Sive Morten
Special Consultant to the FPA
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Fundamentals
So let's keep up our analysis. In gold market report we take a look at some political issues and global markets - bonds, stocks in general. Yesterday we've discussed specific moments of coming collapse on global bond market. UK has become the first bell, Fed now publicly acknowledges liquidity problems on US bond market. Fed shows operational loss because of huge demand from commercial banks (~ $2.2 Trln) for liquidity and reverse RePo trades. And this liquidity drought will increase. Additionally we see USD swaps with SNB, supposedly to support following Credit Suisse and UBS banks. In general, crisis processes are accelerating.
Market overview
Gold pared early declines after hotter-than-expected US inflation data set the stage for more aggressive interest-rate hikes by the Federal Reserve. The rebound in bullion came as the dollar sank and the British pound climbed amid reports that the UK government officials are working on a U-turn of the sweeping tax cuts proposed by Prime Minister Liz Truss. A softer dollar boosted the precious metal which is priced in the greenback.
Earlier, gold tumbled the most in more than two weeks following higher-than-expected inflation data in the US. The core consumer price index, which excludes food and energy, increased 6.6% from a year ago, the highest level since 1982, Labor Department data showed Thursday. Overall CPI increased 0.4% last month, and was up 8.2% from a year earlier.
The Fed’s aggressive moves have strained bond and currency markets around the world this year, while failing to significantly cool the US labor market. It has also hurt gold, sending it down almost 20% from its March peak. Now the US central bank looks set to carry on more big hikes, the precious metal could come under further pressure.
Officials from the US central bank have committed to raising interest rates to a restrictive level in the near future, although some emphasized the importance of calibrating the increases to mitigate risk.
There are two major events this week, guys, CPI report and Fed minutes. By the way, sharp reversal on the markets that has happened right after CPI downside reaction, was triggered partially by Fed minutes, partially because of comments from CEO's of big commercial banks. Fed minutes shows that some members still have doubts that Fed should follow with hard hawkish policy - maybe it makes sense stay on hold for awhile and see how economy reacts. Commercial banks top manages also have given a hint that sharp rising of the interest rate makes negative impact on Bank's provisions and profit margins. We briefly talked about it last week. Banks already have increased provisions for $4 Bln, and this is just a preparation for possible negative consequences. BoE already said that defaults on mortgage loans will increase.
CPI/PPI numbers stand above expectations. It is not the number is important per se, but the fact itself - whatever Fed is doing, inflation stands strong and even rising, despite that now we already have 3.5% Fed rate.
We have the following compounding of CPI numbers - ▪ Heating oil: +58.1%; ▪ Gas utilities: +33.1%; Gasoline: +18.2%; Electricity: +15.5%;
Transport: +14.6%; Homemade food: +13.0%; New cars: +9.4%; Food away from home: 8.5%; Used cars: +7.2%; Medical care: +6.5%
High level of energy and electricity inflation is not a surprise. As we've said previously it should have tendency to decreasing soon by two reasons. First is, global economy is slowing down, thus, demand for energy is dropping, while extraction stands around the same levels. Thus, demand for energy will drop as well. Second - fewer and fewer companies could buy energy resources with the price that we have. So hydrocarbons inflation should converge the average level of 6.5-8%.
Most important thing in report is food and transport inflation that I suspect better reflects the real inflation level. Transportation is everything. To buy or sell something you need first to deliver it and shipping price always will be the part of final price of the goods. And Transportation will make long lasting negative effect on average inflation level. We suggest that inflation level is manipulated now, supposedly it should be higher, standing around 10-11%. But take a look what White House tells -
So we need to adjust it a bit, to make it show that inflation stands at 2 %.
Speaking on Fed minutes here are major conclusions:
Participants agreed that at some point it would be advisable to slow down the pace of rate increases when assessing the cumulative effects of policy adjustments.
Fed officials have decided that they need to adopt and maintain more restrictive policies in order to achieve their goal of reducing elevated inflation.
Many participants expressed their assessment of the ways of federal funding needed to achieve the goals of the committee.
Many participants indicated that once the policy reaches a sufficiently restrictive level, it would be advisable to keep it at this level for a certain period of time.
Several countries need to calibrate Fed tightening to reduce risk
Many participants emphasized that the costs of doing too little to reduce inflation outweigh the costs of doing too much.
