Sive Morten
Special Consultant to the FPA
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Fundamentals
Gold market stands focus on the same driving factors as any other market - Fed policy, the common economical background for the economy. Yesterday we've taken in-depth analysis on coming Fed meeting, and come to conclusion that we could get hawkish surprises from the Fed because of few reasons. First is, rate change expectations were discounted once Omicron has appeared, but are not priced-in back yet at full degree. Second - economy shows the good pace, job market slowly but stubbornly recovers, but inflation start to make negative impact on Democrats' and Biden rating as real wages are stagnating. We suggest that Fed could make rhetoric a bit more hawkish while it should not change the promised steps of tapering acceleration. If nothing from the mentioned events will happen - it improves bullish sentiment around the gold.
Market overview
Fed policymakers look likely to accelerate the wind-down of their asset purchases when they meet later this month as they respond to a tightening labour market and move to open the door to earlier rate hikes than they had projected. A measure of U.S. services industry activity unexpectedly rose in November, hitting a record high as businesses boosted hiring, but there was little sign that supply constraints were easing and prices remained high.
The average prices of gold, silver and platinum next year will be almost the same as in 2021, while the average price of palladium will fall, consultants Metals Focus said.
Gold slipped on Thursday as the dollar firmed and data showed a big drop in U.S. jobless claims ahead of an inflation report that could influence the Federal Reserve's monetary strategy. The number of Americans filing new claims for unemployment benefits dropped to the lowest in over 52 years.
Apart from lingering uncertainties over the Omicron coronavirus variant, focus was also on tensions over Russia and its stance on Ukraine, the diplomatic boycott of the Beijing Olympics by some Western nations and U.S. sanctions on Iran.
Top Asian hubs saw healthy demand for physical gold this week as domestic prices retreated into the year-end, although volatility in rates deterred retail buyers and jewellers in India.
Gold gained on Friday as its safe-haven appeal was boosted by elevated U.S. consumer prices, which also cooled some bets for aggressive interest rate hikes since the jump in inflation was not as big as expected.
Bullion also drew strength from a slip in the dollar, which increased its appeal for overseas buyers, and as U.S. Treasury yields fell after data showed U.S. consumer prices increased further in November, leading to the largest annual gain since 1982
Financial markets, which have struggled this year to decipher central bankers' policy signals, face their biggest challenge yet in December when in the space of 24 hours the Federal Reserve, ECB and Bank of England hold crucial meetings. These come at the end of a year that saw central banks generate frequent bouts of market turmoil, the most recent examples being the BoE's shock "no change" decision on Nov. 4, October's timid rate-hike pushback by the European Central Bank and the Reserve Bank of Australia's failure to defend its bond yield target.
First up on Dec. 15, the Fed's 1800 GMT statement may announce faster tapering of asset-purchases and could reveal its thinking on future rate rises. The next day, the BoE meets, having in November kept rates on hold -- at odds with market pricing. Less than an hour later, the European Central Bank could announce plans for two key bond-buying programmes; implications could be big for highly indebted states like Italy.
Monetary policy messaging, by its very nature, is an inexact business. But unexpectedly sticky inflation, supply-chain threats to economic recovery and COVID's constant background menace now make the outcomes especially hard to model.
ECB chief Christine Lagarde too was criticized after her half-hearted rejection of rate rises priced for 2022 in late October boosted the euro and hurt bonds. But the moves reversed the following week when she forcefully rebutted rate hikes.
The Fed's Jerome Powell seems to have garnered top marks, not least for his willingness to admit he didn't have all the answers. But even his calm wavered recently; days after telling lawmakers Omicron could imperil economic recovery, he suggested it may be time to stop seeing inflation as transitory. The dollar which had weakened, shot straight up again.
But Timothy Graf, State Street's head of EMEA macro strategy, praised Powell for his "honesty and forthrightness", drawing parallels with the candour of ex-ECB chief Mario Draghi, credited with steering the euro zone from its 2011-2012 crisis.
