Happy Friday, traders. Welcome to our weekly market wrap, where we look back at these last five trading days with a focus on the market news, economic data, and headlines that had the most impact on gold prices and other key correlated assets—and may continue to into the future.
At the close of what's been an energetic, up-and-down first week of 2023 for the yellow metal, gold is trading at the highest levels in months.
So, what kind of week has it been?
This first week of 2023, shortened by Monday's market holiday, has been a bit of a see-saw as investors across the equity markets and other major asset classes first positioned for new (or at least corroborative) information to come from the FOMC discussion notes released on Wednesday. The trading since then has been driven by investors' reaction to what the Fed minutes laid out. And as trading has picked up momentum since Thursday morning in the US, we've seen the see-saw begin to swing more energetically into the close.
2023's first trading day was relatively mild across most asset classes, in the stock markets especially. Investors carried an air of confidence that the consensus read on how the Fed will move in the first half of the year-- very generally speaking, a series of "smaller" rate hikes followed (maybe) by a pause and (maybe) an eye towards lowering rate before year-end-- is a solid one. Although gold shed some overnight gains through the US trading hours, this sentiment laid a bed of solid support for the yellow metal above $1830/oz. The US stock market glided mostly flat-to-lower on the day, weighted down by a slump in tech giants like AAPL, more than anything else.
— Yahoo Finance (@YahooFinance) January 5, 2023
The "consensus" view of the 2023 FOMC, at least the view that would need to be a part of the vaguely optimistic outlook that helped buoy the gold spot and arrest the late-2022 slide in US equity indexes, seemed to rely on a dovish sentiment from some FOMC participants that simply is not present in the meeting described by the discussion notes published on Wednesday. As it turns out, the committee that voted to raise policy rates by "only" +0.50% in December did not view that as a first step towards an interest rate easing cycle. In fact, it would be tough to think of how the minutes could have more clearly communicated "WE HAVE NO PLANS TO EASE IN 2023," short of scribbling as much in sharpy on everyone's copy of the release.
"The market" or "the investor mob," depending on your preferred term, fell back onto what might be their riskiest habitual stance from 2022: confidently believing that the Fed is just plain wrong. Wrong about there still being more work to do to truly cool inflation back towards the 2% target, wrong about whether or not the timing will be right to cut interest rates sometime this year. This certitude, in their own view, helped investors to buoy the stock markets through some choppy trading immediately following the release of the FOMC minutes, and all three major indexes ultimately turned out a slight gain on the session. However, it was gold prices that truly thrived under this assumption that a lower rate environment is just over the horizon, and Wednesday's trading prices climbed more than $30/oz, past $1860, to their highest marks in more than six months.
— Bloomberg Economics (@economics) January 5, 2023
On Thursday, rather than seeing the rally continue, we watched a replay of another market trend from 2022; and one that so often followed a session of "the markets are right, the Fed is wrong." Encouraged by a spate of public appearances from Fed officials in the morning, it was easy work to push investors into re-assessing their surety. As the US Dollar has strengthened (back to DXY > 105.0) and Treasury yields have risen (with the 10-year above 3.7% again)-- both moves that reflect higher rate expectations in the near- to medium-term-- what started as some softness in the gold market quickly became a heavy boulder rolling downhill, and spot prices even fell far enough to briefly break the prior support at $1830. Meanwhile, the stock market was mostly red all day, going on to turn in its first day of -1% losses or more across the Dow, NASDAQ, and S&P 500.
There's always the possibility of a turnaround on Friday, given the keen attention that will be paid to the December Jobs Report and its attendant implications for Fed policy. But our sense was that to warrant a real reversal of Thursday's trends would require a relatively strong downside miss in the NFP number. One that might compel the Fed to seriously consider hitting the brakes on their hiking cycle. Otherwise, the refreshed labor market data would likely support the idea that the Fed can continue on as hawkishly as planned-- whether markets like it or not.
Key takeaways from a great December job report:
1) 4.5 million jobs added in 2022.
2) Job growth is slowing, but not much
3) Unemployment rate 3.5% (lowest in 53 years)
4) Labor force is growing! +2.6 million in 2022
5) Wages +4.6% in past year. That's slowing...which Fed wants pic.twitter.com/frtHnDXZhM
— Heather Long (@byHeatherLong) January 6, 2023
Not for the last time in 2023, it looks like we were wrong. Friday morning's non-farm payroll came in above the consensus call for 200K, but still below the prior month's mark. It would be reasonable to view the fact that November's read was revised downward (however modestly,) but we still would've expected this to be a wash at best: carry on as you were, Chair Powell. Instead, investors have grabbed tightly to the new data as an indication that the labor market is finally cooling and will, without doubt, compel the Fed to ease this calendar year. Armed with cold numbers as evidence (questionable or otherwise) this time, the market reaction on Friday has seen Wednesday's trends pushed into overdrive. Cheered on by a flagging Dollar and falling Treasury yields, gold's spot price has taken a rocket ride higher on these expectations of easier monetary conditions, coupled with a shade of uncertainty about the very real negative impact of a potentially weakening labor market. Midday, the precious metal's spot price has risen well beyond $1880/oz. This marks gold's highest mark in more than six months and brings the $1900 level of resistance into view ahead of next week.
Whether or not this momentum can continue will be the question of Monday's updates, and one that will face a tough challenge relatively early with a speech from Fed Chair Powell scheduled for Tuesday morning. Another possible inflection point will come on Thursday with the release of December's inflation data.
For now, traders, I hope you can get out and safely enjoy your weekend for the next couple of days. After that, I'll see everyone back here on Monday for our preview of the week ahead.