Sive Morten
Special Consultant to the FPA
- Messages
- 18,630
Fundamentals
As we've mentioned in our FX weekly report, recent NFP data has made the bomb effect, making happy those who have bets against dollar on many assets and discourage the ones who are watching for inflationary pressure and expecting soon change in Fed policy. As we understand - gold traders stand in the first group.
But let's go step by step...
Market overview
Gold jumped more than 1% en route to its best week since November after an unexpected drop in U.S. jobs growth in April hastened a retreat in the dollar and Treasury yields. The dollar extended declines, while U.S. Treasury yields also retreated, lowering the opportunity cost of holding non-interest bearing bullion.
With the “complete miss on the (jobs) number,” yields are going to compress and the dollar also fell, allowing gold to shoot up, said Phillip Streible, chief market strategist, Blue Line Futures in Chicago. But gold’s rally may be short lived since next month’s jobs data could show a “blow out” number, Streible added.
April’s nonfarm payrolls rose by only 266,000 jobs, with employers likely frustrated by labor shortages as the economy reopens.
“This report at least temporarily throws some cold water on notions the Federal Reserve may be forced to raise interest rates much sooner than many expected,” Kitco Metals senior analyst Jim Wyckoff said in a note.
Gold could push towards $1,857, followed by the $1,925 resistance level, Edward Moya, senior market analyst at OANDA, said in a note.
In the beginning of the week Powell said that the U.S. economy is doing better, but is "not out of the woods yet," in remarks that flagged an upcoming central bank study documenting the disproportionate blow suffered by the less educated and working parents during the coronavirus downturn.
U.S. manufacturing activity grew at a slower pace in April, restrained by shortages of inputs as rising vaccinations against COVID-19 and massive fiscal stimulus unleashed pent-up demand.
U.S. Treasury Secretary Janet Yellen said on Tuesday, even before NFP poor numbers, that she does not anticipate that inflation will be a problem for the U.S. economy, as price increases during the recovery should be transitory. Yellen, speaking to a Wall Street Journal event, clarified earlier remarks that interest rates may need to rise modestly to prevent the economy from overheating. “It’s not something I’m predicting or recommending,” she said.
U.S. Treasury yields drifted lower on Wednesday as inflation expectations leaped to multi-year highs even as Federal Reserve officials downplayed the risk of a big and sustained rise in inflation. The move higher in breakeven rates came as Fed officials tried to allay fears of runaway inflation as the economy recovers from the coronavirus pandemic.
The breakeven rate on 10-year Treasury Inflation-Protected Securities (TIPS) topped 2.47%, its highest level since April 2013, indicating the markets sees inflation averaging closer to 2.5% a year for the next decade. For five-year TIPS, the breakeven inflation rate hit 2.695%, its highest since April 2011.
Ben Jeffery, a strategist at BMO Capital Markets in New York, attributed the spikes "to signs that some of the pockets of inflation that we're seeing are starting flow through to costs being paid in the service sector."
Data from the Institute for Supply Management on Wednesday showed prices paid by services industries rose to 76.8, the highest reading since July 2008, from 74.0 in March.
"Despite the ebbs and flows of the data, inflation is expected to remain close to 2 percent over the forecast horizon," Boston Federal Reserve Bank President Eric Rosengren said. "This does seem to me to be the most likely outcome, which should allow monetary policymakers to be patient in removing accommodation."
In its quarterly refunding announcement, the Treasury Department said it will keep its issuance of notes and bonds steady, with sales of $58 billion of three-year notes, $41 billion of 10-year notes, and $27 billion of 30-year bonds scheduled for next week. It added that it may take certain extraordinary measures if Congress does not raise or suspend the U.S. debt limit in a timely manner and that it expects to have a cash balance of around $450 billion when the debt limit suspension expires on July 31.
The U.S. economy may be growing more quickly and unemployment falling faster than the core of Fed policymakers projected in March, Fed Governor Michelle Bowman said on Wednesday.
However, Chicago Fed President Charles Evans reiterated his worries about reaching the 2% inflation goal and said he expected monetary policy to stay accommodative for some time.
Market is pricing in a ‘more distant’ probability of a Fed rate hike after clarifications on Treasury Secretary Janet Yellen’s remarks,” said Quantitative Commodity Research Analyst Peter Fertig. That has been supportive for gold, with yields on long-term government bonds declining again and the dollar weakening,” Fertig added.
