Sive Morten
Special Consultant to the FPA
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- 18,659
Fundamentals
Recent week was important for the gold market as well as for any other - stocks, currencies etc. Fed sets mid term strategy that becomes a major driver in nearest 6 -9 months and should determine the shape of price performance across the board. Despite that J. Powell statements have provided more details that have added hawkishness to overall Fed position, they mostly have tactical effect, as the core has not changed. It means that our major position on Gold has not changed as well.
Market overview
Gold fell over 1% on Friday after Federal Reserve Chair Jerome Powell in his speech at Jackson Hole said the U.S. economy needed a tight monetary policy until inflation was under control. Powell said this could mean slower growth, but did not hint at what the Fed might do at its September policy meeting.
Since there was no dovish pivot from Powell, gold will continue to face pressure as it will have to deal with higher interest rates, said Philip Streible, chief market strategist at Blue Line Futures in Chicago.
Powell signaled the Fed will likely keep raising interest rates and leave them elevated for a while to contain high inflation. “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” he said Friday in remarks prepared for the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record cautions strongly against prematurely loosening policy.”
Prior to Powell’s speech, investors saw the odds as roughly even of a half-point or another three-quarter point hike at the Fed’s Sept. 20-21 gathering. They remained in that vicinity after he spoke, but the amount of reductions in fed rates priced for 2023 briefly retreated.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said Friday in remarks at the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record cautions strongly against prematurely loosening policy.”
He said lowering inflation to the 2% target is the central bank’s “overarching focus right now” even though consumers and businesses will feel economic pain. He reiterated that another “unusually large” increase in the benchmark lending rate could be appropriate when officials gather next month, though he stopped short of committing to one.
Mark Spindel, chief investment officer at MBB Capital Partners, said the resolute tone of Powell’s speech points to another large rate rise next month.
“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” Powell said in remarks that were set to be live-streamed for the first time from inside the lodge where the event has been held since 1982. Restoring price stability will require a “sustained” period of below-trend growth and a weaker labor market, Powell said. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said.
While the Fed’s preferred measure of inflation eased to 6.3% for the 12-month period ending July, wages and salaries had the biggest monthly gain since February, according to a government report released earlier on Friday.
“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the committee will need to see before we are confident that inflation is moving down,” the Fed chief told the audience, gathered in person after two years of holding the conference virtually because of the pandemic.
“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%.”
The Federal Reserve is likely to deliver the last of its big rate hikes in September, setting up stocks to continue rallying in the second half, according to JPMorgan Chase & Co. strategists.
The strategists are among the most bullish top-ranked voices on US equities and expect rate-sensitive growth stocks to maintain their outperformance over the value basket, even as investors remain worried that the Fed could remain on a hawkish course. A Bloomberg survey found that on average top strategists see the S&P 500 rallying another 3.5% from current levels to the end of the year.
So recent comments from the big banks bring two major features. First is - they confirm analysis that we've made last week, suggesting, that Gold could show volatility and remain under pressure in nearest 6 months because of Fed steps, but there are no expectations of drop below 1650 area. Second - they indirectly hint that Fed should not let stock market to drop at least until the end of the year, as average consensus suggests 3.5% growth, which actually the same like market should stay flat.
Thus, the time bomb on stock market is ticking but it seems that it still has more than 6 month until its explode.
Our "magic" predicting chart shows that market has priced in additional 0.12% on rate change. Now, September and November meeting together count for 1.11%, which means 0.75% +0.5% definitely. While further rising could increase chances of 0.75% change in November as well.
Meantime stock market perfectly repeats the shape of subprime crisis - Wyoming bearish reversal has happened precisely at the corresponding peak of previous crisis:
Future profit margin is dropping for all S&P companies. While revenue grows for ~ 13%, EBIT (operation income) have increased for around 10%, which means the narrowing of a profit margin. While the nominal revenues could stay in positive area due to the high inflation levels, the EBIT to could turn negative as soon as IV Q of 2022.
Population utility services debt is growing. About 20 million homes have a debt on utility bills. It is reported that approximately 1 in 6 American households are not paying their bills and more and more Americans are facing power outages. These are the worst indicators in the entire history of observations in the United States. However, according to forecasts, the situation may worsen due to climatic conditions, high electricity prices and growing demand for it.
