising inflation. A contraction in economic activity, globally, is not our central case but it is a clear risk. Indeed, further reductions in the supply of energy could potentially tip parts of Europe into recession. Meanwhile, China’s economy is grappling with a real estate slump and the largest rise in Covid-19 cases since early 2020. Against such a backdrop, Fathom remains in a risk-off mode.
CFTC Data
This week, despite relatively quiet performance, gold confirms bullish signs. Actually we've mentioned that gold shows good resistance to headwinds from rising interest rates and the dollar. And by recent CFTC data we see as increasing of net long speculative position, position by hedgers, as rising open interest:
Conclusion
The recent data, gold performance and additional statistics that a bit "specific" which I show you below, confirms our correct vision on gold perspective. Despite that some pressure exists indeed, gold doesn't loosing the bullish sentiment, showing, in general positive performance, despite outstanding rising of the interest rates. Just to not repeat here the same things that we've said about EU economy perspectives and geopolitical risks - take a look the "Conclusion" form our FX Report. Here we would like to be a bit more specific on factors that are important for the gold market directly.
First of all, why we suggest that gold should rise from the ash later in the year. Mostly because now, headlines massively advertise good numbers, such as NFP, Initial claims, unemployment and high but stable CPI. This makes the vision that the US economy is rising and coming out of the crisis, while inflation seems temporal effect. This is the most popular market opinion right now. We disagree. We think that current positive signs are the by-product of fiscal measures and capital flows between the regions. Thus, the US is getting a lot of EU money now. The positive effect that hides the real problems, also makes investors to think that demand for the gold should drop. But our view suggests that this situation lasts until July-August, hardly longer. Just because in July - August we should start getting the US numbers that will be "core" of EU money flows.
Now, what is really going on in the US (and EU) economy. This is structural crisis, that in two words could be explained as mismatch of the production power of the economy and households consumption level. Economy produces much smaller than households try to consume, and at some part it comes from overvalue of the currency. Supposedly the value of the US dollar now provides "expected" purchase power, while its real power is significantly lower. Until these two sides of the economy will be balanced - crisis lasts. With rising interest rates Fed could accelerate it form current 7-8% negative GDP growth to 12-15%. It will be more painful for the people, but the end comes sooner. M. Hazin, well-known economist, describes current situation as follows:
Appeal to stock market capitalization of these companies do not work, because everyone understands that a terrible bubble has inflated there, which will either blow or depreciate due to a sharp increase in inflation. And the real income from assets is just depreciating.
Second is, the demand of the US national debt is deteriorating. The issue volume of bonds is radically decreasing in the first quarter of 2022. Municipal bonds "-13%" compared to last year, 5-10-year notes "-11%", MBS bonds "-42%", corporate bonds "-14%", federal agency securities "-28%", mortgages "-45%", and for all types of bonds "-25%" for the first quarter of 2022.
The reasons for this are clear: who is interested in assets whose profitability does not exceed 3-4%, with double-digit price growth? The US monetary authorities were clearly too late with the rate increase (this should have been done at least a year and a half ago). And the negative consequences of this action, the increase in the cost of debt servicing and the strengthening of degradation structural processes, would most likely significantly offset the positive effect. The trouble is that today the rate hike will not give any positive effect at all, despite the fact that the negative ones will not go anywhere.
Yesterday we've talked about Germany ZEW sentiment index that has reached 10+ years lows. The US small business optimism stands at the bottom:
United States Nfib Business Optimism Index
Mortgage market is turing to sharp noise dive:
So, you probably get it. I do not place here multiple charts of PPI, CPI, data and their m/m changes - all of them hit 15-20 years records, reaching highest levels from 80s. Export/Import prices do the same. The situation with inflation has become so acute that the monetary authorities cannot help but react, here any action, even harmful and useless, is politically better than inaction. And here's the question, what to do? Confidence in the dollar has fallen sharply after the confiscation of Russian reserves, international trade is stagnating, and because of the sanctions war, and because of the inability to predict prices, both for goods and insurance. At the same time, the US monetary authorities were categorically late with any actions.
