Sive Morten
Special Consultant to the FPA
- Messages
- 18,564
Fundamentals
When economy comes to some turning point, market performance becomes especially unstable. Any epic reversal on any direction won't come easy. Thus, as gold was strongly inspired by negative GDP as strong it was crushed by NFP report. With long-term downside momentum on the back, the changing of the direction is a lasting process and could bring more surprises.
Market overview
Gold dropped after US labor market data showed employers added more jobs in July than forecast, an indication the Federal Reserve may press on with steep interest-rate hikes to thwart inflation. Nonfarm payrolls rose 528,000 last month, more than double economists’ estimates. The dollar rose following the data release, putting pressure on gold.
Still, bullion is now poised to end the week little changed, after earlier gains amid tension between China and US over US House speaker Nancy Pelosi’s visit to the Taiwan. Bullion is headed for a third weekly gain, even as prices slipped on Friday, after China likely fired missiles over Taiwan during military drills. Beijing has responded aggressively to US House Speaker Nancy Pelosi’s visit to the island this week.
There were more signs that the fight to cool inflation will weigh on global growth. The Bank of England unleashed its biggest rate hike in 27 years on Thursday as it warned the UK is heading for more than a year of recession, while Cleveland Federal Reserve Bank President Loretta Mester said US interest rates need to be raised above 4%.
Gold will average $1,745 an ounce in 2023, slightly below current prices, as high interest rates and a strong dollar reduce its appeal, a Reuters poll showed on Wednesday. The gold price has fallen to about $1,770 an ounce from a high of $2,069.89 in March as the U.S. Federal Reserve and other central banks increased interest rates rapidly in an effort to tame inflation.
The median forecasts from a survey of 35 analysts was for gold to average $1,770 an ounce in the July-September quarter, $1,750 in the fourth quarter and $1,745 in 2023. That is a downgrade from a similar poll in May that predicted average prices of $1,875 in the third quarter and $1,762.50 in 2023. Gold has averaged $1,854 an ounce so far this year.
For silver, the poll forecast average prices of $20 an ounce in the third quarter, $20.06 in the fourth and $20.18 in 2023. That is down from the May poll's projection of $22.50 for 2023.
NFP Report, employment and market reaction we've discussed yesterday in our FX market report.
MAJOR TRENDS
Now take a look at more gold specific topics, economical and geopolitical. I would like to show you exciting stuff. First is, we've got the confirmation of the Fed strategy. If earlier we've just suggested that it should go in this way, now we have clear signal from the Fed. I've briefly mentioned this in the beginning of the week, but it makes to repeat it here:
US Treasury Lifts Quarterly Borrowing Estimate to $444 Billion. The Treasury Department boosted the quarterly borrowing estimate by about $262 billion, a release in Washington showed on Monday. The change reflects in part the Treasury having left out, back in May, any assumption for the Fed’s scaling back its holdings of Treasuries -- in advance of the formal Fed announcement. The Fed’s runoff began in June.
The Treasury’s debt managers now expect to borrow $444 billion in the July-through-September period, compared with the original estimate of $182 billion. The Treasury left unchanged its cash-balance estimate for the end of September, at $650 billion. That stockpile is currently around $597 billion. For the three months through December, the Treasury said Monday that it anticipates borrowing $400 billion through net new marketable debt issuance. It assumes a cash balance of $700 billion at the end of the period.
Fed redemptions contributed $120 billion to the July-through-September borrowing estimate, and $139 billion to the October-through-December estimate, the Treasury said. The Treasury on Wednesday will announce plans for its so-called quarterly refunding of longer-term securities. Most dealers predict US debt managers will scale back its auctions for a fourth straight quarter, predicting extra cutbacks for the 20-year bond, which has been plagued by limited liquidity.
This week Fed has decreased the balance for 25 Bln, but it has been done by using of US Treasury deposit that again has dropped for ~ 50 Bln. It seems that Fed intends to keep this tactic in future. As we've said previously - the rest of cash is enough to stay on surface for 6-8 months, so Democrats could last it until elections without making big impact on the markets. The major intrigue now is - who will buy the new bonds' issues? Whether US Treasury deposit will be spend on buying new debt?
While Fed, US Treasury and US Government takes science debates on whether the US has recession or not - economists worry on bad things.
