Sive Morten
Special Consultant to the FPA
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Fundamentals
This week gold mostly moves together with other markets, forming upside bounce after solid downside action. We've got real surprise this week, when after positive retail sales numbers stocks have been crushed by awful earning reports from retailers and outstanding J.Powell speech when he said that it is no limits for possible rate hike, if needed. These two moments just destroyed the stock market and provide chance to bounce for the others, including gold.
In general, gold has come under pressure since mid-March, when it was within touching distance of its previous record high. Since then, gold has fallen over US$200/oz, finding some support at the US$1,800/oz level. Over recent weeks net long positioning on COMEX has been declining and global gold ETFs have witnessed sizeable outflows.
Of course we keep watching for multiple US statistics, but the major driving factor for the gold is real interest rates level. Correspondingly the performance of the US national debt is vital for the performance of the gold market and we need to understand what is going on there. In general, gold feels good as long as real rates stand negative. Given the level of inflation, it is highly likely that real rates will remain negative. Analysis of gold’s performance during different US real interest rate scenarios shows that:
- gold thrives when real interest rates are negative but isn’t hampered when they are between 0%-4%
- gold is better at reducing portfolio risk during periods of moderate real rates, as it benefits from lower volatility and correlation to equities relative to periods of negative real rates.
*Computations based on monthly returns relative to different US real rate environments using data between January 1971 and April 2022.
Source: Bloomberg, World Gold Council
Another hot topic for the gold is performance of the Chinese economy. In recent few weeks we see fast deterioration of economy conditions, which has tendency to more acceleration, and it might become the 2nd driver for the gold as global economy could get the deadly hit from nobody is expected.
Market overview
Gold rose slightly as a retreat in U.S. Treasury yields offset headwinds from a relatively firm dollar, which, along with looming interest rate hikes, earlier pushed bullion to a more than three-and-a-half-month low. Gold's slight bounce was attributable to a dip in Treasury yields and a small pullback in the dollar, RJO Futures senior market strategist Bob Haberkorn said, adding that the overall trend for the dollar was "still high as the Fed is being aggressive with its rate hikes".
U.S. retail sales increased strongly in April, suggesting demand was holding strong despite high inflation and assuaging some fears that the economy was heading into recession. Gold seems to have come under some pressure since the data, said Ryan McKay, a commodity strategist at TD Securities.
The U.S. central bank will "keep pushing" to tighten policy until it is clear that inflation is declining, Fed chair Jerome Powell said on Tuesday, adding that the Fed would consider moving more aggressively if inflation doesn't come down in a "clear and convincing way.
Reflecting investor sentiment, holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust , were at their lowest since early March.
Automakers are accelerating efforts to use less palladium and more platinum due to worries over palladium supply from Russia, the World Platinum Investment Council (WPIC) said on Monday, predicting a large surplus in the platinum market this year. Automakers were already shifting to platinum, which is cheaper than palladium, to save money, but a faster transition would increase platinum demand and could lift prices while having the opposite effect on palladium.
At around $950 an ounce, platinum costs around half as much as palladium. Automakers use around 2.5-3 million ounces of platinum each year and around 8.5 million ounces of palladium. In its latest quarterly report, the WPIC said the roughly 8 million ounce a year platinum market would be oversupplied by 627,000 ounces this year following a surplus of 1.13 million ounces in 2021.
Major driving factors analysis
In two words speaking, guys, current problems in the US economy happen because too many people would like to consumer but too few would like to work. As the US just was given money for free within a year, printed approximately the half of its GDP - there is no way to normalize situation but make consumption power balanced to production. It means that the US citizens should consume two times less than they do now. Or, which is the same - the dollar should cost two times cheaper. That's why no Fed efforts with rising rate could resolve this problem. Because rising rate doesn't increase production. It does limit consumption but indirectly, making money more expensive, decreasing real income of the households. It means that inflation normalization comes only at the final point of the crisis, when prices stop rising because lack of demand among population, but not because of Fed rate change. This is long way to go still, as we're in the beginning.