It would be extremely important to adjust the pace of further tightening in order to reduce the risk of significant adverse effects on the economic outlook.
As the policy becomes more restrictive, the risks will become more two-sided.
Acknowledge the importance of maintaining a restrictive position for as long as necessary.
Unemployment may rise above forecast
The tightening of monetary policy in other countries may have an impact on the US economy through side effects.
Several officials mentioned the risk of spiraling wages and prices.
BofA warns that the US economy will start to lose 175,000 jobs during Q1 of 2023, expects a ‘harder landing’ rather than a softer one. Bank of America, expects that nonfarm payroll gains to be cut in half in Q4 of 2022 and turn negative in 2023. During the first quarter of 2023, the bank projects that the U.S. will be losing roughly 175,000 jobs a month. And it’s not just the labor market that’s going to take a hit.
Given this labor market strength and rampant inflation, the Fed is raising interest rates aggressively to bring price levels under control. The central bank increased its benchmark interest rates by 75 basis points last month, marking the third such hike in a row. Gapen expects the Fed to remain hawkish.
According to the Fed’s latest projection, Federal Open Market Committee participants have a median forecast of 4.4% for the unemployment rate in 2023. Gapen, on the other hand, sees the unemployment rate in the country rise to 5% or 5.5% next year.
So, BofA confirms same things that we were talking about for few months. Job market should become the next victim in a crisis spiral. I would say that 5.5% is without those who sit on the "stocks welfare" of helicopter Covid money. As stock market will drop more - people will start searching jobs. FPA suggestion that unemployment should be closer to the 8%.
And stock market will do - the prospect of negative job growth and a recession probably won’t bode well for the stock market. When the economy contracts, corporate profits usually deteriorate. In fact, stocks have already been pummeled — the S&P 500 has plunged 25% year to date.
Maybe 2000 level is a bit overextended, but we expect sharp drop to 3000 level by S&P and slow creep under 2500 before the party will be over. Last week we've shown the chart that overall assets, including stocks and real estate are 40% greater than 2x GDP level.
Somewhere we already could see the normal balance that should become common to the whole market. Now we could see it only at some particular stocks. Take a look at virtual assets of Meta (Facebook) comes to match to real assets of Exxon - but that has not happened across the board yet.
In fact, we could say that Fed absolutely doesn't know what to do next - whether to keep fast tightening or to stay on hold. Here, even without comments, it is clear: "I wish I may, love it so, but mother says "No". Some believe that it needs to be sharply tightened, others that it needs to be stopped for now, but everyone is insanely scare of, as it said in aviation, "to exceed the angle of attack and break into uncontrolled mode." There are suspicions that this situation has already caused political consequences (about the Liz Truss government are already almost obvious, about the Biden administration — not yet).
Meantime, markets across the board are turning to the nosedive. Previously we were talking on Germany, UK or the US bond market. But here is global bond market performance. A bond market crash is infinitely worse than a stock market's one. The US Aggregate Bond ETF $AGG, an analogue of the highest quality bonds, is failing. If this continues, we will have big problems:
Speaking in general, as on global stocks as global bond markets situation stands tough. The last time US markets faced a drawdown of this magnitude, the US government defaulted on a gold peg over the next 24 months. 1933 - Executive Order 6102 and 1971 - Nixon Shock:
Previously we've said, that stock market should be relatively stable until US households and foreign investors don't start selling their stock assets. Now it seems that time has come. SNB balance sheet stands in a tight relation with FANG (Facebook, Amazon, Netflix, Google) shares. This chart shows that the Swiss National Bank SNB is one of the largest sellers of FANG shares.
T
he National Bank of Switzerland, as an independent central bank, implements the state monetary and currency policy. Its primary goal is to ensure the stability of the country's financial system and control the level of inflation. The sale of key shares of the US technology sector, which have long been the basis of the Central Bank's portfolio, indicates the SNB's high need for US currency. It is possible to save the system-important Swiss banks that are in a difficult situation.
According to media reports, Credit Suisse, a global system- significant bank and the second largest in Switzerland, was, if not on the verge of bankruptcy, then at least in a critical situation. After another unsuccessful financial quarter, the bank's credit default swaps (CDS) soared to record levels and reminded the market of the 2008 financial crisis. Now C. Suisse under the tax investigation and probe in the US.