Mr. Hazin makes the following conclusion:
But, many investors do not see it. Every week I go through big mass of investors' comments of big companies, many of them I put in report, that you could see every week. But, there are no comments of the same content that we're discussing now. Markets are not ready for that. And once problems become more evident situation for gold market starts changing. From that standpoint current situation might be interesting for accumulation of gold positions for long-term investing.
And the last, but not least. As we've said yesterday, we worry that the US could try to resolve economy problems by radical methods - by big war as it already happened previously in Middle East and Eastern Europe. The logic is simple - if there is instability everywhere, the US once again becomes the safe haven and "safe the world". But the problem is - not many option of war placement. Middle East has nothing more to burn, China is too difficult, as well as direct conflict with Russia. Thus, it might be escalation in the Eastern Europe. Although it might sounds cynic, but it will be the best case scenario for the gold. But even without this radical scenario, gold should feel well in this year and closer to the autumn of 2022.
Technicals are in the next post below
This week investors were watching for the Easter holidays, as week was short and only two major events - CPI report and ECB meeting. While ECB rare makes any meaning to the gold, CPI numbers seem important and Gold market also has shown the reaction on it. But, despite that we see stability in recent CPI data - this is just a visuality of stability. Any statistics has noise and can't moving consistently in one direction. This time, with nominal higher CPI but lower core CPI we suggest no changes in fundamental reasons but mostly statistical effect on the data.
Market overview
Gold advanced more than 1% on Tuesday as Treasury yields eased after U.S. inflation data largely met expectations, reducing the likelihood of long-term aggressive policy tightening by the Federal Reserve. The benchmark 10-year U.S. Treasury yield slipped after data showed inflation accelerated in March, but less than many market participants had expected.
The consumer price index jumped 1.2% last month, the biggest monthly gain since September 2005. The CPI advanced 0.8% in February. An 18.3% surge in gasoline prices, the largest since June 2009, accounted for more than half the increase in the CPI. Gasoline prices at the pump on average soared to an all-time high of $4.33 per gallon in March, according to AAA.
Federal Reserve Governor Lael Brainard said the combined effort of trimming its balance sheet and a series of rate hikes would help bring down inflation, adding a moderation in "core goods" inflation, excluding energy and food prices, is a "welcome" signal.
Optimism among fund managers over global economic growth has hit an all-time low while concerns of possible stagflation have risen to the highest since August 2008, a monthly survey by investment bank BoFA Securities showed on Tuesday. Asked about their expectations for global growth in the coming months, a net 71% of survey respondents were pessimistic about prospects, the most since the survey records began in the early 1990s.
The European edition of the survey found investors continuing to cut their European growth projections, with a net 81% of survey respondents expecting the region's economy to weaken over the coming year compared with 69% in the March edition.
Allocations to commodities jumped to a record 38%, with investments into oil and commodities zipping up the charts to become the top most "crowded trade". Though fund manager holdings of cash - traditionally an indicator of investor caution - eased to 5.5% in the April edition of the survey from 5.9% in the previous month, prospects of a global recession remain the top "tail risk" for global markets, the survey found.
Participants in the survey expect the U.S. Federal Reserve to raise interest rates by as many as seven times in the current cycle, compared with four times in the previous edition, with a majority of investors expecting inflation to soften over the next 12 months.
President Vladimir Putin said on Tuesday peace talks with Ukraine had hit a dead end, using his first public comments on the conflict in more than a week to vow his troops would win and to goad the West for failing to bring Moscow to heel. Addressing the war in public Putin promised that Russia would achieve all of its "noble" aims in Ukraine. In the strongest signal to date that the war will grind on for longer, Putin said Kyiv had derailed peace talks by staging what he said were fake claims of Russian war crimes and by demanding security guarantees to cover the whole of Ukraine.