Zoltan Pozsar of Credit Suisse Group AG says L-Shaped Recession Is Needed to Conquer Inflation. Markets expect the surge in consumer prices will soon peak and central banks will become less hawkish, but there’s a high risk that global cost pressures will remain elevated, Pozsar, global head of short-term interest-rate strategy at Credit Suisse in New York, wrote in a client note. The world is being wracked by an economic war that’s undermining the deflationary relationships that have prevailed in recent decades where Russia and China supplied cheap goods and services to more developed nations such as the US and those in Europe, he said.
Take a look - Pozsar repeats the same things that we've said 1-2 months ago, that the nature of current crisis is structural, not the cyclical. That's why it is not quite a recession as everybody think. We've talked about supply/demand disbalances that have to be fixed by depressing overblown demand. And he tells the same - rate has to be around inflation rate, but not 2-3%. This is not enough.
The same on bond market - that it is toxic now:
The bond market is more misguided now than at any other time this year as traders wager the US central bank will start cutting rates in early 2023, Bloomberg Economics’ chief US economist Anna Wong and her colleagues said this week. Money markets are wagering on almost one percentage point of hikes by year-end followed by a quarter-point cut by June.
But this is not the end yet. Take a look at public letter that best american economists have sent to government:
Next interesting topic is a stock market, that, as we expect should drop significantly in a perspective of 9-12 months. We expect S&P below 2500 level or even lowers. Together with expectation of job market worsening, we've talked on "companies zombification". This phenomena explains the fragility of corporate bond market and corporate loans sector. In fact, many companies, that can't create positive cashflow have got a lot of funds by bond issuing and loans, because of free and unlimited liquidity. Now, when this "easy money" flow droughted - somebody has to pay on accounts. "Zombie companies" do not have money, then - either bond holders or banks will have to pay for it in a way of defaults and provisions.
Fathom research has identified a link between persistently low interest rates and weak productivity outturns, a phenomenon known in the academic literature as zombification. The premise for this theory is that holding borrowing costs at abnormally low levels for a prolonged period allows unprofitable firms to stay in business. Not only are these firms unproductive, but their survival blocks the emergence of younger, more innovative competitors. Expressed another way, Fathom thinks that low interest rates have stifled the forces of creative destruction. This is reflected by a fall in the rates of corporate failures and corporate births, and is one explanation for the so-called ‘productivity puzzle’. But could we now be at a turning point? Corporate failures have been rising since 2015 when the Federal Reserve began its previous tightening cycle, and they shot up during the pandemic.
And just to close stock market topic - here is exciting chart, guys. Comparison of nowadays S&P performance with the shape of Great Depression (1930-1937), Dotcom bubble (2000-2002) and subprime crisis (2008-2010). Looks cool...
Finally, few moments on Geopolitics. There was a lot of noise around Pelosi flight to Taiwan which brings nothing good to global stability. Here are the first fruits. China is abandoning US Treasuries market:
And this one:
Somebody, guys, plays the bad games, trying to pit China against the EU as well, or make a pressure on it.
It is not needed even to comments guys. I suppose that you understand it as well as me. China starts drifting out of US cooperation. They are too related to each other and China can't just burn all down, but the gradual process has started. The intrigue with Taiwan has special background. The TSMC plant produces chips not only for common use, but US defence industry mostly is based on its application. Controlling TSMC plant and Taiwan also means control over US defense...
Next week Wednesday's July U.S. inflation print is shaping up as a key test for a summer rally in U.S. stocks that has lifted the S&P 500 to multi-week highs. The benchmark index is up 14% from its mid-June low, supported in part by expectations that the Federal Reserve will be less hawkish than previously anticipated.
Fed officials have pushed back against the idea that they will be less aggressive in a so-called dovish pivot. Any signs that inflation is not yet peaking after the Fed's 225 bps worth of rate hikes could provide a reality check to markets hopeful of a soft landing for the economy. Analysts polled by Reuters forecast annual inflation at 8.9% in July versus 9.1% in June, which was the largest increase since 1981
Conclusion
Shortly speaking guys, we now get confirmation of our long-term view from other sources. Today they are Mr. Pozsar from Credit Suisse and community of best US economists. Markets right now are wrong with long-term expectations with expectation of policy easing in the beginning of 2023. They are wrong in two ways - either no easing will happen, because rate has to remain high for long-term to defeat inflation or, if easing happens - it triggers the new spiral of inflation. Both scenarios are positive to gold market. By taking a look at Fed policy that doesn't intend to control money supply, it seems that 2nd scenario is more probable.