To understand what is going on, we should take together recent J. Powell statement, stock market performance and some statistics. Recall what we've said last time - Fed critically needs cash to support bond market, they can't print any more as QE is already closed and they actually announced QT, which is the opposite programme. Thus, they have to absorb it from all other markets, with rising attractiveness (at least in theory) of national bonds. The first pig that is slaughtered - crypto currencies. 60% of its capitalization was taken away already, but this is the drop in the sea. Fed needs more...much more. Next one is a stock market, which is already stand under pressure. Despite relatively good retail sales report, retailers themselves, such as Target, Walmart have shown awful results. This has crushed the stock market on Tuesday. This data is a stormbinder of coming recession.
But take a look at the Fed, when do they do - J. Powell sees stocks problems but tells -
In fact they put final nail in the coffin of stocks, giving investors no options but run away out of it. By the way, stock market also stands two times overvalued in terms of P/E and other multiples to historical data, suggesting that its performance very close to the disbalance in the whole economy, and final should be similar as well - 2500 points on S&P now doesn't seem impossible. Sounds unbelievable? Take a look at this:
Just Fed has started to pump out liquidity in december - stocks collapsed for ~20%. But as you can see - it is still a lot of space to go. Despite that QT (Quantitative tightening) is publicly announced only since June 2022 - the liquidity drying started at the end of 2021, if we correctly take a look at other Fed tools like Repo etc. Since the Dec 2021, Fed and Treasuries have cut the liquidity approx. for 600 Bln, not too much compares to 5 Trln printed by different CV-19 programs.
Besides, Fed has huge problems with distribution of new issues of the bonds. We already mentioned it earlier. Demand stands weak, because the trust level is low and nobody wants to invest with "-8%" for ten years. In March-April the net issue was just around $29 Bln, while in May it was net retirement with ~37 Bln, which means that in recent three months Treasury was not able to sell "new " debt.
Besides, although Fed is talking about QT - it still keep printing money and buying bonds out of the market
For instance, last week, it balance has increased for $14 Bln, mostly because of buying MBS:
But, I'm already hear your grumble on "why you bother us with all this stuff" Indeed, what's the reason, and how it relates to the gold? It is simple. In fact, with announcement of "unlimited tightening", Fed indirectly announced liquidity drying out of all other markets and put it in the bonds. This will not resolve the problem because stock market has limited liquidity capacity, although it is large still, and second - bond market is too big. This just edure the US bond market agony and disguises its problem for some time, when investors still will be thinking on "safe haven" feature of Treasuries.
For the gold it has the same meaning. Gold market now is falling not because of lack of demand, but because it also falls under pressure of liquidity drying by the Fed. Investors in majority do not think yet about recession and "safe haven" but hunting for the bargain. Take a look - Berenberg economists say the chance of a mild U.S. recession is roughly 40%. But an index of U.S. financial conditions is still in loose territory and distance away from a pandemic-era high. So batten down the hatches and prepare for more pain. UK consumer moral hit its lowest since records began in 1974, data released Friday shows as well.
And though U.S. and European stock futures are rising on Friday after China cut its benchmark reference rate for mortgages to support a struggling economy, there is a growing fear that the world economy is lurching towards recession.
How we expect that situation starts to change
First is, we expect that deterioration process in the US economy becomes more evident in all spheres - consumption, production, inflation, sentiment, employment etc. when it becomes impossible to hide any more. For example, we see big chances that coming GDP release will drop in negative territory, although it is supposed to be positive now by market expectations.
The deteriorating of statistics will be accompanied with downside trend on the stock market, Fed keep rising fund rate while longer-term rates should be more or less stable, as money keep flowing from the stocks into bonds. The worsening economy conditions starts hurting "weak" companies with massive bankruptcies in junk bonds sector that should have bad consequences for the whole market, adding more to inflation as credit spreads should wide significantly.
