Sive Morten
Special Consultant to the FPA
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Fundamentals
As we've decided, today we consider second part of our fundamental research, dedicated to economy conditions, not only in the US but in some other countries as well. Together with yesterday's inflation analysis it should give us clear picture and lets us to make some conclusion concerning next Fed step. Despite that this information is not about gold per se, but it is crucial for this market This is fundamental moving power for all markets actually, including gold. At the same time, some gold specific issues will be considered as well.
Market overview
Gold prices held steady on Tuesday, with key inflation reading and comments from Federal Reserve officials on investors' radar this week. Recent comments from Fed policymakers suggested that the U.S. central bank is in no rush to cut rates. Data showed U.S. durable goods orders posted the largest drop in nearly four years in January.
Gold prices were also supported as China's middle-class attempts "to preserve their dwindling fortunes caused by the property market crisis and a prolonged stock market sell-off", Ole Hansen, Saxo Bank's head of commodity strategy, wrote in a note. Top bullion consumer China's net gold imports via Hong Kong in January hit the highest since mid-2018, official data showed.
Gold prices ticked up on Wednesday as traders strapped in for key economic data and comments from U.S. central bank officials on the timeline of interest rate cuts.
Recent Fed commentary and hot inflation data has pushed bets of Fed's first rate cut to June, compared to March at the start of the year. Higher rates tend to discourage investment in non-yielding bullion.
Federal Reserve Governor Christopher Waller said he would like the central bank to boost its share of short-term Treasuries. Also speaking Friday, Fed Bank of Chicago President Austan Goolsbee told CNBC he believes the Fed funds rate is quite restrictive. Separately, his Richmond counterpart Thomas Barkin said markets are pricing in fewer rate reductions in response to economic data. Dallas Fed chief counterpart Lorie Logan reiterated it’ll likely be appropriate to start slowing the pace at which it shrinks its balance sheet.
Gold scaled a one-month high on Thursday as the dollar slipped after U.S. inflation data came in line with expectations, with traders' attention turning to further commentary from Federal Reserve officials for cues on interest rate cuts. Data showed the U.S. personal consumption expenditures price index rose by 0.3% in January, while the core PCE price index gained 0.4%, pressuring the dollar.
Gold rose to the highest in nine weeks as disappointing US factory data and a drop in consumer sentiment reinforced bets on the possibility of interest-rate cuts later this year. Signs of a softening economy solidified expectations that the Federal Reserve will need to lower borrowing costs to help shore up the economy. Higher rates are typically negative for non-yielding bullion.
The precious metal has largely held above the key $2,000 level since mid-December on bets of the Fed’s pivot to monetary easing. That view hasn’t changed even though expectations of the timing and size of the central bank’s rate reduction varied against mixed US economic data recently.
Data released Friday showed a measure of US factory activity shrank at a faster pace in February as orders, production and employment contracted, suggesting manufacturing is struggling for momentum. Separate data showed US consumer sentiment fell in February for the first time in three months as current and expected views of the economy deteriorated. Treasury yields tumbled, helping send bullion higher by as much as 2.2%, the biggest intraday increase since Dec. 13.
Investors also kept a tab on news that New York Community Bancorp found "material weaknesses" in internal controls related to its loan review, adding to commercial real estate exposure woes.
Fish are on the menu as the World Trade Organization holds its 13th ministerial meeting in Abu Dhabi this week. Elsewhere, jet fuel demand in the US is picking up just in time for a busy travel season, while oil’s February advance is on the cusp of evaporating. A slew of energy industry conferences take place in London, including International Energy Week. Here are few notable charts and one map to consider in global commodity markets as the week gets underway, but we're mostly interested with precious metals here.
While gold has attracted much of the attention in precious metals circles amid its record rally, silver has been slumbering away in a tight range this year. At almost $23 an ounce, it’s more than halfway below its peak reached in 1980 and trading beneath two key moving averages (after forming a bearish death cross technical pattern earlier this month). Change could be on the horizon: Hedge funds flipped to net bullish from bearish, according to the latest US Commodity Futures Trading Commission data.