All analysts expect that gold price has to be more or less stable. In long-term perspective it sounds bullish, because current levels is just 30% pullback from ATH. Anticipation of 1% rate change could make some pressure on gold prices, but it likely will be temporal and tactic, because it doesn't change real interest rates positive. They could become less negative for awhile but as inflation will keep going higher - it doesn't help. The negative interest rates is the major gold driver.
Here is comparison of 1 week ago expectations and now - market are ready for 1.0% rate hike within 6 months, but 1-year yield barely has changed, meaning that policy easing are still widely expected:
More and more people talk about jobs' shortage although NFP and unemployment data do not confirm it by far. This indirectly confirms our worry about job market that soon it should start showing signs of deteriorating.
Finally, recent geopolitical events in Serbia, Taiwan, now around Gaza sector do not cut the tension at all. Taking it all together we keep our bullish long-term view on the gold market. Occasional events, such as NFP report could bring some mess in investors' minds but it should not change the major trend if we indeed correct in our long-term strategy.
To be continued...
When economy comes to some turning point, market performance becomes especially unstable. Any epic reversal on any direction won't come easy. Thus, as gold was strongly inspired by negative GDP as strong it was crushed by NFP report. With long-term downside momentum on the back, the changing of the direction is a lasting process and could bring more surprises.
Market overview
Gold dropped after US labor market data showed employers added more jobs in July than forecast, an indication the Federal Reserve may press on with steep interest-rate hikes to thwart inflation. Nonfarm payrolls rose 528,000 last month, more than double economists’ estimates. The dollar rose following the data release, putting pressure on gold.
Still, bullion is now poised to end the week little changed, after earlier gains amid tension between China and US over US House speaker Nancy Pelosi’s visit to the Taiwan. Bullion is headed for a third weekly gain, even as prices slipped on Friday, after China likely fired missiles over Taiwan during military drills. Beijing has responded aggressively to US House Speaker Nancy Pelosi’s visit to the island this week.
“Gold bulls didn’t get their green light from the jobs data with the outsized strong beat,” said Nicky Shiels, head of metals strategy at MKS PAMP SA. “Gold should remain capped below $1,800 for now, but attention will turn to the CPI.”
There were more signs that the fight to cool inflation will weigh on global growth. The Bank of England unleashed its biggest rate hike in 27 years on Thursday as it warned the UK is heading for more than a year of recession, while Cleveland Federal Reserve Bank President Loretta Mester said US interest rates need to be raised above 4%.
"Some Fed speakers have repeated an aggressive stance, which is keeping inflow (in gold) limited," Edward Moya, senior analyst with OANDA, said. "However, global recessionary fears are to put an end to these aggressive rate hikes, so gold should maintain a bullish trend".
Gold will average $1,745 an ounce in 2023, slightly below current prices, as high interest rates and a strong dollar reduce its appeal, a Reuters poll showed on Wednesday. The gold price has fallen to about $1,770 an ounce from a high of $2,069.89 in March as the U.S. Federal Reserve and other central banks increased interest rates rapidly in an effort to tame inflation.
The median forecasts from a survey of 35 analysts was for gold to average $1,770 an ounce in the July-September quarter, $1,750 in the fourth quarter and $1,745 in 2023. That is a downgrade from a similar poll in May that predicted average prices of $1,875 in the third quarter and $1,762.50 in 2023. Gold has averaged $1,854 an ounce so far this year.
"The U.S. dollar's dominance and the rise in real U.S. bond yields are weighing on the mood in the gold market," said Julius Baer analyst Carsten Menke. He said that further price falls are possible but the "base case calls for a stabilisation around current levels".
For silver, the poll forecast average prices of $20 an ounce in the third quarter, $20.06 in the fourth and $20.18 in 2023. That is down from the May poll's projection of $22.50 for 2023.
NFP Report, employment and market reaction we've discussed yesterday in our FX market report.