U.S. import prices accelerated by the most in 11 years in March. Import prices jumped 2.6% last month, the largest rise since April 2011, after increasing 1.6% in February, the Labor Department said on Thursday. In the 12 months through March, prices raced 12.5%, the largest gain since September 2011, after advancing 11.3% in February. Economists polled by Reuters had forecast import prices, which exclude tariffs, increasing 2.3%.
Excluding fuel and food, import prices accelerated 1.2%. These so-called core import prices increased 0.7% in February. They jumped 7.1% on a year-on-year basis in March. The report also showed export prices soared 4.5% in March, the largest since the monthly series started in January 1989, after advancing 3.0% in February.
Retail sales rose 0.5% last month. Data for February was revised higher to show sales increasing 0.8% instead of 0.3% as previously reported. Economists polled by Reuters had forecast retail sales climbing 0.6%, with estimates ranging from as low as a 0.3% decline to as high as 2.2% jump. Excluding gasoline, retail sales fell 0.3%. Soaring prices are reducing consumers' purchasing power, but rising wages are helping to blunt some of the hit. Consumers also accumulated more than $2 trillion in excess savings during the COVID-19 pandemic.
Gold eased on Thursday after the dollar strengthened and yields rose as investors geared up for U.S. interest rate hikes, but safe-haven demand triggered by the Ukraine crisis and mounting inflation kept bullion on track for a weekly gain. While central banks the world over are racing to tame surging inflation, the European Central Bank on Thursday stuck to its plans to dial back stimulus this year, a move seen as less aggressive in the face of soaring inflation.
The global economy is facing increasing headwinds. In January, the IMF revised down its forecast for global growth this year by 0.5 percentage points, to 4.4%. In Fathom’s most recent central scenario, issued in March, economic activity stagnates later this year in a number of major economies. This reflects a combination of tighter monetary policy and a reduction in the supply of energy, particularly in Europe. We expect to see global growth of around 3.5% this year. Given developments since January it seems possible that the IMF will also revise down its forecasts:
Global trade is currently above its trend, but it may soften a little this year. Now a combination of slower growth and a greater focus on supply chain resilience, both for economic and geopolitical reasons, which is likely to lead to some movement of supply chains closer to home, are set to slow trade somewhat.
Fears that this period of materially above-target inflation will become embedded into expectations of higher future inflation, and become sustained, have led a number of central banks to rein in their monetary accommodation. Fathom’s own analysis shows that, over the past 30 years or so, US monetary policymakers have typically begun to tighten when inflation has been just over 2% and the real rate of interest has been just under 3%. When the federal reserve made its move last month, inflation was 7.9% and the real rate of interest was minus 7.6%.
The rise in government debt-to-GDP was more modest in emerging markets, but is also very high by historic standards. Amid modest recoveries in many emerging countries, financing government borrowing could become much trickier as the Fed’s tightening cycle gathers steam.
After the strong post-pandemic rebound in global economic activity in 2021, growth is likely to slow substantially this year, as monetary policy is tightened to combat rising inflation. A contraction in economic activity, globally, is not our central case but it is a clear risk. Indeed, further reductions in the supply of energy could potentially tip parts of Europe into recession. Meanwhile, China’s economy is grappling with a real estate slump and the largest rise in Covid-19 cases since early 2020. Against such a backdrop, Fathom remains in a risk-off mode.
CFTC Data
This week, despite relatively quiet performance, gold confirms bullish signs. Actually we've mentioned that gold shows good resistance to headwinds from rising interest rates and the dollar. And by recent CFTC data we see as increasing of net long speculative position, position by hedgers, as rising open interest:
Conclusion
The recent data, gold performance and additional statistics that a bit "specific" which I show you below, confirms our correct vision on gold perspective. Despite that some pressure exists indeed, gold doesn't loosing the bullish sentiment, showing, in general positive performance, despite outstanding rising of the interest rates. Just to not repeat here the same things that we've said about EU economy perspectives and geopolitical risks - take a look the "Conclusion" form our FX Report. Here we would like to be a bit more specific on factors that are important for the gold market directly.