The U.S. Federal Reserve's experiment with running a "hot" economy has edged into historically uncharted territory, with an unemployment rate never reached without associated central bank rate increases and now levels of inflation that in the past also prompted a policy response. The Consumer Price Index for November posted the biggest annual increase in 39 years, data on Friday showed, amid signs that price pressures are broadening and likely leading policymakers at their meeting next week to significantly raise inflation projections that have been running behind actual outcomes.
That may prompt a policy shift, with officials accelerating plans to end their bondbuying and, many analysts expect, signaling that rate increases may begin sooner than anticipated.
The unemployment rate is also flashing red, at least by past Fed standards. The 4.2% rate reached in November has only been hit or exceeded about 20% of the time since the late 1940s, covering four periods of low joblessness, including the late 2010s, with the Fed raising rates during each.
The central bank in 2020 concluded that inflation was now less of a risk and pledged to try to milk more jobs and a lower unemployment rate out of an economy it felt had changed in fundamental ways since the high inflation scares of the 1980s - a conclusion that's now being tested in real time.
On the surface wages are rising as employers struggle to fill open jobs in a pandemic era where the unemployed are reluctant to rejoin jobs for health or other reasons, and those who are in jobs have gained leverage to job-hop for higher pay. Yet once adjusted for inflation wages have fallen for nine of the past 11 months, with growth in "real" wages moving little beyond the pre-pandemic trend.
That fact has hit home in the Oval Office, with President Joe Biden's Democratic Party facing a potentially difficult mid-term election map next year and his approval ratings taking a hit in part because of rising prices. Biden in a statement Friday pitched the issue forward, arguing that key prices for gas and autos were already drifting lower, and said steps taken or proposed by his administration would help ease inflation's pace.
Inflation is one aspect of that, with global supply chains trying to catch up with unprecedented consumer demand in the United States that was driven by another historic anomaly - personal incomes that rose, due to large government support programs, despite massive unemployment.
But the Fed's response is similarly unprecedented. The November unemployment rate is now close to the 4% level that policymakers consider sustainable over the long run. It is also edging towards what Fed officials have effectively penciled in as the lower limit on the unemployment rate of about 3.5%.
Since policymakers began publishing quarterly economic projections in 2012 the median unemployment rate for any given year-end has slipped below 3.5% only once, and that just barely, at 3.45%. In data since January 1948, the unemployment rate has only fallen below 3.5% in 41 of 887 months - during a jobs boom of the early 1950s, again in the late 1960s, and never since.
The central bank is counting on finding a sweet spot this time that has been elusive, a "soft landing" that brings inflation down from higher-than-desired levels while allowing the labor market to continue to heal.
Spells of unemployment this low have not, so far, tended to end so well.
For the record, the consensus forecasts for 2022 sees higher equities, a higher dollar and higher bond yields. It's just never as simple as that.
The US Long-term strategy progress
Last time we've talked about long term US strategy to keep economy struggle with China. Now we could see the first fruits of this long-term trade war. We've built the theory that China growth is slowing down by intended slowing of cargo shipping across the ocean as sea ways mostly controlled by US and UK. And second - delaying of sending empty containers back, i.e. slowing the containers' turnover.
Much like the coronavirus pandemic, and the economic disruption that it has caused, a global shipping crisis looks set to go on delaying goods traffic and fuelling inflation well into 2023. The cost of shipping a 40-foot container (FEU) unit has eased some 15% from record highs above $11,000 touched in September, according to the Freightos FBX index. But before the pandemic, the same container cost just $1,300.
With 90% of the world's merchandise shipped by sea, it risks exacerbating global inflation that is already proving more troublesome than anticipated.
Peter Sand, chief analyst at the freight rate benchmarking platform Xeneta, does not expect container shipping costs to normalise before 2023.
In early November, 11% of the world's loaded container volume was being held up in logjams, down from August peaks but well above the pre-pandemic 7%, Berenberg analysts estimate.