Economy condition
It is very difficult now to understand what is really going on. Every week we have new data and very often it stands contradictive to each other. Just two weeks ago Gold was under pressure due high CPI, while this week it has skyrocketed, driven by flat PCE and poor PMI numbers. So, in what direction we're moving? Also I would ask another question. Whether the Fed will act according to the numbers that they officially show, or, according to real situation? As we've estimated, they could show you pretty nice picture but with detailed looking it is found out that "the King is naked". Here are few updated numbers, there is no need to make any comments:
If we would take a look at "real numbers", it becomes obvious that economy is contracting, not only in the US but in EU and other G7 countries. Some of them are officially in recession already. And it has started not yesterday, but in 2021. Most important event of last week is collapse of Durable Goods orders for ~6%. This is the bottom since 2017, ex CV19 period. Drop has happened not only in orders by Purchase Managers. We see raising of reserves in retail sector as well, suggesting drop of consumer power:
Indeed, US consumer confidence fell in February for the first time in four months as Americans’ views deteriorated about the outlook for the economy, the job market and financial conditions. The Conference Board’s gauge of sentiment decreased to 106.7 from a downwardly revised 110.9 a month earlier, data published Tuesday showed. The February reading trailed all estimates in a Bloomberg survey of economists. A measure of expectations dropped to a three-month low, while the gauge of current conditions also slipped.
The structural crisis has reached a stable level, and the authorities are no longer trying to hide it, because it is absolutely impossible. The differences accumulated over the previous two years from reality (caused precisely by attempts to wishful thinking in the hope that the negative will quickly resolve) sometimes give "outbursts" of deterioration in indicators. But in general, as it should be in a structural rather than cyclical downturn, all significant indicators are consistently negative.
At the same time, there is no discussion of the reasons for this phenomenon in the public field. This suggests not only that liberal economics does not understand the causes of the structural crisis. The fact is that the topic of the crisis is blocked at the political level and there is an opinion that its discussion weakens the current political power in the G7 countries.
As it is clear, the lack of discussion of the problems and consequences of the economic crisis in the public field has an extremely negative impact on the ability of entrepreneurs to counteract it. In fact all recent most resonance political news in EU are due raising of internal pressure. The political elite are scare to acknowledge crisis, they do not know how to deal with it and what they have to do, they are not ready to turn this problem public and prepare population. This raises internal pressure that is released in a way of stupid statements or events, such as M. Macron's statement to send NATO troops to Ukraine, Germany scandal around Crimea Bridge, and constant talks about stealing of Russian frozen assets. These are signs of raising political crisis as well.
Germans' willingness to save has risen to its highest level since June 2008, while consumer morale remains low. Although earnings expectations have risen following the wage hike, buyers remain pessimistic about the German economy. In general sentiment in Germany remains depressed
A quick look at nominal GDP growth, which rose from $27.61 trillion in the third quarter to $27.94 trillion in the fourth quarter, shows that the US economy grew by about $334.5 billion in absolute nominal dollar terms. Then we go to the US Treasury website and find that the debt on September 30, 2023 was $33.16 Trln, and the debt on December 31, 2023 was $34 Trln. ️It turns out that every 2.5 dollars of debt gives only a 1 dollar of GDP growth.
Few other events point that situation in the US financial, and particularly banking sector is becoming tight. Here is just briefly, some events that illustrate situation.
Maersk has warned of disruptions to container shipping via the Red Sea dragging into the second half of the year and of heavy congestion and delays for U.S.-bound goods.
There are not less problems in Asia Pacific region. The segregation of economies stand underway. Chinese stimulus to re-fresh the economy bring no fruits by far. And the weakest point is a Real Estate sector. Deutsche Bank is preparing a liquidation lawsuit in Hong Kong against Chinese developer Shimao Group, two sources said, in a rare move by a foreign firm that comes amid rising credit defaults and China's deepening property sector crisis. They already start using political tools for economy stimulation and supporting of stock market. Hopes are high for fresh China stimulus when the National People's Congress begins its annual session on Tuesday, aimed at reviving a crumbling property sector, and invigorating moribund consumers given the worst deflation since the global financial crisis.