First of all, why we suggest that gold should rise from the ash later in the year. Mostly because now, headlines massively advertise good numbers, such as NFP, Initial claims, unemployment and high but stable CPI. This makes the vision that the US economy is rising and coming out of the crisis, while inflation seems temporal effect. This is the most popular market opinion right now. We disagree. We think that current positive signs are the by-product of fiscal measures and capital flows between the regions. Thus, the US is getting a lot of EU money now. The positive effect that hides the real problems, also makes investors to think that demand for the gold should drop. But our view suggests that this situation lasts until July-August, hardly longer. Just because in July - August we should start getting the US numbers that will be "core" of EU money flows.
Now, what is really going on in the US (and EU) economy. This is structural crisis, that in two words could be explained as mismatch of the production power of the economy and households consumption level. Economy produces much smaller than households try to consume, and at some part it comes from overvalue of the currency. Supposedly the value of the US dollar now provides "expected" purchase power, while its real power is significantly lower. Until these two sides of the economy will be balanced - crisis lasts. With rising interest rates Fed could accelerate it form current 7-8% negative GDP growth to 12-15%. It will be more painful for the people, but the end comes sooner. M. Hazin, well-known economist, describes current situation as follows:
Appeal to stock market capitalization of these companies do not work, because everyone understands that a terrible bubble has inflated there, which will either blow or depreciate due to a sharp increase in inflation. And the real income from assets is just depreciating.
Second is, the demand of the US national debt is deteriorating. The issue volume of bonds is radically decreasing in the first quarter of 2022. Municipal bonds "-13%" compared to last year, 5-10-year notes "-11%", MBS bonds "-42%", corporate bonds "-14%", federal agency securities "-28%", mortgages "-45%", and for all types of bonds "-25%" for the first quarter of 2022.
The reasons for this are clear: who is interested in assets whose profitability does not exceed 3-4%, with double-digit price growth? The US monetary authorities were clearly too late with the rate increase (this should have been done at least a year and a half ago). And the negative consequences of this action, the increase in the cost of debt servicing and the strengthening of degradation structural processes, would most likely significantly offset the positive effect. The trouble is that today the rate hike will not give any positive effect at all, despite the fact that the negative ones will not go anywhere.
Yesterday we've talked about Germany ZEW sentiment index that has reached 10+ years lows. The US small business optimism stands at the bottom:
United States Nfib Business Optimism Index
Mortgage market is turing to sharp noise dive:
So, you probably get it. I do not place here multiple charts of PPI, CPI, data and their m/m changes - all of them hit 15-20 years records, reaching highest levels from 80s. Export/Import prices do the same. The situation with inflation has become so acute that the monetary authorities cannot help but react, here any action, even harmful and useless, is politically better than inaction. And here's the question, what to do? Confidence in the dollar has fallen sharply after the confiscation of Russian reserves, international trade is stagnating, and because of the sanctions war, and because of the inability to predict prices, both for goods and insurance. At the same time, the US monetary authorities were categorically late with any actions.
Mr. Hazin makes the following conclusion:
But, many investors do not see it. Every week I go through big mass of investors' comments of big companies, many of them I put in report, that you could see every week. But, there are no comments of the same content that we're discussing now. Markets are not ready for that. And once problems become more evident situation for gold market starts changing. From that standpoint current situation might be interesting for accumulation of gold positions for long-term investing.
And the last, but not least. As we've said yesterday, we worry that the US could try to resolve economy problems by radical methods - by big war as it already happened previously in Middle East and Eastern Europe. The logic is simple - if there is instability everywhere, the US once again becomes the safe haven and "safe the world". But the problem is - not many option of war placement. Middle East has nothing more to burn, China is too difficult, as well as direct conflict with Russia. Thus, it might be escalation in the Eastern Europe. Although it might sounds cynic, but it will be the best case scenario for the gold. But even without this radical scenario, gold should feel well in this year and closer to the autumn of 2022.
Technicals are in the next post below
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