Happy Friday, traders. Welcome to our weekly market wrap, where we take a 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.
Gold prices are closing the week with more positive momentum after a cooler-than-expected report on consumer price inflation in the US has investors across several asset classes more seriously considering when the Fed might hit the brakes on their regime of aggressive rate hikes.
So, what kind of week has it been?
This week’s “action” in the gold market has gone pretty much as we expected, in terms of the pace, (the relative lack of) volatility, and even directionally. It’s always nice when things come together like that. Of course, in this specific case, that doesn’t leave us with a lot to talk about or break down in detail looking back at this week’s trading. The big data point of the week, this time, was pretty much the only data point of the week that had a tangible impact on the gold market (and, if we’re being honest, most other asset classes outside of equities,) as the July report on consumer inflation came in notably cooler than the consensus expectations.
Holy cow: There was ZERO inflation last month. That's the headline number, which is well below expectations of +0.2%.
Also a good core inflation reading: +0.3%, also below expectations of 0.5%.
Finally some good news on the inflation front. We've likely seen the inflation peak.
— Justin Wolfers (@JustinWolfers) August 10, 2022
August tends to be the dullest, most deadening month of financial markets in general—and this is often doubly true for gold and the rest of the precious metals complex—as broad swaths of otherwise active US-based investors and traders take off for the summer vacations that their London and Europe-based counterparts have been enjoying since June 1. Even this year, amid the relative peak of something akin to uncertainty around the Fed’s next move(s) that we are experiencing at present, the pulse of the market is thready because we have no FOMC meeting in August (and no real cause to expect policy moves around the Jackson Hole summit coming up.)
Following a positive start to trading on Sunday evening, this low and laconic base hum drove a calm and uneventful path to the gold market through Monday and Tuesday. The yellow metal climbed steadily higher at a point in both sessions. Because investors displayed a little bit of skittishness and worry pre-CPI report, not wanting to get whiplashed by another surprisingly hot set of inflation numbers, we assumed that the gold’s tailwind was coming from some preemptive concern that the inflation data—and inflationary outlooks—would remain stubbornly unmoved from the top. (Come Wednesday morning, we learned otherwise.) Even that bit of risk aversion only had the most modest impact, though, on risk assets: the key US stock market indexes moved relatively flat on Monday and Tuesday, aside from some deeper losses in the tech-heavy NASDAQ.
Inflation is at 0%, and Inflation is at 8.5%
The keystone inflation report for July dropped on Wednesday morning and, as anticipated, was the only thing to drive any real volatility to the gold market. The CPI report was an objectively positive surprise, relative to expectations (and certainly relative to the still-rising inflation data we saw through the first half of summer.) Equity investors cheered right away and loudly, and all three major US stock indexes roared higher. The move in risk was led by the same NASDAQ, which rocketed from a rough start to the week to be—as of Wednesday’s closing prices— the first index to re-enter a bull market (20% off the low.)
Had the early-week driver of gold’s move higher, which saw spot prices trading above $1790/oz just before the data print, in fact, been inflation worries, we would have seen a swift drop in the yellow metal as risk appetite soared once the CPI data hit the transom. Instead, the yellow metal immediately moved higher, even trading briefly above $1800 mid-morning. Meanwhile, the US Dollar—gold’s primary antagonist these last few months—which had been softening a bit at the start of the week, rolled off the table post CPI. As of Friday morning, even after a mild recovery, the US Dollar Index has pulled back to a (still expensive) 105-handle. While there still seems to be strong resistance for gold at the key $1800 level, $1795/oz (or thereabouts) has been very sticky for the yellow metal post-CPI. Even as activity has cooled (and liquidity has appeared to wane) since Wednesday morning, gold has held on to most of the week’s gains and could be consolidating for another push if next week presents a supportive backdrop.
We can feel safe in assuming that if you read us (or anything like us) regularly, you are too well informed about what inflation data represents to have been swept up in the nonsense argument of the week regarding what the CPI report tells us about consumer prices in the US economy. But, just to make sure we’re all clear:
- Compared to last month (June 2022,) prices for the basket(s) of common consumer goods that are used to measure inflation did not change at all, as a whole. Month-over-month inflation for July 2022, then, was 0.0%
- As compared to prices for the same goods one year ago (July 2021,) prices were +8.5% higher in July of 2022. This is “cooler’ inflation than both June 2022’s number (+9.1%) and the number the consensus expected to see this week (+8.7%.) Year-over-year inflation for July 2022 was +8.5%
These are the facts. They are indisputable.
Based the July CPI and PPI, economists at Morgan Stanley and JP Morgan estimate core PCE in July print at 0.1% when reported later this month
This would bring core PCE to 4.6% in July
JPM: "This lends credence to the view that we are moving past the firmest period of inflation"
— Nick Timiraos (@NickTimiraos) August 11, 2022
So, in context, the moves we’ve seen post CPI in gold and the Greenback as prime safe-havens, and in risk assets like US stocks, generally, align with what we would expect to see. The alleviation (by more than expected) of inflation pressures on the US consumer and economy certainly won’t push the Fed to pull back now from their crusade against inflation that has been mostly effectuated by historically high rate hikes of +0.75%. The expectation seems to be that the FOMC will be encouraged to “finish the fight” and not pause from increasing its target overnight rates until that point.
Even if we had zero additional inflation for the rest of the year, CPI would not reach Fed’s 2% target (applying pre- or post-COVID averages brings it down much less)@biancoresearch @BLS_gov @ClevelandFed pic.twitter.com/pPi8gKZG8T
— Liz Ann Sonders (@LizAnnSonders) August 11, 2022
It does, however, imply two changes to the policy path: 1.) the Fed could start to flatten out the policy curve as early as September by throttling back to +0.5 or +0.25% hikes through the end of the year, and 2.) if coming inflation data carries on this trend, it likely moves forward the terminal date at which point the Fed pauses hikes entirely. The reaction in major assets to Wednesday’s CPI (and its implications for FOMC/monetary policy aligns with historical relationships as follows:
- Gold moves higher on the expectation that rates (and, therefore, yields) will stop climbing—before eventually being lowered by Fed rate cuts. The lower rate environment is almost always a boon for non-yielding gold. This dynamic also clarifies for us that the rate-reaction function is right now stronger for gold support than is the inflation-fear function.
- Stocks and other risk assets (but mostly stocks) move higher on, sure, the healthier indicator of cooling inflation pressures but, mostly, in expectation of monetary conditions getting looser (read: debt getting cheaper) sooner.
- The US Dollar has weakened after a major catalyst for this summer’s 20-year record breaker of a bull run was higher Fed/USD borrowing rates, making the Greenback all the more attractive as a yield-bearing investment relative to its peers.
Next Up
Thursday and (so far) Friday’s market activity—or lack thereof—has had the back-end of this trading week looking a lot more like Monday than Wednesday in the gold market as everyone who plugged in to trade the CPI print moseys back to their beach towels or deck chairs. Next week, as a whole, may not be much more exciting, as the biggest point on the calendar (for now) is the release of the FOMC’s discussion minutes from the July meeting. Maybe it’s time to get out and work on that tan.
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.