Concerning SNB, this information seems correct because it also gets USD Swaps this week for $10 Bln, supposedly to support national banks - C. Suisse and UBS:
it's getting really tough. And some hopes that Fed will stop and stock market will turn up are in vain. In fact, historically, when Fed stops, stock markets drops more:
Over the past 6 major crashes, stocks have fallen by an average of 28% AFTER the Fed cut the rate for the first time. It took another 14 months to get to the "Bottom".
Demand for the gold is rising. UK coin yard reports on overload on unprecedented demand because of bond market collapse and attempt to exchange wrap pounds to real metal:
While in the US Congress debates start on golden standard. The bill on the gold standard of a member of the House of Representatives A. Mooney was introduced on October 7, 2022 and submitted to the House Committee on Financial Services. Referred to as the “Gold Standard Restoration Act” by sound money activists, H.R. 9157 calls for the re-pegging of the Federal Reserve note to gold in order to address the ongoing problems of inflation, runaway federal debt, and monetary system instability.
Upon passage of H.R. 9157, the U.S. Treasury and the Federal Reserve would have 30 months to publicly disclose all gold holdings and gold transactions, after which time the Federal Reserve note “dollar” would be pegged to a fixed weight of gold at its then-market price. Federal Reserve notes would become fully redeemable for and exchangeable with gold at the new fixed price, with the U.S. Treasury and its gold reserves backstopping Federal Reserve Banks as guarantor.
To be continued...
So let's keep up our analysis. In gold market report we take a look at some political issues and global markets - bonds, stocks in general. Yesterday we've discussed specific moments of coming collapse on global bond market. UK has become the first bell, Fed now publicly acknowledges liquidity problems on US bond market. Fed shows operational loss because of huge demand from commercial banks (~ $2.2 Trln) for liquidity and reverse RePo trades. And this liquidity drought will increase. Additionally we see USD swaps with SNB, supposedly to support following Credit Suisse and UBS banks. In general, crisis processes are accelerating.
Market overview
Gold pared early declines after hotter-than-expected US inflation data set the stage for more aggressive interest-rate hikes by the Federal Reserve. The rebound in bullion came as the dollar sank and the British pound climbed amid reports that the UK government officials are working on a U-turn of the sweeping tax cuts proposed by Prime Minister Liz Truss. A softer dollar boosted the precious metal which is priced in the greenback.
Earlier, gold tumbled the most in more than two weeks following higher-than-expected inflation data in the US. The core consumer price index, which excludes food and energy, increased 6.6% from a year ago, the highest level since 1982, Labor Department data showed Thursday. Overall CPI increased 0.4% last month, and was up 8.2% from a year earlier.
The Fed’s aggressive moves have strained bond and currency markets around the world this year, while failing to significantly cool the US labor market. It has also hurt gold, sending it down almost 20% from its March peak. Now the US central bank looks set to carry on more big hikes, the precious metal could come under further pressure.
“The narrative of 75-basis-point hike in November and then slowing to 50 basis-point is in some jeopardy,” said Tai Wong, a senior trader at Heraeus Precious Metals in New York, noting that the CPI report suggests inflation may be more stubborn than investors believed. Wong said a 75-basis-point hike in November is “a total done deal.”
Officials from the US central bank have committed to raising interest rates to a restrictive level in the near future, although some emphasized the importance of calibrating the increases to mitigate risk.
There are two major events this week, guys, CPI report and Fed minutes. By the way, sharp reversal on the markets that has happened right after CPI downside reaction, was triggered partially by Fed minutes, partially because of comments from CEO's of big commercial banks. Fed minutes shows that some members still have doubts that Fed should follow with hard hawkish policy - maybe it makes sense stay on hold for awhile and see how economy reacts. Commercial banks top manages also have given a hint that sharp rising of the interest rate makes negative impact on Bank's provisions and profit margins. We briefly talked about it last week. Banks already have increased provisions for $4 Bln, and this is just a preparation for possible negative consequences. BoE already said that defaults on mortgage loans will increase.
CPI/PPI numbers stand above expectations. It is not the number is important per se, but the fact itself - whatever Fed is doing, inflation stands strong and even rising, despite that now we already have 3.5% Fed rate.
