By: Rhona O'Connell, Head of Market Analysis
Coininvest round-up Monday 6th March 2023
Gold regaining lost ground; still largely dollar and monetary policy-driven
Coininvest round-up Monday 6th March 2023
Since our previous note, and while your correspondent has been on holiday, gold has eased in dollar terms over the latter part of February but since end-month it has more or less re-couped all of those losses, to trade at just over $1,850 as we write. As usual the official sector has been one of the key drivers, with Fed Committee members reiterating the hawkish stance and some calling for a 50 basis point hike at the next Committee meeting (21-22 March, when we will see the next dot plot), while others are expecting just 25 basis points.
This hawkishness is perhaps slightly surprising given the continued slowdown in the United States’ housing market and a downward revision to GDP growth to 2.7% quarter on-quarter and 0.9% year-on-year and a slowdown in what had been an improving auto sector, but the mood music at the Fed still revolves around inflationary forces. The does appear to be an acceptance at the Fed that inflation has peaked, but there is also some concern that it may take time to revert to the 2% target and that there is therefore more work to be done in order to rein prices in. That said, the core Personal Consumption Expenditure number for January came in at 5.4% a week ago. This is a key parameter for the Fed and will have underpinned the views of the hawks. The most recent comments came at the end of last week from the President of the Richmond Fed, Thomas Barkin, who believes that the Fed needs to continue to raise rates, although at a slower pace than last year’s dramatic moves, which saw the fed funds target rate rise from zero to 4.3 by year-end.
Spot Gold, technical annotations
Spot gold, in major currencies
Source for both charts: Bloomberg, StoneX
Meanwhile in Europe Olli Rehn, a member of the Governing Council of the European Central Bank, has said that the Bank is expecting to implement “a fairly significant interest-rate increase” in order not only to slow inflation but also to anchor inflationary expectations. The tone in Europe has hardened in recent weeks with inflation rates across the EU standing at 10.6% year-on-year in the final quarter of 2022, although the flash estimate for the February Harmonised Consumer Price Index was 8.5%, level with that of January. Germany and France have reported February annualised inflation numbers at 8.7% and 6.2% respectively. This clearly keeps real (i.e. inflation-adjusted) rates in negative territory in both Europe and the States, but the markets are concentrating more on the nominal rates and also their rate of change. So while the United States may be moderating its rate cycle from the aggressive action of last year, Europe has more to do.
Furthermore the Bank for International Settlements has weighed in on the debate, saying in its March Quarterly Review, released last week, that central banks around the world need to get inflation beaten. Here, too, the Bank discusses the difference between the view of the bond markets (rate hikes to end this year) and the cautious views of the central bankers themselves while also pointing up the increased risk of stagflation as a result of higher commodity prices and an appreciating dollar last year. It is worth noting that over the past three weeks the bond markets have pushed out their projected date of peak rates out to September, having previously been June.
As far as gold is concerned, continued geopolitical tension is supportive, with both Joe Biden and Janet Yellen visiting Ukraine in recent days, and with U.S. yields easing slightly last week gold was able to outflank a mildly stronger dollar in the early part of the week; this performance was also helped by the renewed expectation that Europe is moving away from recessionary fears as economic activity has shown some surprising improvement in the first weeks of the year.
China’s economic data, released in the middle of last week, showed remarkable strength, nicely timed just ahead of the National People’s Congress meeting of this past weekend. The February PMI posted a Composite reading of 56.4 in February, with 52.6 for manufacturing and 55.6 in Services and a hefty 60.2 in construction. This will have helped in putting some pressure on the dollar and by association would also have helped silver from a fundamental standpoint. At the Congress the Chinese Premier set a 5% growth target for the economy for this year, which is relatively moderate following last year’s miss from the 5.5% target; certainly the PMI numbers so far this year suggest that a firm foundation is being developed although this momentum is unlikely to be kept up.
The People’s Bank of China reported January as a third consecutive month of rising gold reserves, with an increase of 14.9t (compared with just over 30tpm in November and December), while Turkey continued its gold purchase programme with an addition of 23.3t.
U.S. fed funds rate from January 2022
US fed funds implied overnight rates
EU bond markets’ implied rates
Source for all three charts: Bloomberg, StoneX
The U.S., E.U. and China yield curves
Source: Bloomberg, StoneX
Gold, the dollar and their correlation
Source: Bloomberg, StoneX
Gold (inverted) and the two and ten-year yields; correlation with the 10Y
Source: Bloomberg, StoneX
Source: Bloomberg, StoneX
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