WSJ nightmares economy society, suggesting that China, to solve economic problems, is increasing the output of goods that significantly exceeded domestic demand, the countries of the world will face an influx of Chinese imports for the second time. Imports from China in the early 2000s lowered prices and destroyed American jobs. Perhaps a sequel is planned.
What official data tells us
Analysts are on the line and claim that the market entered 2023 expecting a recession, and into 2024 with the expectation of six Fed rate cuts. They believe the US economy is simply not slowing down and the Fed's turnaround has provided a strong tailwind for growth from December 2023.
The economy is not slowing down, but accelerating. Growth expectations for 2024 increased significantly after the Fed's reversal in December and the associated softening of financial conditions. Expectations of economic growth in the United States continue to be revised upward.
Financial conditions continue to improve after the Fed's reversal in December with record Investment Grade (high-quality bonds) issuance, high HY (high-risk/high-yield) issuance, increased IPO activity, increased M&A activity, as well as narrow credit spreads, and the stock market reaches new record highs. Given the significant improvement in financial conditions, it is not surprising that we saw strong non-farm employment and inflation figures in January, and we should expect this strength to continue.
The result of this "official" strong data, together with our investigation of inflationary background yesterday makes analysts to think that the Fed will remain focused on inflation fight first of all. So the caveat that they are made - no rate cut this year, because official data shows strong economy, while price indexes show increasing of inflationary pressure.
What could happen in reality
For some more time they could keep the rosy picture of economy, and support the legend of economy growth. Together with raising inflation this will make negative impact on gold. But as longer they try to hide the truth as more evident its breakout will be. Keeping silence the real deal in economy means the postponing of any efforts to fix it. And this start smelling like Stagflation instead of "soft landing". When the fairy tale will be over, hard crash will boost gold price, because inflation remains high, while the Fed will have to stop QT and cut the rate. Now the US mid&small banking sector and its significant imposing to CRE market seems like the weakest point that immediately will hurt the stock market. As we've estimated last week, based on the recent Fed reaction - they will go with the way of QE for resolving any problem. Because they do not have any more time to take serious gradual work on recovering of the economy. It is just ~ a half of the year until elections.
As we've decided, today we consider second part of our fundamental research, dedicated to economy conditions, not only in the US but in some other countries as well. Together with yesterday's inflation analysis it should give us clear picture and lets us to make some conclusion concerning next Fed step. Despite that this information is not about gold per se, but it is crucial for this market This is fundamental moving power for all markets actually, including gold. At the same time, some gold specific issues will be considered as well.
Market overview
Gold prices held steady on Tuesday, with key inflation reading and comments from Federal Reserve officials on investors' radar this week. Recent comments from Fed policymakers suggested that the U.S. central bank is in no rush to cut rates. Data showed U.S. durable goods orders posted the largest drop in nearly four years in January.
"A slight uptick in inflation data will pressure the gold market but it is well supported at the $2,000 level by central bank buying. It is unlikely Fed officials will change their stance until more data," said Phillip Streible, chief market strategist at Blue Line Futures, in Chicago. Gold will have a record run in the fourth quarter when rate cuts materialise."
Gold prices were also supported as China's middle-class attempts "to preserve their dwindling fortunes caused by the property market crisis and a prolonged stock market sell-off", Ole Hansen, Saxo Bank's head of commodity strategy, wrote in a note. Top bullion consumer China's net gold imports via Hong Kong in January hit the highest since mid-2018, official data showed.
Gold prices ticked up on Wednesday as traders strapped in for key economic data and comments from U.S. central bank officials on the timeline of interest rate cuts.
"The Fed is in the driver's seat for the gold market. We can see all-time highs in prices when they say something more concise on when the rate cuts are coming," said Bob Haberkorn, senior market strategist at RJO Futures. "Gold is having a quiet session ahead of tomorrow's data. We need to see significantly better data that shows inflation is cooling for prices to move above the $2,050 mark."