Fed will spare neither strength nor resources to support this process, trying to last it until November elections. But the bond market is supposedly doomed. With no external inflows from EU and Japan (they have record trading and current balance deficit) and problems in China (see below), Fed can't keep going with its strategy to take liquidity out of other markets because of too negative bonds' return. Fed could stabilize situation only if rate becomes around 8-10%, but in this case economy just stumble and population falls in poverty.
Hence, the more realistic scenario, that once Fed ability to control situation starts exhausting, interest rates start climbing higher as investors demand more reward for the default risk, rather than because of Fed rate level. This should become the moment when gold start new upside trend. As we suggest 1.5-2 times US economy collapse, gold should rise approximately for the same rate within 2-3 years. This is the reason why we have to take a close eye on Fed statistics - balance, new debt auctions results and other.
about China...
Although China has outstanding economy but it too closely relates to the US, in fact, I would say it is focused on the US consumption. So, the US problems spread over the other partners, including China. China in fact, could start selling its USD reserves that mostly accumulated in the US Bonds. With about 1Trln in holdings, it could add significant pressure on the Fed, if situation in China will not stabilize soon, and we suggest that hardly this happens.
China cut its benchmark reference rate for mortgages by an unexpectedly wide margin on Friday, its second reduction this year as Beijing seeks to revive the ailing housing sector to prop up the economy. Many private-sector economists expect China's economy to shrink this quarter from a year earlier, compared with first quarter's 4.8% growth. Indicators from credit lending, industrial output and retail sales showed COVID-related stringent measures and mobility restrictions have taken a heavy toll.
A key drag on growth has been the property sector, which policymakers are seeking to turn around. Property and related industries such as construction account for more than a quarter of the economy. China's property sales in April fell at their fastest pace in around 16 years, while new new-home prices declined for the first time month-on-month since December, hurt by weak demand amid wide COVID-19 lockdowns.
Total lending to the real economy in China was significantly lower than expected in April, highlighting the negative economic fallout from the lockdowns and restrictions in place in a number of cities. Particular softness was evident in new renminbi bank loans. Household loans contracted amid falls in mortgage loans, consumer loans and business loans. With the economy looking extremely weak in the second quarter, further policy stimulus is highly likely from the authorities. The government’s 5.5% growth target for the year looks more difficult by the day.
There has been a steady drumbeat of dire economic news out of China in May, pointing to a contraction in the economy in the second quarter. This comes at a tricky time for President Xi who is trying to secure a third term as Chinese President later this year. Expectations were already low after the very gloomy picture painted at the beginning of the month by the purchasing-managers’ surveys, and yet the hard data this week still managed to surprise to the downside. Industrial output contracted by 2.9% on a twelve-month basis, with a seasonally adjusted monthly decline of over 7%. Retail sales dropped by more than 11% on a year-on-year basis, with a particularly sharp fall in car sales. Fixed-asset investment exhibited some resilience, rising 6.8% on a twelve-month basis, although this was weaker than in March. New bank lending registered its lowest monthly rise since December 2017.
The deterioration in the labour market has been striking, with Premier Li Keqiang describing the employment market as “complicated and grim”. The surveyed rate of urban unemployment has risen markedly over recent quarters and is now well above the early 2020 peak in 31 large cities. It is particularly elevated among 16-24-year-olds, rising from 14.3% in December to over 18% in April. This comes in a year when a record 11 million students are due to graduate from Chinese universities. The authorities will increasingly worry about the risks to social stability if unemployment continues to spike.
Perhaps unsurprisingly, housing activity remains firmly in the doldrums. In the first four months of the year, the areas of floor space started and sold were down 28% and 25% respectively compared with the same period in 2021, while the area of land purchased by real estate developers was almost 50% lower. This will add to pressures on local government finances, already hit by a weakening economy. The central bank cut its 5-year Loan Prime Rate by 15bps and has allowed financial institutions to lower mortgage rates by an additional 20bps for first-time buyers. Policymakers are in a tricky position. Their policies have created a massive bubble in the housing market over the past decade, which appears to be bursting. It may be difficult to prevent this without an aggressive easing in policy that changes the narrative on the outlook for the sector, but also risks inflating the bubble more.