In late October at Los Angeles/Long Beach, one of the world's biggest container ports, ships were taking twice as long to turn around as before the pandemic, RBC Capital Markets estimates. Although the worst may be past, RBC analyst Michael Tran does not see freight prices returning to pre-pandemic levels for another couple of years.
A United Nations report said last month that high freight rates were threatening the global recovery, suggesting they could boost global import prices by 11% and consumer prices by 1.5% between now and 2023.The impact also ripples out; a 10% rise in container freight rates cuts U.S. and European industrial production by more than 1%.
The report noted that cheaper goods will proportionally rise more in price than dearer ones, and that poor nations producing low-value-added items such as furniture and textiles will take the biggest hit to competitiveness.
With the U.S. inventory-sales ratio near record lows, businesses will also need to restock. "This will support demand for goods through the first half of next year," Unicredit analysts said.
"These time bombs are riddled through large enterprises' supply chains and will present many problems for their customers who rely on their goods and services."
Real relief may come only when more vessels appear. Ship orders have risen significantly this year. But it takes three years to build and deliver one, and it will be 2024 before sizeable new tonnage hits the water, senior ING economist Rico Luman predicted.
Now let's take a look at effect on China economy...
China's exports growth lost steam in November, pressured by a strong yuan, weakening demand and higher costs, but imports unexpectedly accelerated as the country scrambled to restock depleted commodities like coal. Exports rose 22% year-on-year in November, customs data showed on Tuesday, slower than the 27.1% jump in the previous month but faster than the 19.0% expected in a Reuters poll. Imports climbed 31.7%, beating the 19.8% rise in October and well above the forecast 20.6% gain.
China's trade surplus was $71.72 billion last month, narrower than the poll's forecast for $82.75 billion and the $84.54 billion surplus in October. The data comes a day after China's central bank announced a cut to the amount of cash that banks must hold in reserve, its second such move this year, to bolster slowing economic growth
The country has staged an impressive rebound from the pandemic but there are signs momentum is flagging. Power shortages, regulatory crackdowns on major industries and debt troubles in the property sector are weighing on China's recovery. Analysts expect more supportive policy measures in the coming months
A private sector survey showed factory activity fell in November, hit by higher prices and subdued demand although the government's official survey showed activity grew in the month. China's factory-gate inflation hit a 26-year high in October as coal prices soared during the power crunch.
So, US just needs to lead the situation to the vital point where the chain reaction of economy crush will be triggered. With the data that we have here - it could take 2-3 years more. It means that pandemic will not over till this moment and inflation hardly get meaningful relief. And take a look what is going on - the most smart ones gets the idea where all stuff is going to:
South Korea’s Samsung Electronics Co. is considering an investment of as much as $17 billion to build a chip-making factory in Arizona, Texas or New York, according to documents and people familiar with the company’s plans. Samsung is scouting two locations in and around Phoenix, two locations in and near Austin and a large industrial campus in western New York’s Genesee County, according to one of the people.
TSMC, Sony to invest $7 bln for new Japanese chip plant
Japan will allocate about 600 billion yen ($5.2 billion) from its fiscal 2021 supplementary budget to support advanced semiconductor manufacturers including the world's No. 1 contract chipmaker, Taiwan Semiconductor Manufacturing Co (TSMC), Nikkei reported on Tuesday. As part of the stimulus package, the Japanese government will invest about 400 billion yen in a new factory to be set up by TSMC in Kumamoto prefecture, southwest Japan, according to Nikkei. TSMC said earlier this month it would build a $7 billion chip plant in Japan with Sony Group Corp (6758.T), a move that was welcomed by the Japanese government.
Whether we're getting "Made in Japan" electronics again? And whether we really will get "Made in USA" Samsung goods? Are you kidding? What would you say about it three years ago? Slowly but stubbornly US hunts its own line. You will see - very soon other will follow to ship back production either in the US, Canada, UK, Japan, Australia, NZ or EU, at least. This is the next hit on China that comes very soon, once the new plants will be ready to not hurt overall production volumes.