Gold also largely held its course after the Bank of England said it would slow the pace of its bond-buying as it sharply increased its forecast for Britain’s economic growth this year. However, the central bank stressed it was not tightening monetary policy.
On the technical front, a clear break above the $1,800 level would open space for further recoveries in gold, Carlo Alberto De Casa, chief analyst at ActivTrades said in a note.
U.S. investors who had been betting the Fed would raise rates as early as the end of next year abruptly retreated from those positions on Friday after a disappointing April employment report and now see the earliest the Fed might tighten roughly two years away. The push back in expectations for when the Fed might start raising rates also means any reduction in the pace of its bond buying - which the Fed has said will begin first - may also occur later than some investors had been betting.
"It was a rude awakening. It could be what the Fed is worried about, that we're going to continue to see uneven numbers and it's not just going to be smooth sailing," said George Goncalves, head of U.S. macro strategy at MUFG.
Following April's meeting, investors were betting the Fed would raise rates in late 2022 or early 2023 and would offer clues about tapering its $120 million in monthly asset purchases as soon as June 2021.
U.S. interest rate futures on Friday, however, showed that traders pushed out expectations of a rate hike by roughly three months after Friday morning's payrolls report. Eurodollar futures, a proxy for interest rate expectations, showed a 90% chance of an interest rate hike in March 2023, and fully priced in a hike in June 2023. Prior to the report, investors were betting there was a 90% chance of a hike in December 2022, and a 100% chance in March 2023.
Goncalves said that "we would probably need two to three more months like this to push back tapering."
Investors still see the Fed needing to lay out a roadmap to tapering. Rick Rieder, BlackRock’s chief investment officer of global fixed income, said in a note that conditions "argue for at least beginning to lay out a plan for asset purchase tapering, even if the Fed is more likely to hold off on this transition for now."
The change in interest rate expectations brings the market more in line with the Fed's dovish approach to the coronavirus pandemic recovery. Though economic data has been improving, the Fed has said it has no plans to raise rates until maximum employment is achieved.
"I don't believe this report changes the calculus of Powell or the core FOMC," said Gregory Whiteley, portfolio manager at DoubleLine Capital. The Fed is looking for maximum employment. They've said it will take quite a while to get there. Today reinforces that idea - although a lack of strong GDP growth does not appear to be behind today's disappointment."
COT Report
This report was published before NFP data and doesn't include yet its effect. Thus, as for the middle of the week, overall position barely has changed. Open interest has increased slightly and traders have closed some shorts before NFP data, but in general overall position remains the same.
It is understandable euphoria around recent NFP report as many traders have made good results on it and inspired to continue. We also are pleased by unexpected bad numbers as it perfectly fits to our long-term technical view, when we expect still a bit more time, approximately 2-4 months until inflation runs up with the markets. As we've said in our FX report - we should be reasonable on this result and do not overestimate its effect. This is just a single number in a rather long chain of very positive statistics. Even this week we've got jump in retail sales for 2.4% that was few times greater than expectations. On previous week it was GDP and Consumption data. Sentiment also stands at all time highs, such as PMI index.
Current situation just shows that market has itching ears and blow up the sensation, making long-term plans for any more or less important event. We, in turn, should put the data in a sequence of events and correctly understand its place and value. For example, indeed NFP has shown 3-4 times less numbers, but have you paid attention to unemployment that decreased, hourly earnings (i.e. wage inflation) that have increased above the expectations?
Our opinion that too many statistic numbers of different spheres show that economy is rising, as well as inflation. It means that sooner rather than later everything will get back on track. But thanks to surprises of this kind, such markets as gold that are sensitive to interest rates, have chance to stay on the surface and even climb higher. This is actually that we've said last week as well.
That's being said, in short-term, this is great background for the gold that boost the sentiment and let market to climb higher. While in the longer-term view everything mostly remains the same as this is swan song for the gold and last rally before the start of long-term downside trend.
Technicals
Monthly
Finally gold shows the performance that makes impact on charts, at least on short-term.
Recent rally has made a lot of noise locally, but higher time frames stand the same by far. Market shows nice performance in April and May, finally breaking above YPP, but context on monthly chart remains bearish due multiple factors - MACD trend stands bearish, downside action shows acceleration on CD leg. Currently price is coiling around most popular $1850 target. Moving above YPP brings more confidence that gold could proceed higher in short-term, but we should not fall in rush, because currently upward action is just a retracement from downside swing. As it was mentioned above, in a case of 1850$ breakout next target supposedly should be around 1925$ area.