Exports may provide less support to the economy than in recent years. Export growth slowed to just 3.8% on a twelve-month basis in April, compared to the bumper year in 2021 when exports increased by almost a third and net trade contributed 1.7 percentage points to annual growth. Some of the recent decline may signal slowing demand in overseas markets. Surging inflation and policy tightening could further hamper demand growth in key markets such as the US and Western Europe over coming quarters.
This also has political background. The sharp deterioration in the Chinese economy in the second quarter comes at a particularly tricky time for President Xi. He will be seeking a precedent-breaking third consecutive term as President of China at the upcoming National Party Congress, most likely in November. The political horse-trading around this and around key appointments to the Politburo and its Standing Committee is likely to be already in full flow. The odds are still in favour of Xi winning another five-year term, but he is looking much less of a sure bet than was the case just a month ago. If the economy continues to languish over coming quarters, then all bets could be off.
The anticipation of Fed liquidity drying process out of all markets and put it into the bonds let Rick Rieder, chief investment officer of global fixed income at Blackrock, the world’s largest asset manager, suggest stabilizing of the interest rates in summertime:
Rieder believes that a rise in Treasury yields, which move inversely to bond pieces and saw yields on the benchmark 10-year Treasury hit a 3-1/2-year high of 3.2% last week, is nearly over. Ten-year yields could hit an upper limit of possibly 3.25% to 3.5%, Rieder said, though he expects them to decline from those levels in the coming few months.
But, Longer-term, however, Rieder (BlackRock) believes the decades-long bull market in bonds is likely over. "We've seen the end of the bond bull market: There's a structurally higher inflation because of deglobalization, supply chain evolutions, stickier infrastructure costs,” he said.
Taking all this stuff together let us to conclude that everything goes with our plan with no necessity to adjust it by far. Terms could change a bit because this is dynamic process, but meantime we should be happy, because Fed policy gives us change to grab gold at very good price later in the year.
This week gold mostly moves together with other markets, forming upside bounce after solid downside action. We've got real surprise this week, when after positive retail sales numbers stocks have been crushed by awful earning reports from retailers and outstanding J.Powell speech when he said that it is no limits for possible rate hike, if needed. These two moments just destroyed the stock market and provide chance to bounce for the others, including gold.
In general, gold has come under pressure since mid-March, when it was within touching distance of its previous record high. Since then, gold has fallen over US$200/oz, finding some support at the US$1,800/oz level. Over recent weeks net long positioning on COMEX has been declining and global gold ETFs have witnessed sizeable outflows.
Of course we keep watching for multiple US statistics, but the major driving factor for the gold is real interest rates level. Correspondingly the performance of the US national debt is vital for the performance of the gold market and we need to understand what is going on there. In general, gold feels good as long as real rates stand negative. Given the level of inflation, it is highly likely that real rates will remain negative. Analysis of gold’s performance during different US real interest rate scenarios shows that:
- gold thrives when real interest rates are negative but isn’t hampered when they are between 0%-4%
- gold is better at reducing portfolio risk during periods of moderate real rates, as it benefits from lower volatility and correlation to equities relative to periods of negative real rates.
Gold’s performance under negative and moderate interest-rate conditions*
| Negative Real (<0%) | Moderate Real (0%-4%) |
|---|---|---|
| Annualized monthly return | 17.92% | 8.79% |
| Annualized volatility | 27.11% | 17.10% |
| Correlation to global equities | 0.21 | 0.06 |
Source: Bloomberg, World Gold Council
Another hot topic for the gold is performance of the Chinese economy. In recent few weeks we see fast deterioration of economy conditions, which has tendency to more acceleration, and it might become the 2nd driver for the gold as global economy could get the deadly hit from nobody is expected.
Market overview
Gold rose slightly as a retreat in U.S. Treasury yields offset headwinds from a relatively firm dollar, which, along with looming interest rate hikes, earlier pushed bullion to a more than three-and-a-half-month low. Gold's slight bounce was attributable to a dip in Treasury yields and a small pullback in the dollar, RJO Futures senior market strategist Bob Haberkorn said, adding that the overall trend for the dollar was "still high as the Fed is being aggressive with its rate hikes".