To be continued...
Gold market stands focus on the same driving factors as any other market - Fed policy, the common economical background for the economy. Yesterday we've taken in-depth analysis on coming Fed meeting, and come to conclusion that we could get hawkish surprises from the Fed because of few reasons. First is, rate change expectations were discounted once Omicron has appeared, but are not priced-in back yet at full degree. Second - economy shows the good pace, job market slowly but stubbornly recovers, but inflation start to make negative impact on Democrats' and Biden rating as real wages are stagnating. We suggest that Fed could make rhetoric a bit more hawkish while it should not change the promised steps of tapering acceleration. If nothing from the mentioned events will happen - it improves bullish sentiment around the gold.
Market overview
Fed policymakers look likely to accelerate the wind-down of their asset purchases when they meet later this month as they respond to a tightening labour market and move to open the door to earlier rate hikes than they had projected. A measure of U.S. services industry activity unexpectedly rose in November, hitting a record high as businesses boosted hiring, but there was little sign that supply constraints were easing and prices remained high.
The average prices of gold, silver and platinum next year will be almost the same as in 2021, while the average price of palladium will fall, consultants Metals Focus said.
Gold slipped on Thursday as the dollar firmed and data showed a big drop in U.S. jobless claims ahead of an inflation report that could influence the Federal Reserve's monetary strategy. The number of Americans filing new claims for unemployment benefits dropped to the lowest in over 52 years.
Apart from lingering uncertainties over the Omicron coronavirus variant, focus was also on tensions over Russia and its stance on Ukraine, the diplomatic boycott of the Beijing Olympics by some Western nations and U.S. sanctions on Iran.
Top Asian hubs saw healthy demand for physical gold this week as domestic prices retreated into the year-end, although volatility in rates deterred retail buyers and jewellers in India.
Gold gained on Friday as its safe-haven appeal was boosted by elevated U.S. consumer prices, which also cooled some bets for aggressive interest rate hikes since the jump in inflation was not as big as expected.
Bullion also drew strength from a slip in the dollar, which increased its appeal for overseas buyers, and as U.S. Treasury yields fell after data showed U.S. consumer prices increased further in November, leading to the largest annual gain since 1982
Financial markets, which have struggled this year to decipher central bankers' policy signals, face their biggest challenge yet in December when in the space of 24 hours the Federal Reserve, ECB and Bank of England hold crucial meetings. These come at the end of a year that saw central banks generate frequent bouts of market turmoil, the most recent examples being the BoE's shock "no change" decision on Nov. 4, October's timid rate-hike pushback by the European Central Bank and the Reserve Bank of Australia's failure to defend its bond yield target.
First up on Dec. 15, the Fed's 1800 GMT statement may announce faster tapering of asset-purchases and could reveal its thinking on future rate rises. The next day, the BoE meets, having in November kept rates on hold -- at odds with market pricing. Less than an hour later, the European Central Bank could announce plans for two key bond-buying programmes; implications could be big for highly indebted states like Italy.
Monetary policy messaging, by its very nature, is an inexact business. But unexpectedly sticky inflation, supply-chain threats to economic recovery and COVID's constant background menace now make the outcomes especially hard to model.
ECB chief Christine Lagarde too was criticized after her half-hearted rejection of rate rises priced for 2022 in late October boosted the euro and hurt bonds. But the moves reversed the following week when she forcefully rebutted rate hikes.
The Fed's Jerome Powell seems to have garnered top marks, not least for his willingness to admit he didn't have all the answers. But even his calm wavered recently; days after telling lawmakers Omicron could imperil economic recovery, he suggested it may be time to stop seeing inflation as transitory. The dollar which had weakened, shot straight up again.
But Timothy Graf, State Street's head of EMEA macro strategy, praised Powell for his "honesty and forthrightness", drawing parallels with the candour of ex-ECB chief Mario Draghi, credited with steering the euro zone from its 2011-2012 crisis.