Unfortunately gold is dependable asset right now and its performance tightly related to interest rates. Last week we've estimated that ability to reach 1850$ corresponds to 1.5% level breakout by 10-year interest rates.
Weekly
By looking at weekly chart, indeed - next target stands around 1922-1925$ area it is formed by next major 5/8 Fib resistance level and daily overbought. On Friday gold has completed classic upside target of rectangle breakout when it equals to its height and stands precisely around 1850$. Trend stands bullish here.
Meantime, gold has not finally broken the K-area and has to make additional effort to complete this. On lower time frames we could watch for bullish patterns and pullback for taking long position
Daily
It seems that on daily chart market is aiming on XOP target around 1853$ that has not been hit yet. Partially because of overbought level. Once XOP will be hit market should get downside response on strong resistance area - K-level and Agreement. It means that currently we could have two different plans. For short-term, until market is not completed XOP - we could consider very small retracements to buy the gold and out at XOP. In more extended plan we're watching for stronger downside retracement after XOP will be hit. Once long position will be opened we focus on next, 1925$ target.
Intraday
On intraday charts we could consider only first trading plan by far. As we've set the target above, now let's take a look where position might be opened. Definitely it should not be too deep retracement until XOP is reached. Thus, we're not interested in too far standing levels.
In general intraday setup is very similar to EUR/USD that we've considered yesterday. First of all, definitely the recent rally has to stay intact, otherwise context for trading will be destroyed. Second - downside retracement should not be too extended, because market is still going to the major target. I wouldn't consider right now levels that are outside of recent swing up.
Still, retracement could reach 1810-1815 area because of daily Overbought. Besides, market is still at daily K-area. In this case we could get nice B&B "Buy" around K-support level. Let's make it as our primary short-term scenario. Alternatively, retracement might be either too small, to the nearest 1822 level only or more extended - right back to 1800$ area. But they have less probability by our view. Besides, retracement to 1800$ area doesn't deny B&B action first - market could complete B&B target and then turn to deeper retracement.
As we've mentioned in our FX weekly report, recent NFP data has made the bomb effect, making happy those who have bets against dollar on many assets and discourage the ones who are watching for inflationary pressure and expecting soon change in Fed policy. As we understand - gold traders stand in the first group.
But let's go step by step...
Market overview
Gold jumped more than 1% en route to its best week since November after an unexpected drop in U.S. jobs growth in April hastened a retreat in the dollar and Treasury yields. The dollar extended declines, while U.S. Treasury yields also retreated, lowering the opportunity cost of holding non-interest bearing bullion.
With the “complete miss on the (jobs) number,” yields are going to compress and the dollar also fell, allowing gold to shoot up, said Phillip Streible, chief market strategist, Blue Line Futures in Chicago. But gold’s rally may be short lived since next month’s jobs data could show a “blow out” number, Streible added.
April’s nonfarm payrolls rose by only 266,000 jobs, with employers likely frustrated by labor shortages as the economy reopens.
“This report at least temporarily throws some cold water on notions the Federal Reserve may be forced to raise interest rates much sooner than many expected,” Kitco Metals senior analyst Jim Wyckoff said in a note.
Gold could push towards $1,857, followed by the $1,925 resistance level, Edward Moya, senior market analyst at OANDA, said in a note.
In the beginning of the week Powell said that the U.S. economy is doing better, but is "not out of the woods yet," in remarks that flagged an upcoming central bank study documenting the disproportionate blow suffered by the less educated and working parents during the coronavirus downturn.
U.S. manufacturing activity grew at a slower pace in April, restrained by shortages of inputs as rising vaccinations against COVID-19 and massive fiscal stimulus unleashed pent-up demand.
U.S. Treasury Secretary Janet Yellen said on Tuesday, even before NFP poor numbers, that she does not anticipate that inflation will be a problem for the U.S. economy, as price increases during the recovery should be transitory. Yellen, speaking to a Wall Street Journal event, clarified earlier remarks that interest rates may need to rise modestly to prevent the economy from overheating. “It’s not something I’m predicting or recommending,” she said.