Recent Fed commentary and hot inflation data has pushed bets of Fed's first rate cut to June, compared to March at the start of the year. Higher rates tend to discourage investment in non-yielding bullion.
Fed's John Williams said "while the economy has come a long way toward achieving better balance and reaching our 2% inflation goal, we are not there yet."
Federal Reserve Governor Christopher Waller said he would like the central bank to boost its share of short-term Treasuries. Also speaking Friday, Fed Bank of Chicago President Austan Goolsbee told CNBC he believes the Fed funds rate is quite restrictive. Separately, his Richmond counterpart Thomas Barkin said markets are pricing in fewer rate reductions in response to economic data. Dallas Fed chief counterpart Lorie Logan reiterated it’ll likely be appropriate to start slowing the pace at which it shrinks its balance sheet.
"Signs of a weaker economy would be expected to support gold as they imply greater pressure on central banks to cut interest rates," Frank Watson, market analyst at Kinesis Money, said in a note.
Gold scaled a one-month high on Thursday as the dollar slipped after U.S. inflation data came in line with expectations, with traders' attention turning to further commentary from Federal Reserve officials for cues on interest rate cuts. Data showed the U.S. personal consumption expenditures price index rose by 0.3% in January, while the core PCE price index gained 0.4%, pressuring the dollar.
"Gold bulls just needed an excuse to buy, and they found it," with the data only on consensus after recent strong inflation readings, said Tai Wong, a New York-based independent metals analyst, adding gold could face technical resistance around $2,065. "However, the Fed's preferred gauge of inflation running at 0.4% for the month won't bring a rate cut any closer than June," Wong added.
"The steady stream of Fed speak has noted that there's no rush in lowering rates and that news is priced into the market," said David Meger, director of metals trading at High Ridge Futures. "If there is a potential change that would allude to the idea of lowering interest rates even a smidgen sooner, it will be positive for gold."
Gold rose to the highest in nine weeks as disappointing US factory data and a drop in consumer sentiment reinforced bets on the possibility of interest-rate cuts later this year. Signs of a softening economy solidified expectations that the Federal Reserve will need to lower borrowing costs to help shore up the economy. Higher rates are typically negative for non-yielding bullion.
The precious metal has largely held above the key $2,000 level since mid-December on bets of the Fed’s pivot to monetary easing. That view hasn’t changed even though expectations of the timing and size of the central bank’s rate reduction varied against mixed US economic data recently.
Data released Friday showed a measure of US factory activity shrank at a faster pace in February as orders, production and employment contracted, suggesting manufacturing is struggling for momentum. Separate data showed US consumer sentiment fell in February for the first time in three months as current and expected views of the economy deteriorated. Treasury yields tumbled, helping send bullion higher by as much as 2.2%, the biggest intraday increase since Dec. 13.
Today’s rally “is likely short-cover driven as discretionary investors continue to be under-positioned in gold,” said Bart Melek, global head of commodity strategy at TD Securities. Melek sees bullion moving to $2,300 or higher “once there’s more certainty surrounding the timing and magnitude of the pending Fed pivot. In three-four months, prices will hit a record if we see poor economic data and the market is convinced that (the) Fed is ready to cut," he said, adding that strong central bank buying is also supporting the market currently.
Investors also kept a tab on news that New York Community Bancorp found "material weaknesses" in internal controls related to its loan review, adding to commercial real estate exposure woes.
"There's been consistent buying today behind weaker-than-expected data and somewhat friendly Fed commentary. The NYCB news after the close yesterday helped to set the table," said Tai Wong, a New York-based independent metals analyst.
Fish are on the menu as the World Trade Organization holds its 13th ministerial meeting in Abu Dhabi this week. Elsewhere, jet fuel demand in the US is picking up just in time for a busy travel season, while oil’s February advance is on the cusp of evaporating. A slew of energy industry conferences take place in London, including International Energy Week. Here are few notable charts and one map to consider in global commodity markets as the week gets underway, but we're mostly interested with precious metals here.