While Fed is sabotaging QT programme, crisis is spreading over the major part of the US economy.
Starting September 1st, the balance sheet should be reduced at a rate of $ 95 billion per month, but in fact the current backlog from the schedule is at least $ 82 billion. They were supposed to cut by 133 billion, but they cut just for 50 billion, where the reduction of treasuries is 69 billion, which is more or less according to the promised pace. But! MBS balance have increased by 19 billion because of real estate market starts collapsing like a house of cards.
The percentage of successful implementation of the QT plan is 38% - this is a complete failure. For treasuries, 82% of sales are almost within the reduction schedule, while for MBS, they are not just zero, but even increasing the balance.
According to the actual change in the balance of treasuries, it is clear that the Fed began selling treasuries only in July as the market conditions stabilized and continues to do so while market situation was relatively stable. We can't say the same about the mortgage market, which began to crumble amid the collapse of demand for primary and secondary sales in the real estate market.
The first line of Fed support is primary dealers and the financial industry associated with the Fed, which together have accumulated enough excess cache and will be able to intercept the falling demand of the private sector and non–residents for treasuries. We discussed it last week and have shown that they have accumulated about $2.2 Trln on short-term RePo accounts with the Fed.
Starting in the autumn, the US Treasury will try to enter the open market for the first time in six months since March with fairly tangible borrowings, but as it seems, none of this will happen – there is no demand for debt securities in conditions of record negative real rates. With about 530 billion in cash, the US Treasury, as usual, will continue to balance on the fine line of default. And what's next?
Speaking on Mortgages, MBS bonds - the US real estate market has gone into collapse mode. Never before in the history of the American real estate market have sales fallen as much as in the last 6 months through July 2022. From February to March, the change in sales of new homes in the United States amounted to - 320 thousand in annual terms. For comparison, during the real estate crisis of 2006-2008, sales decreased at the rate of 180-220 thousand houses in 6 months, and in April 1980 at the moment by 300 thousand.
The number of new houses put up for sale to the number of new houses sold was 10.9, i.e. almost 11 months are needed to realize the available supply at the current demand. In a state of shortage of new homes, as in 1997-2006, this ratio was on average about 4, from 2012 to 2019 about 5-5.2. Now it is more than twice the norm of 2012-2019.
The current overstocking has been at its maximum since the acute phase of the crisis in September 2008-February 2009, when the real estate market was completely frozen.
The market is in a severe crisis – the strongest in history. The reason is obvious – the maximum mortgage rates since 2008, falling real incomes and inadequately high prices, which at the peak in Q4 2021 grew at a rate of 23.1% YoY, in Q1 2022 the growth was 22.8% YoY, in the second quarter of 2022 – 19.2% YoY. This is the highest rate of price growth in the history of the market.
In the conditions of the real estate market price bubble of 2004-2006, the annual growth rates of prices did not exceed 13.2% and on average were about 9% YoY. During the inflationary crisis of the 70s, the rate of price growth did not exceed 19.5%.
Now, in two years, US home prices have increased by 40% from 375K to 525K per house – this is a record. In 2004-2006, the peak was 25% in two years, and in the late 70s "only" 37%. As a result, prices are in space, sales are zero. From the 3rd quarter, prices will collapse and almost immediately speculative schemes for buying houses on credit for resale...
Conclusion
Thus, taking in consideration the time bomb on stock market that we've discussed last week, although it is a bit more time given, at least until November elections, big Fed and US Treasury problems with new debt placement and repayment of the old one, while government has to finance enormous trade deficit and just collapsing real estate market - it is few reasons to expect big drop on the Gold. While all these factors might be terrible for stocks and currencies, gold is a quite different song, as it enjoys massive inflows, while everybody feels bad.
Thus we stay on our course, suggesting no direction change within nearest 6 months and expecting higher volatility with price performance above 1650-1680 area. With winter approaching and rising financial problems in EU, passing the US November elections and visible Fed and US Treasury problems with debt financing - Gold should start drifting north. From long-term investment view, current levels and period could be treated as "accumulation".
Our long-term view suggest 1.5-2 times gold price increase within 1-2 years.