MAJOR TRENDS
Now take a look at more gold specific topics, economical and geopolitical. I would like to show you exciting stuff. First is, we've got the confirmation of the Fed strategy. If earlier we've just suggested that it should go in this way, now we have clear signal from the Fed. I've briefly mentioned this in the beginning of the week, but it makes to repeat it here:
US Treasury Lifts Quarterly Borrowing Estimate to $444 Billion. The Treasury Department boosted the quarterly borrowing estimate by about $262 billion, a release in Washington showed on Monday. The change reflects in part the Treasury having left out, back in May, any assumption for the Fed’s scaling back its holdings of Treasuries -- in advance of the formal Fed announcement. The Fed’s runoff began in June.
The Treasury’s debt managers now expect to borrow $444 billion in the July-through-September period, compared with the original estimate of $182 billion. The Treasury left unchanged its cash-balance estimate for the end of September, at $650 billion. That stockpile is currently around $597 billion. For the three months through December, the Treasury said Monday that it anticipates borrowing $400 billion through net new marketable debt issuance. It assumes a cash balance of $700 billion at the end of the period.
Fed redemptions contributed $120 billion to the July-through-September borrowing estimate, and $139 billion to the October-through-December estimate, the Treasury said. The Treasury on Wednesday will announce plans for its so-called quarterly refunding of longer-term securities. Most dealers predict US debt managers will scale back its auctions for a fourth straight quarter, predicting extra cutbacks for the 20-year bond, which has been plagued by limited liquidity.
This week Fed has decreased the balance for 25 Bln, but it has been done by using of US Treasury deposit that again has dropped for ~ 50 Bln. It seems that Fed intends to keep this tactic in future. As we've said previously - the rest of cash is enough to stay on surface for 6-8 months, so Democrats could last it until elections without making big impact on the markets. The major intrigue now is - who will buy the new bonds' issues? Whether US Treasury deposit will be spend on buying new debt?
While Fed, US Treasury and US Government takes science debates on whether the US has recession or not - economists worry on bad things.
Zoltan Pozsar of Credit Suisse Group AG says L-Shaped Recession Is Needed to Conquer Inflation. Markets expect the surge in consumer prices will soon peak and central banks will become less hawkish, but there’s a high risk that global cost pressures will remain elevated, Pozsar, global head of short-term interest-rate strategy at Credit Suisse in New York, wrote in a client note. The world is being wracked by an economic war that’s undermining the deflationary relationships that have prevailed in recent decades where Russia and China supplied cheap goods and services to more developed nations such as the US and those in Europe, he said.
“War is inflationary,” Pozsar wrote. “Think of the economic war as a fight between the consumer-driven West, where the level of demand has been maximized, and the production-driven East, where the level of supply has been maximized to serve the needs of the West.” That pattern held “until East-West relations soured, and supply snapped back,” he said.
Take a look - Pozsar repeats the same things that we've said 1-2 months ago, that the nature of current crisis is structural, not the cyclical. That's why it is not quite a recession as everybody think. We've talked about supply/demand disbalances that have to be fixed by depressing overblown demand. And he tells the same - rate has to be around inflation rate, but not 2-3%. This is not enough.
The result is that inflation is now a structural problem, rather than a cyclical one. Supply disruptions have arisen from the changes in Russia and China, along with tighter labor markets due to immigration restrictions and a reduction in mobility caused by the coronavirus pandemic, Pozsar said. There’s now a risk the Federal Reserve under Chair Jerome Powell has to raise interest rates to 5% or 6% and keep them there(!!!) to create a substantial and sustained reduction of aggregate demand to match the tighter supply profile, he said.
The same on bond market - that it is toxic now:
The bond market is more misguided now than at any other time this year as traders wager the US central bank will start cutting rates in early 2023, Bloomberg Economics’ chief US economist Anna Wong and her colleagues said this week. Money markets are wagering on almost one percentage point of hikes by year-end followed by a quarter-point cut by June.
“Interest rates may be kept high for a while to ensure that rate cuts won’t cause an economic rebound (an ‘L’ and not a ‘V’), which might trigger a renewed bout of inflation,” Pozsar wrote in his note. “The risks are such that Powell will try his very best to curb inflation, even at the cost of a ‘depression’ and not getting reappointed.”