U.S. retail sales increased strongly in April, suggesting demand was holding strong despite high inflation and assuaging some fears that the economy was heading into recession. Gold seems to have come under some pressure since the data, said Ryan McKay, a commodity strategist at TD Securities.
The U.S. central bank will "keep pushing" to tighten policy until it is clear that inflation is declining, Fed chair Jerome Powell said on Tuesday, adding that the Fed would consider moving more aggressively if inflation doesn't come down in a "clear and convincing way.
Reflecting investor sentiment, holdings of the world's largest gold-backed exchange-traded fund, SPDR Gold Trust , were at their lowest since early March.
Automakers are accelerating efforts to use less palladium and more platinum due to worries over palladium supply from Russia, the World Platinum Investment Council (WPIC) said on Monday, predicting a large surplus in the platinum market this year. Automakers were already shifting to platinum, which is cheaper than palladium, to save money, but a faster transition would increase platinum demand and could lift prices while having the opposite effect on palladium.
At around $950 an ounce, platinum costs around half as much as palladium. Automakers use around 2.5-3 million ounces of platinum each year and around 8.5 million ounces of palladium. In its latest quarterly report, the WPIC said the roughly 8 million ounce a year platinum market would be oversupplied by 627,000 ounces this year following a surplus of 1.13 million ounces in 2021.
Major driving factors analysis
In two words speaking, guys, current problems in the US economy happen because too many people would like to consumer but too few would like to work. As the US just was given money for free within a year, printed approximately the half of its GDP - there is no way to normalize situation but make consumption power balanced to production. It means that the US citizens should consume two times less than they do now. Or, which is the same - the dollar should cost two times cheaper. That's why no Fed efforts with rising rate could resolve this problem. Because rising rate doesn't increase production. It does limit consumption but indirectly, making money more expensive, decreasing real income of the households. It means that inflation normalization comes only at the final point of the crisis, when prices stop rising because lack of demand among population, but not because of Fed rate change. This is long way to go still, as we're in the beginning.
To understand what is going on, we should take together recent J. Powell statement, stock market performance and some statistics. Recall what we've said last time - Fed critically needs cash to support bond market, they can't print any more as QE is already closed and they actually announced QT, which is the opposite programme. Thus, they have to absorb it from all other markets, with rising attractiveness (at least in theory) of national bonds. The first pig that is slaughtered - crypto currencies. 60% of its capitalization was taken away already, but this is the drop in the sea. Fed needs more...much more. Next one is a stock market, which is already stand under pressure. Despite relatively good retail sales report, retailers themselves, such as Target, Walmart have shown awful results. This has crushed the stock market on Tuesday. This data is a stormbinder of coming recession.
But take a look at the Fed, when do they do - J. Powell sees stocks problems but tells -
In fact they put final nail in the coffin of stocks, giving investors no options but run away out of it. By the way, stock market also stands two times overvalued in terms of P/E and other multiples to historical data, suggesting that its performance very close to the disbalance in the whole economy, and final should be similar as well - 2500 points on S&P now doesn't seem impossible. Sounds unbelievable? Take a look at this:
Just Fed has started to pump out liquidity in december - stocks collapsed for ~20%. But as you can see - it is still a lot of space to go. Despite that QT (Quantitative tightening) is publicly announced only since June 2022 - the liquidity drying started at the end of 2021, if we correctly take a look at other Fed tools like Repo etc. Since the Dec 2021, Fed and Treasuries have cut the liquidity approx. for 600 Bln, not too much compares to 5 Trln printed by different CV-19 programs.
Besides, Fed has huge problems with distribution of new issues of the bonds. We already mentioned it earlier. Demand stands weak, because the trust level is low and nobody wants to invest with "-8%" for ten years. In March-April the net issue was just around $29 Bln, while in May it was net retirement with ~37 Bln, which means that in recent three months Treasury was not able to sell "new " debt.