Recent week was important for the gold market as well as for any other - stocks, currencies etc. Fed sets mid term strategy that becomes a major driver in nearest 6 -9 months and should determine the shape of price performance across the board. Despite that J. Powell statements have provided more details that have added hawkishness to overall Fed position, they mostly have tactical effect, as the core has not changed. It means that our major position on Gold has not changed as well.
Market overview
Gold fell over 1% on Friday after Federal Reserve Chair Jerome Powell in his speech at Jackson Hole said the U.S. economy needed a tight monetary policy until inflation was under control. Powell said this could mean slower growth, but did not hint at what the Fed might do at its September policy meeting.
Since there was no dovish pivot from Powell, gold will continue to face pressure as it will have to deal with higher interest rates, said Philip Streible, chief market strategist at Blue Line Futures in Chicago.
Powell signaled the Fed will likely keep raising interest rates and leave them elevated for a while to contain high inflation. “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” he said Friday in remarks prepared for the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record cautions strongly against prematurely loosening policy.”
Prior to Powell’s speech, investors saw the odds as roughly even of a half-point or another three-quarter point hike at the Fed’s Sept. 20-21 gathering. They remained in that vicinity after he spoke, but the amount of reductions in fed rates priced for 2023 briefly retreated.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell said Friday in remarks at the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record cautions strongly against prematurely loosening policy.”
He said lowering inflation to the 2% target is the central bank’s “overarching focus right now” even though consumers and businesses will feel economic pain. He reiterated that another “unusually large” increase in the benchmark lending rate could be appropriate when officials gather next month, though he stopped short of committing to one.
Mark Spindel, chief investment officer at MBB Capital Partners, said the resolute tone of Powell’s speech points to another large rate rise next month.
“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance,” Powell said in remarks that were set to be live-streamed for the first time from inside the lodge where the event has been held since 1982. Restoring price stability will require a “sustained” period of below-trend growth and a weaker labor market, Powell said. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said.
While the Fed’s preferred measure of inflation eased to 6.3% for the 12-month period ending July, wages and salaries had the biggest monthly gain since February, according to a government report released earlier on Friday.
“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the committee will need to see before we are confident that inflation is moving down,” the Fed chief told the audience, gathered in person after two years of holding the conference virtually because of the pandemic.
“We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%.”
The Federal Reserve is likely to deliver the last of its big rate hikes in September, setting up stocks to continue rallying in the second half, according to JPMorgan Chase & Co. strategists.
The strategists are among the most bullish top-ranked voices on US equities and expect rate-sensitive growth stocks to maintain their outperformance over the value basket, even as investors remain worried that the Fed could remain on a hawkish course. A Bloomberg survey found that on average top strategists see the S&P 500 rallying another 3.5% from current levels to the end of the year.
So recent comments from the big banks bring two major features. First is - they confirm analysis that we've made last week, suggesting, that Gold could show volatility and remain under pressure in nearest 6 months because of Fed steps, but there are no expectations of drop below 1650 area. Second - they indirectly hint that Fed should not let stock market to drop at least until the end of the year, as average consensus suggests 3.5% growth, which actually the same like market should stay flat.
Thus, the time bomb on stock market is ticking but it seems that it still has more than 6 month until its explode.
Our "magic" predicting chart shows that market has priced in additional 0.12% on rate change. Now, September and November meeting together count for 1.11%, which means 0.75% +0.5% definitely. While further rising could increase chances of 0.75% change in November as well.
Meantime stock market perfectly repeats the shape of subprime crisis - Wyoming bearish reversal has happened precisely at the corresponding peak of previous crisis:
Future profit margin is dropping for all S&P companies. While revenue grows for ~ 13%, EBIT (operation income) have increased for around 10%, which means the narrowing of a profit margin. While the nominal revenues could stay in positive area due to the high inflation levels, the EBIT to could turn negative as soon as IV Q of 2022.
Population utility services debt is growing. About 20 million homes have a debt on utility bills. It is reported that approximately 1 in 6 American households are not paying their bills and more and more Americans are facing power outages. These are the worst indicators in the entire history of observations in the United States. However, according to forecasts, the situation may worsen due to climatic conditions, high electricity prices and growing demand for it.