The U.S. Federal Reserve's experiment with running a "hot" economy has edged into historically uncharted territory, with an unemployment rate never reached without associated central bank rate increases and now levels of inflation that in the past also prompted a policy response. The Consumer Price Index for November posted the biggest annual increase in 39 years, data on Friday showed, amid signs that price pressures are broadening and likely leading policymakers at their meeting next week to significantly raise inflation projections that have been running behind actual outcomes.
That may prompt a policy shift, with officials accelerating plans to end their bondbuying and, many analysts expect, signaling that rate increases may begin sooner than anticipated.
The unemployment rate is also flashing red, at least by past Fed standards. The 4.2% rate reached in November has only been hit or exceeded about 20% of the time since the late 1940s, covering four periods of low joblessness, including the late 2010s, with the Fed raising rates during each.
The central bank in 2020 concluded that inflation was now less of a risk and pledged to try to milk more jobs and a lower unemployment rate out of an economy it felt had changed in fundamental ways since the high inflation scares of the 1980s - a conclusion that's now being tested in real time.
On the surface wages are rising as employers struggle to fill open jobs in a pandemic era where the unemployed are reluctant to rejoin jobs for health or other reasons, and those who are in jobs have gained leverage to job-hop for higher pay. Yet once adjusted for inflation wages have fallen for nine of the past 11 months, with growth in "real" wages moving little beyond the pre-pandemic trend.
That fact has hit home in the Oval Office, with President Joe Biden's Democratic Party facing a potentially difficult mid-term election map next year and his approval ratings taking a hit in part because of rising prices. Biden in a statement Friday pitched the issue forward, arguing that key prices for gas and autos were already drifting lower, and said steps taken or proposed by his administration would help ease inflation's pace.
Inflation is one aspect of that, with global supply chains trying to catch up with unprecedented consumer demand in the United States that was driven by another historic anomaly - personal incomes that rose, due to large government support programs, despite massive unemployment.
But the Fed's response is similarly unprecedented. The November unemployment rate is now close to the 4% level that policymakers consider sustainable over the long run. It is also edging towards what Fed officials have effectively penciled in as the lower limit on the unemployment rate of about 3.5%.
Since policymakers began publishing quarterly economic projections in 2012 the median unemployment rate for any given year-end has slipped below 3.5% only once, and that just barely, at 3.45%. In data since January 1948, the unemployment rate has only fallen below 3.5% in 41 of 887 months - during a jobs boom of the early 1950s, again in the late 1960s, and never since.
The central bank is counting on finding a sweet spot this time that has been elusive, a "soft landing" that brings inflation down from higher-than-desired levels while allowing the labor market to continue to heal.
Spells of unemployment this low have not, so far, tended to end so well.
For the record, the consensus forecasts for 2022 sees higher equities, a higher dollar and higher bond yields. It's just never as simple as that.
The US Long-term strategy progress
Last time we've talked about long term US strategy to keep economy struggle with China. Now we could see the first fruits of this long-term trade war. We've built the theory that China growth is slowing down by intended slowing of cargo shipping across the ocean as sea ways mostly controlled by US and UK. And second - delaying of sending empty containers back, i.e. slowing the containers' turnover.
Much like the coronavirus pandemic, and the economic disruption that it has caused, a global shipping crisis looks set to go on delaying goods traffic and fuelling inflation well into 2023. The cost of shipping a 40-foot container (FEU) unit has eased some 15% from record highs above $11,000 touched in September, according to the Freightos FBX index. But before the pandemic, the same container cost just $1,300.
With 90% of the world's merchandise shipped by sea, it risks exacerbating global inflation that is already proving more troublesome than anticipated.
Peter Sand, chief analyst at the freight rate benchmarking platform Xeneta, does not expect container shipping costs to normalise before 2023.
In early November, 11% of the world's loaded container volume was being held up in logjams, down from August peaks but well above the pre-pandemic 7%, Berenberg analysts estimate.