U.S. Treasury yields drifted lower on Wednesday as inflation expectations leaped to multi-year highs even as Federal Reserve officials downplayed the risk of a big and sustained rise in inflation. The move higher in breakeven rates came as Fed officials tried to allay fears of runaway inflation as the economy recovers from the coronavirus pandemic.
The breakeven rate on 10-year Treasury Inflation-Protected Securities (TIPS) topped 2.47%, its highest level since April 2013, indicating the markets sees inflation averaging closer to 2.5% a year for the next decade. For five-year TIPS, the breakeven inflation rate hit 2.695%, its highest since April 2011.
Ben Jeffery, a strategist at BMO Capital Markets in New York, attributed the spikes "to signs that some of the pockets of inflation that we're seeing are starting flow through to costs being paid in the service sector."
Data from the Institute for Supply Management on Wednesday showed prices paid by services industries rose to 76.8, the highest reading since July 2008, from 74.0 in March.
"Despite the ebbs and flows of the data, inflation is expected to remain close to 2 percent over the forecast horizon," Boston Federal Reserve Bank President Eric Rosengren said. "This does seem to me to be the most likely outcome, which should allow monetary policymakers to be patient in removing accommodation."
In its quarterly refunding announcement, the Treasury Department said it will keep its issuance of notes and bonds steady, with sales of $58 billion of three-year notes, $41 billion of 10-year notes, and $27 billion of 30-year bonds scheduled for next week. It added that it may take certain extraordinary measures if Congress does not raise or suspend the U.S. debt limit in a timely manner and that it expects to have a cash balance of around $450 billion when the debt limit suspension expires on July 31.
The U.S. economy may be growing more quickly and unemployment falling faster than the core of Fed policymakers projected in March, Fed Governor Michelle Bowman said on Wednesday.
However, Chicago Fed President Charles Evans reiterated his worries about reaching the 2% inflation goal and said he expected monetary policy to stay accommodative for some time.
Market is pricing in a ‘more distant’ probability of a Fed rate hike after clarifications on Treasury Secretary Janet Yellen’s remarks,” said Quantitative Commodity Research Analyst Peter Fertig. That has been supportive for gold, with yields on long-term government bonds declining again and the dollar weakening,” Fertig added.
Gold also largely held its course after the Bank of England said it would slow the pace of its bond-buying as it sharply increased its forecast for Britain’s economic growth this year. However, the central bank stressed it was not tightening monetary policy.
On the technical front, a clear break above the $1,800 level would open space for further recoveries in gold, Carlo Alberto De Casa, chief analyst at ActivTrades said in a note.
U.S. investors who had been betting the Fed would raise rates as early as the end of next year abruptly retreated from those positions on Friday after a disappointing April employment report and now see the earliest the Fed might tighten roughly two years away. The push back in expectations for when the Fed might start raising rates also means any reduction in the pace of its bond buying - which the Fed has said will begin first - may also occur later than some investors had been betting.
"It was a rude awakening. It could be what the Fed is worried about, that we're going to continue to see uneven numbers and it's not just going to be smooth sailing," said George Goncalves, head of U.S. macro strategy at MUFG.
Following April's meeting, investors were betting the Fed would raise rates in late 2022 or early 2023 and would offer clues about tapering its $120 million in monthly asset purchases as soon as June 2021.
U.S. interest rate futures on Friday, however, showed that traders pushed out expectations of a rate hike by roughly three months after Friday morning's payrolls report. Eurodollar futures, a proxy for interest rate expectations, showed a 90% chance of an interest rate hike in March 2023, and fully priced in a hike in June 2023. Prior to the report, investors were betting there was a 90% chance of a hike in December 2022, and a 100% chance in March 2023.
Goncalves said that "we would probably need two to three more months like this to push back tapering."
Investors still see the Fed needing to lay out a roadmap to tapering. Rick Rieder, BlackRock’s chief investment officer of global fixed income, said in a note that conditions "argue for at least beginning to lay out a plan for asset purchase tapering, even if the Fed is more likely to hold off on this transition for now."
The change in interest rate expectations brings the market more in line with the Fed's dovish approach to the coronavirus pandemic recovery. Though economic data has been improving, the Fed has said it has no plans to raise rates until maximum employment is achieved.
"I don't believe this report changes the calculus of Powell or the core FOMC," said Gregory Whiteley, portfolio manager at DoubleLine Capital. The Fed is looking for maximum employment. They've said it will take quite a while to get there. Today reinforces that idea - although a lack of strong GDP growth does not appear to be behind today's disappointment."