While Fed is sabotaging QT programme, crisis is spreading over the major part of the US economy.
Starting September 1st, the balance sheet should be reduced at a rate of $ 95 billion per month, but in fact the current backlog from the schedule is at least $ 82 billion. They were supposed to cut by 133 billion, but they cut just for 50 billion, where the reduction of treasuries is 69 billion, which is more or less according to the promised pace. But! MBS balance have increased by 19 billion because of real estate market starts collapsing like a house of cards.
The percentage of successful implementation of the QT plan is 38% - this is a complete failure. For treasuries, 82% of sales are almost within the reduction schedule, while for MBS, they are not just zero, but even increasing the balance.
According to the actual change in the balance of treasuries, it is clear that the Fed began selling treasuries only in July as the market conditions stabilized and continues to do so while market situation was relatively stable. We can't say the same about the mortgage market, which began to crumble amid the collapse of demand for primary and secondary sales in the real estate market.
The first line of Fed support is primary dealers and the financial industry associated with the Fed, which together have accumulated enough excess cache and will be able to intercept the falling demand of the private sector and non–residents for treasuries. We discussed it last week and have shown that they have accumulated about $2.2 Trln on short-term RePo accounts with the Fed.
Starting in the autumn, the US Treasury will try to enter the open market for the first time in six months since March with fairly tangible borrowings, but as it seems, none of this will happen – there is no demand for debt securities in conditions of record negative real rates. With about 530 billion in cash, the US Treasury, as usual, will continue to balance on the fine line of default. And what's next?
Speaking on Mortgages, MBS bonds - the US real estate market has gone into collapse mode. Never before in the history of the American real estate market have sales fallen as much as in the last 6 months through July 2022. From February to March, the change in sales of new homes in the United States amounted to - 320 thousand in annual terms. For comparison, during the real estate crisis of 2006-2008, sales decreased at the rate of 180-220 thousand houses in 6 months, and in April 1980 at the moment by 300 thousand.
The number of new houses put up for sale to the number of new houses sold was 10.9, i.e. almost 11 months are needed to realize the available supply at the current demand. In a state of shortage of new homes, as in 1997-2006, this ratio was on average about 4, from 2012 to 2019 about 5-5.2. Now it is more than twice the norm of 2012-2019.
The current overstocking has been at its maximum since the acute phase of the crisis in September 2008-February 2009, when the real estate market was completely frozen.
The market is in a severe crisis – the strongest in history. The reason is obvious – the maximum mortgage rates since 2008, falling real incomes and inadequately high prices, which at the peak in Q4 2021 grew at a rate of 23.1% YoY, in Q1 2022 the growth was 22.8% YoY, in the second quarter of 2022 – 19.2% YoY. This is the highest rate of price growth in the history of the market.
In the conditions of the real estate market price bubble of 2004-2006, the annual growth rates of prices did not exceed 13.2% and on average were about 9% YoY. During the inflationary crisis of the 70s, the rate of price growth did not exceed 19.5%.
Now, in two years, US home prices have increased by 40% from 375K to 525K per house – this is a record. In 2004-2006, the peak was 25% in two years, and in the late 70s "only" 37%. As a result, prices are in space, sales are zero. From the 3rd quarter, prices will collapse and almost immediately speculative schemes for buying houses on credit for resale...
Conclusion
Thus, taking in consideration the time bomb on stock market that we've discussed last week, although it is a bit more time given, at least until November elections, big Fed and US Treasury problems with new debt placement and repayment of the old one, while government has to finance enormous trade deficit and just collapsing real estate market - it is few reasons to expect big drop on the Gold. While all these factors might be terrible for stocks and currencies, gold is a quite different song, as it enjoys massive inflows, while everybody feels bad.
Thus we stay on our course, suggesting no direction change within nearest 6 months and expecting higher volatility with price performance above 1650-1680 area. With winter approaching and rising financial problems in EU, passing the US November elections and visible Fed and US Treasury problems with debt financing - Gold should start drifting north. From long-term investment view, current levels and period could be treated as "accumulation".
Our long-term view suggest 1.5-2 times gold price increase within 1-2 years.