While gold has attracted much of the attention in precious metals circles amid its record rally, silver has been slumbering away in a tight range this year. At almost $23 an ounce, it’s more than halfway below its peak reached in 1980 and trading beneath two key moving averages (after forming a bearish death cross technical pattern earlier this month). Change could be on the horizon: Hedge funds flipped to net bullish from bearish, according to the latest US Commodity Futures Trading Commission data.
Economy condition
It is very difficult now to understand what is really going on. Every week we have new data and very often it stands contradictive to each other. Just two weeks ago Gold was under pressure due high CPI, while this week it has skyrocketed, driven by flat PCE and poor PMI numbers. So, in what direction we're moving? Also I would ask another question. Whether the Fed will act according to the numbers that they officially show, or, according to real situation? As we've estimated, they could show you pretty nice picture but with detailed looking it is found out that "the King is naked". Here are few updated numbers, there is no need to make any comments:
If we would take a look at "real numbers", it becomes obvious that economy is contracting, not only in the US but in EU and other G7 countries. Some of them are officially in recession already. And it has started not yesterday, but in 2021. Most important event of last week is collapse of Durable Goods orders for ~6%. This is the bottom since 2017, ex CV19 period. Drop has happened not only in orders by Purchase Managers. We see raising of reserves in retail sector as well, suggesting drop of consumer power:
Indeed, US consumer confidence fell in February for the first time in four months as Americans’ views deteriorated about the outlook for the economy, the job market and financial conditions. The Conference Board’s gauge of sentiment decreased to 106.7 from a downwardly revised 110.9 a month earlier, data published Tuesday showed. The February reading trailed all estimates in a Bloomberg survey of economists. A measure of expectations dropped to a three-month low, while the gauge of current conditions also slipped.
The structural crisis has reached a stable level, and the authorities are no longer trying to hide it, because it is absolutely impossible. The differences accumulated over the previous two years from reality (caused precisely by attempts to wishful thinking in the hope that the negative will quickly resolve) sometimes give "outbursts" of deterioration in indicators. But in general, as it should be in a structural rather than cyclical downturn, all significant indicators are consistently negative.
At the same time, there is no discussion of the reasons for this phenomenon in the public field. This suggests not only that liberal economics does not understand the causes of the structural crisis. The fact is that the topic of the crisis is blocked at the political level and there is an opinion that its discussion weakens the current political power in the G7 countries.
As it is clear, the lack of discussion of the problems and consequences of the economic crisis in the public field has an extremely negative impact on the ability of entrepreneurs to counteract it. In fact all recent most resonance political news in EU are due raising of internal pressure. The political elite are scare to acknowledge crisis, they do not know how to deal with it and what they have to do, they are not ready to turn this problem public and prepare population. This raises internal pressure that is released in a way of stupid statements or events, such as M. Macron's statement to send NATO troops to Ukraine, Germany scandal around Crimea Bridge, and constant talks about stealing of Russian frozen assets. These are signs of raising political crisis as well.
Germans' willingness to save has risen to its highest level since June 2008, while consumer morale remains low. Although earnings expectations have risen following the wage hike, buyers remain pessimistic about the German economy. In general sentiment in Germany remains depressed
A quick look at nominal GDP growth, which rose from $27.61 trillion in the third quarter to $27.94 trillion in the fourth quarter, shows that the US economy grew by about $334.5 billion in absolute nominal dollar terms. Then we go to the US Treasury website and find that the debt on September 30, 2023 was $33.16 Trln, and the debt on December 31, 2023 was $34 Trln. ️It turns out that every 2.5 dollars of debt gives only a 1 dollar of GDP growth.
Few other events point that situation in the US financial, and particularly banking sector is becoming tight. Here is just briefly, some events that illustrate situation.
- Canadian pension fund is selling a Manhattan office tower for $1;
- Fitch has downgraded New York Community Bancorp and its bank subsidiary Flagstar Bank to junk 'BB+' level;
- A hawkish Federal Reserve is narrowing the window on trades that some U.S. regional banks have been hoping to use to reduce their commercial real estate exposure, investors, analysts and lawyers said.