But this is not the end yet. Take a look at public letter that best american economists have sent to government:
Next interesting topic is a stock market, that, as we expect should drop significantly in a perspective of 9-12 months. We expect S&P below 2500 level or even lowers. Together with expectation of job market worsening, we've talked on "companies zombification". This phenomena explains the fragility of corporate bond market and corporate loans sector. In fact, many companies, that can't create positive cashflow have got a lot of funds by bond issuing and loans, because of free and unlimited liquidity. Now, when this "easy money" flow droughted - somebody has to pay on accounts. "Zombie companies" do not have money, then - either bond holders or banks will have to pay for it in a way of defaults and provisions.
Fathom research has identified a link between persistently low interest rates and weak productivity outturns, a phenomenon known in the academic literature as zombification. The premise for this theory is that holding borrowing costs at abnormally low levels for a prolonged period allows unprofitable firms to stay in business. Not only are these firms unproductive, but their survival blocks the emergence of younger, more innovative competitors. Expressed another way, Fathom thinks that low interest rates have stifled the forces of creative destruction. This is reflected by a fall in the rates of corporate failures and corporate births, and is one explanation for the so-called ‘productivity puzzle’. But could we now be at a turning point? Corporate failures have been rising since 2015 when the Federal Reserve began its previous tightening cycle, and they shot up during the pandemic.
And just to close stock market topic - here is exciting chart, guys. Comparison of nowadays S&P performance with the shape of Great Depression (1930-1937), Dotcom bubble (2000-2002) and subprime crisis (2008-2010). Looks cool...
Finally, few moments on Geopolitics. There was a lot of noise around Pelosi flight to Taiwan which brings nothing good to global stability. Here are the first fruits. China is abandoning US Treasuries market:
And this one:
Somebody, guys, plays the bad games, trying to pit China against the EU as well, or make a pressure on it.
It is not needed even to comments guys. I suppose that you understand it as well as me. China starts drifting out of US cooperation. They are too related to each other and China can't just burn all down, but the gradual process has started. The intrigue with Taiwan has special background. The TSMC plant produces chips not only for common use, but US defence industry mostly is based on its application. Controlling TSMC plant and Taiwan also means control over US defense...
Next week Wednesday's July U.S. inflation print is shaping up as a key test for a summer rally in U.S. stocks that has lifted the S&P 500 to multi-week highs. The benchmark index is up 14% from its mid-June low, supported in part by expectations that the Federal Reserve will be less hawkish than previously anticipated.
Fed officials have pushed back against the idea that they will be less aggressive in a so-called dovish pivot. Any signs that inflation is not yet peaking after the Fed's 225 bps worth of rate hikes could provide a reality check to markets hopeful of a soft landing for the economy. Analysts polled by Reuters forecast annual inflation at 8.9% in July versus 9.1% in June, which was the largest increase since 1981
Conclusion
Shortly speaking guys, we now get confirmation of our long-term view from other sources. Today they are Mr. Pozsar from Credit Suisse and community of best US economists. Markets right now are wrong with long-term expectations with expectation of policy easing in the beginning of 2023. They are wrong in two ways - either no easing will happen, because rate has to remain high for long-term to defeat inflation or, if easing happens - it triggers the new spiral of inflation. Both scenarios are positive to gold market. By taking a look at Fed policy that doesn't intend to control money supply, it seems that 2nd scenario is more probable.
All analysts expect that gold price has to be more or less stable. In long-term perspective it sounds bullish, because current levels is just 30% pullback from ATH. Anticipation of 1% rate change could make some pressure on gold prices, but it likely will be temporal and tactic, because it doesn't change real interest rates positive. They could become less negative for awhile but as inflation will keep going higher - it doesn't help. The negative interest rates is the major gold driver.
Here is comparison of 1 week ago expectations and now - market are ready for 1.0% rate hike within 6 months, but 1-year yield barely has changed, meaning that policy easing are still widely expected:
More and more people talk about jobs' shortage although NFP and unemployment data do not confirm it by far. This indirectly confirms our worry about job market that soon it should start showing signs of deteriorating.
Finally, recent geopolitical events in Serbia, Taiwan, now around Gaza sector do not cut the tension at all. Taking it all together we keep our bullish long-term view on the gold market. Occasional events, such as NFP report could bring some mess in investors' minds but it should not change the major trend if we indeed correct in our long-term strategy.
To be continued...
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