In late October at Los Angeles/Long Beach, one of the world's biggest container ports, ships were taking twice as long to turn around as before the pandemic, RBC Capital Markets estimates. Although the worst may be past, RBC analyst Michael Tran does not see freight prices returning to pre-pandemic levels for another couple of years.
A United Nations report said last month that high freight rates were threatening the global recovery, suggesting they could boost global import prices by 11% and consumer prices by 1.5% between now and 2023.The impact also ripples out; a 10% rise in container freight rates cuts U.S. and European industrial production by more than 1%.
The report noted that cheaper goods will proportionally rise more in price than dearer ones, and that poor nations producing low-value-added items such as furniture and textiles will take the biggest hit to competitiveness.
With the U.S. inventory-sales ratio near record lows, businesses will also need to restock. "This will support demand for goods through the first half of next year," Unicredit analysts said.
"These time bombs are riddled through large enterprises' supply chains and will present many problems for their customers who rely on their goods and services."
Real relief may come only when more vessels appear. Ship orders have risen significantly this year. But it takes three years to build and deliver one, and it will be 2024 before sizeable new tonnage hits the water, senior ING economist Rico Luman predicted.
Now let's take a look at effect on China economy...
China's exports growth lost steam in November, pressured by a strong yuan, weakening demand and higher costs, but imports unexpectedly accelerated as the country scrambled to restock depleted commodities like coal. Exports rose 22% year-on-year in November, customs data showed on Tuesday, slower than the 27.1% jump in the previous month but faster than the 19.0% expected in a Reuters poll. Imports climbed 31.7%, beating the 19.8% rise in October and well above the forecast 20.6% gain.
China's trade surplus was $71.72 billion last month, narrower than the poll's forecast for $82.75 billion and the $84.54 billion surplus in October. The data comes a day after China's central bank announced a cut to the amount of cash that banks must hold in reserve, its second such move this year, to bolster slowing economic growth
The country has staged an impressive rebound from the pandemic but there are signs momentum is flagging. Power shortages, regulatory crackdowns on major industries and debt troubles in the property sector are weighing on China's recovery. Analysts expect more supportive policy measures in the coming months
A private sector survey showed factory activity fell in November, hit by higher prices and subdued demand although the government's official survey showed activity grew in the month. China's factory-gate inflation hit a 26-year high in October as coal prices soared during the power crunch.
So, US just needs to lead the situation to the vital point where the chain reaction of economy crush will be triggered. With the data that we have here - it could take 2-3 years more. It means that pandemic will not over till this moment and inflation hardly get meaningful relief. And take a look what is going on - the most smart ones gets the idea where all stuff is going to:
South Korea’s Samsung Electronics Co. is considering an investment of as much as $17 billion to build a chip-making factory in Arizona, Texas or New York, according to documents and people familiar with the company’s plans. Samsung is scouting two locations in and around Phoenix, two locations in and near Austin and a large industrial campus in western New York’s Genesee County, according to one of the people.
TSMC, Sony to invest $7 bln for new Japanese chip plant
Japan will allocate about 600 billion yen ($5.2 billion) from its fiscal 2021 supplementary budget to support advanced semiconductor manufacturers including the world's No. 1 contract chipmaker, Taiwan Semiconductor Manufacturing Co (TSMC), Nikkei reported on Tuesday. As part of the stimulus package, the Japanese government will invest about 400 billion yen in a new factory to be set up by TSMC in Kumamoto prefecture, southwest Japan, according to Nikkei. TSMC said earlier this month it would build a $7 billion chip plant in Japan with Sony Group Corp (6758.T), a move that was welcomed by the Japanese government.
Whether we're getting "Made in Japan" electronics again? And whether we really will get "Made in USA" Samsung goods? Are you kidding? What would you say about it three years ago? Slowly but stubbornly US hunts its own line. You will see - very soon other will follow to ship back production either in the US, Canada, UK, Japan, Australia, NZ or EU, at least. This is the next hit on China that comes very soon, once the new plants will be ready to not hurt overall production volumes.
To be continued...