- The banking sector as a whole faces $441 billion of CRE loans maturing this year, according to Moody's Analytics, which expects the share of troubled loans to increase.
- Moody's Reidy said roughly 75%-80% of the maturing office loans included in securitized pools this year could have issues with timely payoff, leading to more charge-offs and delinquencies. "We expect more workouts and extensions by banks to delay losses this year," Reidy said.
"We don’t intend to take on higher risk entailed in CRE portfolios whose loss probability cannot be modeled easily as consumer or corporate loans," said Jason Walker, chief investment officer of asset backed securities at alternative credit firm CQS.
Maersk has warned of disruptions to container shipping via the Red Sea dragging into the second half of the year and of heavy congestion and delays for U.S.-bound goods.
Be prepared for the Red Sea situation to last into the second half of the year and build longer transit times into your supply chain planning," Maersk's head of North America, Charles van der Steene, said in a statement on Tuesday. Many customers factor a cost per unit into their budgeting, and if that fundamentally changes due to all of this volatility, it could have a big impact on overall costs," van der Steene said.
There are not less problems in Asia Pacific region. The segregation of economies stand underway. Chinese stimulus to re-fresh the economy bring no fruits by far. And the weakest point is a Real Estate sector. Deutsche Bank is preparing a liquidation lawsuit in Hong Kong against Chinese developer Shimao Group, two sources said, in a rare move by a foreign firm that comes amid rising credit defaults and China's deepening property sector crisis. They already start using political tools for economy stimulation and supporting of stock market. Hopes are high for fresh China stimulus when the National People's Congress begins its annual session on Tuesday, aimed at reviving a crumbling property sector, and invigorating moribund consumers given the worst deflation since the global financial crisis.
WSJ nightmares economy society, suggesting that China, to solve economic problems, is increasing the output of goods that significantly exceeded domestic demand, the countries of the world will face an influx of Chinese imports for the second time. Imports from China in the early 2000s lowered prices and destroyed American jobs. Perhaps a sequel is planned.
What official data tells us
Analysts are on the line and claim that the market entered 2023 expecting a recession, and into 2024 with the expectation of six Fed rate cuts. They believe the US economy is simply not slowing down and the Fed's turnaround has provided a strong tailwind for growth from December 2023.
The economy is not slowing down, but accelerating. Growth expectations for 2024 increased significantly after the Fed's reversal in December and the associated softening of financial conditions. Expectations of economic growth in the United States continue to be revised upward.
Financial conditions continue to improve after the Fed's reversal in December with record Investment Grade (high-quality bonds) issuance, high HY (high-risk/high-yield) issuance, increased IPO activity, increased M&A activity, as well as narrow credit spreads, and the stock market reaches new record highs. Given the significant improvement in financial conditions, it is not surprising that we saw strong non-farm employment and inflation figures in January, and we should expect this strength to continue.
The result of this "official" strong data, together with our investigation of inflationary background yesterday makes analysts to think that the Fed will remain focused on inflation fight first of all. So the caveat that they are made - no rate cut this year, because official data shows strong economy, while price indexes show increasing of inflationary pressure.
What could happen in reality
For some more time they could keep the rosy picture of economy, and support the legend of economy growth. Together with raising inflation this will make negative impact on gold. But as longer they try to hide the truth as more evident its breakout will be. Keeping silence the real deal in economy means the postponing of any efforts to fix it. And this start smelling like Stagflation instead of "soft landing". When the fairy tale will be over, hard crash will boost gold price, because inflation remains high, while the Fed will have to stop QT and cut the rate. Now the US mid&small banking sector and its significant imposing to CRE market seems like the weakest point that immediately will hurt the stock market. As we've estimated last week, based on the recent Fed reaction - they will go with the way of QE for resolving any problem. Because they do not have any more time to take serious gradual work on recovering of the economy. It is just ~ a half of the year until elections.