We have the following compounding of CPI numbers - ▪ Heating oil: +58.1%; ▪ Gas utilities: +33.1%; Gasoline: +18.2%; Electricity: +15.5%;
Transport: +14.6%; Homemade food: +13.0%; New cars: +9.4%; Food away from home: 8.5%; Used cars: +7.2%; Medical care: +6.5%
High level of energy and electricity inflation is not a surprise. As we've said previously it should have tendency to decreasing soon by two reasons. First is, global economy is slowing down, thus, demand for energy is dropping, while extraction stands around the same levels. Thus, demand for energy will drop as well. Second - fewer and fewer companies could buy energy resources with the price that we have. So hydrocarbons inflation should converge the average level of 6.5-8%.
Most important thing in report is food and transport inflation that I suspect better reflects the real inflation level. Transportation is everything. To buy or sell something you need first to deliver it and shipping price always will be the part of final price of the goods. And Transportation will make long lasting negative effect on average inflation level. We suggest that inflation level is manipulated now, supposedly it should be higher, standing around 10-11%. But take a look what White House tells -
"We do not agree that the consumer price index is an accurate indicator of inflation"
So we need to adjust it a bit, to make it show that inflation stands at 2 %.
Speaking on Fed minutes here are major conclusions:
Participants agreed that at some point it would be advisable to slow down the pace of rate increases when assessing the cumulative effects of policy adjustments.
Fed officials have decided that they need to adopt and maintain more restrictive policies in order to achieve their goal of reducing elevated inflation.
Many participants expressed their assessment of the ways of federal funding needed to achieve the goals of the committee.
Many participants indicated that once the policy reaches a sufficiently restrictive level, it would be advisable to keep it at this level for a certain period of time.
Several countries need to calibrate Fed tightening to reduce risk
Many participants emphasized that the costs of doing too little to reduce inflation outweigh the costs of doing too much.
It would be extremely important to adjust the pace of further tightening in order to reduce the risk of significant adverse effects on the economic outlook.
As the policy becomes more restrictive, the risks will become more two-sided.
Acknowledge the importance of maintaining a restrictive position for as long as necessary.
Unemployment may rise above forecast
The tightening of monetary policy in other countries may have an impact on the US economy through side effects.
Several officials mentioned the risk of spiraling wages and prices.
Federal Reserve members have expressed concern at their meeting last month about the persistence of high inflation and expected that lower prices and wages would probably require a weakening of the labor market. - WSJ
BofA warns that the US economy will start to lose 175,000 jobs during Q1 of 2023, expects a ‘harder landing’ rather than a softer one. Bank of America, expects that nonfarm payroll gains to be cut in half in Q4 of 2022 and turn negative in 2023. During the first quarter of 2023, the bank projects that the U.S. will be losing roughly 175,000 jobs a month. And it’s not just the labor market that’s going to take a hit.
“We are looking for a recession to begin in the first half of next year,” Bank of America’s head of U.S. economics Michael Gapen tells CNN. “The premise is a harder landing rather than a softer one.”
Given this labor market strength and rampant inflation, the Fed is raising interest rates aggressively to bring price levels under control. The central bank increased its benchmark interest rates by 75 basis points last month, marking the third such hike in a row. Gapen expects the Fed to remain hawkish.
“They’ll accept some weakness in labor markets in order to bring inflation down,” he says, adding that “we could see six months of weakness in the labor market.”
According to the Fed’s latest projection, Federal Open Market Committee participants have a median forecast of 4.4% for the unemployment rate in 2023. Gapen, on the other hand, sees the unemployment rate in the country rise to 5% or 5.5% next year.
So, BofA confirms same things that we were talking about for few months. Job market should become the next victim in a crisis spiral. I would say that 5.5% is without those who sit on the "stocks welfare" of helicopter Covid money. As stock market will drop more - people will start searching jobs. FPA suggestion that unemployment should be closer to the 8%.
And stock market will do - the prospect of negative job growth and a recession probably won’t bode well for the stock market. When the economy contracts, corporate profits usually deteriorate. In fact, stocks have already been pummeled — the S&P 500 has plunged 25% year to date.