Besides, although Fed is talking about QT - it still keep printing money and buying bonds out of the market
For instance, last week, it balance has increased for $14 Bln, mostly because of buying MBS:But, I'm already hear your grumble on "why you bother us with all this stuff"
Indeed, what's the reason, and how it relates to the gold? It is simple. In fact, with announcement of "unlimited tightening", Fed indirectly announced liquidity drying out of all other markets and put it in the bonds. This will not resolve the problem because stock market has limited liquidity capacity, although it is large still, and second - bond market is too big. This just edure the US bond market agony and disguises its problem for some time, when investors still will be thinking on "safe haven" feature of Treasuries.For the gold it has the same meaning. Gold market now is falling not because of lack of demand, but because it also falls under pressure of liquidity drying by the Fed. Investors in majority do not think yet about recession and "safe haven" but hunting for the bargain. Take a look - Berenberg economists say the chance of a mild U.S. recession is roughly 40%. But an index of U.S. financial conditions is still in loose territory and distance away from a pandemic-era high. So batten down the hatches and prepare for more pain. UK consumer moral hit its lowest since records began in 1974, data released Friday shows as well.
And though U.S. and European stock futures are rising on Friday after China cut its benchmark reference rate for mortgages to support a struggling economy, there is a growing fear that the world economy is lurching towards recession.
How we expect that situation starts to change
First is, we expect that deterioration process in the US economy becomes more evident in all spheres - consumption, production, inflation, sentiment, employment etc. when it becomes impossible to hide any more. For example, we see big chances that coming GDP release will drop in negative territory, although it is supposed to be positive now by market expectations.
The deteriorating of statistics will be accompanied with downside trend on the stock market, Fed keep rising fund rate while longer-term rates should be more or less stable, as money keep flowing from the stocks into bonds. The worsening economy conditions starts hurting "weak" companies with massive bankruptcies in junk bonds sector that should have bad consequences for the whole market, adding more to inflation as credit spreads should wide significantly.
Fed will spare neither strength nor resources to support this process, trying to last it until November elections. But the bond market is supposedly doomed. With no external inflows from EU and Japan (they have record trading and current balance deficit) and problems in China (see below), Fed can't keep going with its strategy to take liquidity out of other markets because of too negative bonds' return. Fed could stabilize situation only if rate becomes around 8-10%, but in this case economy just stumble and population falls in poverty.
Hence, the more realistic scenario, that once Fed ability to control situation starts exhausting, interest rates start climbing higher as investors demand more reward for the default risk, rather than because of Fed rate level. This should become the moment when gold start new upside trend. As we suggest 1.5-2 times US economy collapse, gold should rise approximately for the same rate within 2-3 years. This is the reason why we have to take a close eye on Fed statistics - balance, new debt auctions results and other.
about China...
Although China has outstanding economy but it too closely relates to the US, in fact, I would say it is focused on the US consumption. So, the US problems spread over the other partners, including China. China in fact, could start selling its USD reserves that mostly accumulated in the US Bonds. With about 1Trln in holdings, it could add significant pressure on the Fed, if situation in China will not stabilize soon, and we suggest that hardly this happens.
China cut its benchmark reference rate for mortgages by an unexpectedly wide margin on Friday, its second reduction this year as Beijing seeks to revive the ailing housing sector to prop up the economy. Many private-sector economists expect China's economy to shrink this quarter from a year earlier, compared with first quarter's 4.8% growth. Indicators from credit lending, industrial output and retail sales showed COVID-related stringent measures and mobility restrictions have taken a heavy toll.
A key drag on growth has been the property sector, which policymakers are seeking to turn around. Property and related industries such as construction account for more than a quarter of the economy. China's property sales in April fell at their fastest pace in around 16 years, while new new-home prices declined for the first time month-on-month since December, hurt by weak demand amid wide COVID-19 lockdowns.