COT Report
This report was published before NFP data and doesn't include yet its effect. Thus, as for the middle of the week, overall position barely has changed. Open interest has increased slightly and traders have closed some shorts before NFP data, but in general overall position remains the same.
It is understandable euphoria around recent NFP report as many traders have made good results on it and inspired to continue. We also are pleased by unexpected bad numbers as it perfectly fits to our long-term technical view, when we expect still a bit more time, approximately 2-4 months until inflation runs up with the markets. As we've said in our FX report - we should be reasonable on this result and do not overestimate its effect. This is just a single number in a rather long chain of very positive statistics. Even this week we've got jump in retail sales for 2.4% that was few times greater than expectations. On previous week it was GDP and Consumption data. Sentiment also stands at all time highs, such as PMI index.
Current situation just shows that market has itching ears and blow up the sensation, making long-term plans for any more or less important event. We, in turn, should put the data in a sequence of events and correctly understand its place and value. For example, indeed NFP has shown 3-4 times less numbers, but have you paid attention to unemployment that decreased, hourly earnings (i.e. wage inflation) that have increased above the expectations?
Our opinion that too many statistic numbers of different spheres show that economy is rising, as well as inflation. It means that sooner rather than later everything will get back on track. But thanks to surprises of this kind, such markets as gold that are sensitive to interest rates, have chance to stay on the surface and even climb higher. This is actually that we've said last week as well.
That's being said, in short-term, this is great background for the gold that boost the sentiment and let market to climb higher. While in the longer-term view everything mostly remains the same as this is swan song for the gold and last rally before the start of long-term downside trend.
Technicals
Monthly
Finally gold shows the performance that makes impact on charts, at least on short-term.
Recent rally has made a lot of noise locally, but higher time frames stand the same by far. Market shows nice performance in April and May, finally breaking above YPP, but context on monthly chart remains bearish due multiple factors - MACD trend stands bearish, downside action shows acceleration on CD leg. Currently price is coiling around most popular $1850 target. Moving above YPP brings more confidence that gold could proceed higher in short-term, but we should not fall in rush, because currently upward action is just a retracement from downside swing. As it was mentioned above, in a case of 1850$ breakout next target supposedly should be around 1925$ area.
Unfortunately gold is dependable asset right now and its performance tightly related to interest rates. Last week we've estimated that ability to reach 1850$ corresponds to 1.5% level breakout by 10-year interest rates.
Weekly
By looking at weekly chart, indeed - next target stands around 1922-1925$ area it is formed by next major 5/8 Fib resistance level and daily overbought. On Friday gold has completed classic upside target of rectangle breakout when it equals to its height and stands precisely around 1850$. Trend stands bullish here.
Meantime, gold has not finally broken the K-area and has to make additional effort to complete this. On lower time frames we could watch for bullish patterns and pullback for taking long position
Daily
It seems that on daily chart market is aiming on XOP target around 1853$ that has not been hit yet. Partially because of overbought level. Once XOP will be hit market should get downside response on strong resistance area - K-level and Agreement. It means that currently we could have two different plans. For short-term, until market is not completed XOP - we could consider very small retracements to buy the gold and out at XOP. In more extended plan we're watching for stronger downside retracement after XOP will be hit. Once long position will be opened we focus on next, 1925$ target.
Intraday
On intraday charts we could consider only first trading plan by far. As we've set the target above, now let's take a look where position might be opened. Definitely it should not be too deep retracement until XOP is reached. Thus, we're not interested in too far standing levels.
In general intraday setup is very similar to EUR/USD that we've considered yesterday. First of all, definitely the recent rally has to stay intact, otherwise context for trading will be destroyed. Second - downside retracement should not be too extended, because market is still going to the major target. I wouldn't consider right now levels that are outside of recent swing up.
Still, retracement could reach 1810-1815 area because of daily Overbought. Besides, market is still at daily K-area. In this case we could get nice B&B "Buy" around K-support level. Let's make it as our primary short-term scenario. Alternatively, retracement might be either too small, to the nearest 1822 level only or more extended - right back to 1800$ area. But they have less probability by our view. Besides, retracement to 1800$ area doesn't deny B&B action first - market could complete B&B target and then turn to deeper retracement.