Bank of America’s head of U.S. equity and quantitative strategy Savita Subramanian recently said that the benchmark index is “expensive” and “super crowded. The worst thing to hold is the S&P 500 wholesale,” she tells CNBC. Subramanian suggests that if you have a 10-year investment horizon, you can “hold the S&P 500 and watch and wait. “But if you're thinking about what's going to happen between now and let's say the next 12 months, I don't think the bottom is in.”
Maybe 2000 level is a bit overextended, but we expect sharp drop to 3000 level by S&P and slow creep under 2500 before the party will be over. Last week we've shown the chart that overall assets, including stocks and real estate are 40% greater than 2x GDP level.
Somewhere we already could see the normal balance that should become common to the whole market. Now we could see it only at some particular stocks. Take a look at virtual assets of Meta (Facebook) comes to match to real assets of Exxon - but that has not happened across the board yet.
In fact, we could say that Fed absolutely doesn't know what to do next - whether to keep fast tightening or to stay on hold. Here, even without comments, it is clear: "I wish I may, love it so, but mother says "No". Some believe that it needs to be sharply tightened, others that it needs to be stopped for now, but everyone is insanely scare of, as it said in aviation, "to exceed the angle of attack and break into uncontrolled mode." There are suspicions that this situation has already caused political consequences (about the Liz Truss government are already almost obvious, about the Biden administration — not yet).
Meantime, markets across the board are turning to the nosedive. Previously we were talking on Germany, UK or the US bond market. But here is global bond market performance. A bond market crash is infinitely worse than a stock market's one. The US Aggregate Bond ETF $AGG, an analogue of the highest quality bonds, is failing. If this continues, we will have big problems:
Speaking in general, as on global stocks as global bond markets situation stands tough. The last time US markets faced a drawdown of this magnitude, the US government defaulted on a gold peg over the next 24 months. 1933 - Executive Order 6102 and 1971 - Nixon Shock:
Previously we've said, that stock market should be relatively stable until US households and foreign investors don't start selling their stock assets. Now it seems that time has come. SNB balance sheet stands in a tight relation with FANG (Facebook, Amazon, Netflix, Google) shares. This chart shows that the Swiss National Bank SNB is one of the largest sellers of FANG shares.
T
he National Bank of Switzerland, as an independent central bank, implements the state monetary and currency policy. Its primary goal is to ensure the stability of the country's financial system and control the level of inflation. The sale of key shares of the US technology sector, which have long been the basis of the Central Bank's portfolio, indicates the SNB's high need for US currency. It is possible to save the system-important Swiss banks that are in a difficult situation.
According to media reports, Credit Suisse, a global system- significant bank and the second largest in Switzerland, was, if not on the verge of bankruptcy, then at least in a critical situation. After another unsuccessful financial quarter, the bank's credit default swaps (CDS) soared to record levels and reminded the market of the 2008 financial crisis. Now C. Suisse under the tax investigation and probe in the US.
Concerning SNB, this information seems correct because it also gets USD Swaps this week for $10 Bln, supposedly to support national banks - C. Suisse and UBS:
it's getting really tough. And some hopes that Fed will stop and stock market will turn up are in vain. In fact, historically, when Fed stops, stock markets drops more:
Over the past 6 major crashes, stocks have fallen by an average of 28% AFTER the Fed cut the rate for the first time. It took another 14 months to get to the "Bottom".
Demand for the gold is rising. UK coin yard reports on overload on unprecedented demand because of bond market collapse and attempt to exchange wrap pounds to real metal:
While in the US Congress debates start on golden standard. The bill on the gold standard of a member of the House of Representatives A. Mooney was introduced on October 7, 2022 and submitted to the House Committee on Financial Services. Referred to as the “Gold Standard Restoration Act” by sound money activists, H.R. 9157 calls for the re-pegging of the Federal Reserve note to gold in order to address the ongoing problems of inflation, runaway federal debt, and monetary system instability.
Upon passage of H.R. 9157, the U.S. Treasury and the Federal Reserve would have 30 months to publicly disclose all gold holdings and gold transactions, after which time the Federal Reserve note “dollar” would be pegged to a fixed weight of gold at its then-market price. Federal Reserve notes would become fully redeemable for and exchangeable with gold at the new fixed price, with the U.S. Treasury and its gold reserves backstopping Federal Reserve Banks as guarantor.
“The gold standard would protect against Washington’s irresponsible spending habits and the creation of money out of thin air," said Rep. Mooney in a statement
To be continued...