Total lending to the real economy in China was significantly lower than expected in April, highlighting the negative economic fallout from the lockdowns and restrictions in place in a number of cities. Particular softness was evident in new renminbi bank loans. Household loans contracted amid falls in mortgage loans, consumer loans and business loans. With the economy looking extremely weak in the second quarter, further policy stimulus is highly likely from the authorities. The government’s 5.5% growth target for the year looks more difficult by the day.
There has been a steady drumbeat of dire economic news out of China in May, pointing to a contraction in the economy in the second quarter. This comes at a tricky time for President Xi who is trying to secure a third term as Chinese President later this year. Expectations were already low after the very gloomy picture painted at the beginning of the month by the purchasing-managers’ surveys, and yet the hard data this week still managed to surprise to the downside. Industrial output contracted by 2.9% on a twelve-month basis, with a seasonally adjusted monthly decline of over 7%. Retail sales dropped by more than 11% on a year-on-year basis, with a particularly sharp fall in car sales. Fixed-asset investment exhibited some resilience, rising 6.8% on a twelve-month basis, although this was weaker than in March. New bank lending registered its lowest monthly rise since December 2017.
The deterioration in the labour market has been striking, with Premier Li Keqiang describing the employment market as “complicated and grim”. The surveyed rate of urban unemployment has risen markedly over recent quarters and is now well above the early 2020 peak in 31 large cities. It is particularly elevated among 16-24-year-olds, rising from 14.3% in December to over 18% in April. This comes in a year when a record 11 million students are due to graduate from Chinese universities. The authorities will increasingly worry about the risks to social stability if unemployment continues to spike.
Perhaps unsurprisingly, housing activity remains firmly in the doldrums. In the first four months of the year, the areas of floor space started and sold were down 28% and 25% respectively compared with the same period in 2021, while the area of land purchased by real estate developers was almost 50% lower. This will add to pressures on local government finances, already hit by a weakening economy. The central bank cut its 5-year Loan Prime Rate by 15bps and has allowed financial institutions to lower mortgage rates by an additional 20bps for first-time buyers. Policymakers are in a tricky position. Their policies have created a massive bubble in the housing market over the past decade, which appears to be bursting. It may be difficult to prevent this without an aggressive easing in policy that changes the narrative on the outlook for the sector, but also risks inflating the bubble more.
Exports may provide less support to the economy than in recent years. Export growth slowed to just 3.8% on a twelve-month basis in April, compared to the bumper year in 2021 when exports increased by almost a third and net trade contributed 1.7 percentage points to annual growth. Some of the recent decline may signal slowing demand in overseas markets. Surging inflation and policy tightening could further hamper demand growth in key markets such as the US and Western Europe over coming quarters.
This also has political background. The sharp deterioration in the Chinese economy in the second quarter comes at a particularly tricky time for President Xi. He will be seeking a precedent-breaking third consecutive term as President of China at the upcoming National Party Congress, most likely in November. The political horse-trading around this and around key appointments to the Politburo and its Standing Committee is likely to be already in full flow. The odds are still in favour of Xi winning another five-year term, but he is looking much less of a sure bet than was the case just a month ago. If the economy continues to languish over coming quarters, then all bets could be off.
The anticipation of Fed liquidity drying process out of all markets and put it into the bonds let Rick Rieder, chief investment officer of global fixed income at Blackrock, the world’s largest asset manager, suggest stabilizing of the interest rates in summertime:
Rieder believes that a rise in Treasury yields, which move inversely to bond pieces and saw yields on the benchmark 10-year Treasury hit a 3-1/2-year high of 3.2% last week, is nearly over. Ten-year yields could hit an upper limit of possibly 3.25% to 3.5%, Rieder said, though he expects them to decline from those levels in the coming few months.
But, Longer-term, however, Rieder (BlackRock) believes the decades-long bull market in bonds is likely over. "We've seen the end of the bond bull market: There's a structurally higher inflation because of deglobalization, supply chain evolutions, stickier infrastructure costs,” he said.
Taking all this stuff together let us to conclude that everything goes with our plan with no necessity to adjust it by far. Terms could change a bit because this is dynamic process, but meantime we should be happy, because Fed policy gives us change to grab gold at very good price later in the year.
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