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.
As markets wake up on Friday morning—in as much as they’ve been awake at all these last three sessions—the price of gold has slid at the tail-end of a leaden, holiday-shortened week. Absent any clear drivers for the yellow metal, prices have waned as gold has been subjected to drag created by the overall commodities complex.
So, what kind of week has it been?
By the time we get to September, it seems very possible that we could look back on this as the dullest market week of the summer. (Even the week truncated by Independence Day in the US will still wrap with an important Jobs Report.) Despite the reality that the loudly negative sentiments which set volatility soaring in financial markets at points over the last two weeks have gone nowhere—concern about decades-high inflation stubbornly persisting; concern that the Federal Reserve’s fight against said inflationary pressure could tip the US economy into an ugly recession, regardless of success or failure— markets have been downright boring in this holiday-shortened week. An odd calm has settled over financials this week, even if it’s an uneasy calm. While it’s been a mostly flat road for equities and bonds after a more volatile Tuesday session, the slowdown in activity has resulted in a slump in gold prices.
Fed Chair Jerome Powell calls his commitment to curbing inflation “unconditional” and another of his colleagues backs raising interest rates by 75 basis points again next month, even as Democrats warn him against triggering a recession https://t.co/OGilx44uQL
— Bloomberg Economics (@economics) June 23, 2022
While investors have been sitting on their hands this week, they presumably have been tracking updates and headlines around the potential risks to economic growth and expansion, created alternately by high inflation or by a reckless Federal Reserve, depending on which brief you’re reading at the moment. The most pivotal moment for this week may have come during Chairman Jerome Powell’s semi-annual testimony to Congress, during which Powell seemed to more openly acknowledge the level of difficulty in bringing the US economy in for a “soft landing” while curbing inflation at this point. Forward-looking bets on interest rates appeared to read this commentary as more dovish than we’ve seen from Powell & Co. recently, with terminal-rate predictions sliding meaningfully lower this week.
On balance and relative to recent comments, Powell's prepared remarks on the dovish side. Repeats commitment to getting inflation down "expeditiously", but decisions will be taken meeting by meeting.
SOFR pricing shows terminal rate next year below 3.60% (vs over 4% last week) pic.twitter.com/fPutGUlZ7r
— Jamie McGeever (@ReutersJamie) June 22, 2022
Following Powell’s testimony and Wednesday and Thursday, the downward shift in various interest rate derivatives (which eventually passed through to a mild, but steady slide in US Treasury yields this week) was just another sign of investors hemming and hawing between wanting to price for (or protect themselves from) a looming recession, or more aggressive hiking from the Fed. (The softening we’ve seen in rates this week, after all, seems counter to the still-hawkish messaging we’ve gotten from other important FOMC participants.)
For most of the week, gold seemed locked into the same holding pattern as most major assets as the spot-price chart traded mostly sideways. Absent any strong headline pressure to move the yellow metal higher or lower, and with a nearly empty data calendar, the push-pull of inflation worries (positive for gold) and the rate hikes the Fed is projected to continue rolling out to fight the same inflation (negative for gold) seemed to be netting out to zero. In Thursday’s trading, after gold spot prices had been treading water just below $1840/oz, gold dropped sharply (relative to the rest of the week.) It seems like the tie-breaker that decided the precious metal’s profit/loss for the week was the overall slump we’ve seen in the commodities space.
Outside of the meat and potatoes of stocks and bonds, commodities markets have seemed much more willing to price in a recession in the near- to medium-term: Bloomberg’s broad commodities index has been tracking lower for consecutive sessions as raw materials prices have weakened on worries of lower demand (which would presumably result from a global recession.) Unable to find a catalyst to push prices higher this week, gold was instead dragged lower along with the rest of the flagging commodities basket. As we move into the next of the slow summer months, the dynamics of this week suggest that gold needs some kind of external driver to lead prices higher; the intrinsic reasons for investing in the yellow metal—for this moment at least—alone may not be enough to draw new investors in.
Markets and their investors seem somewhat paralyzed by the uncertainty around inflation, interest rates, and recession risks in the months ahead; for now, this fearful freeze looks just like it sounds: a flatline of price charts and very low volatility in major asset classes. Soon, though, whether through headlines generated by more forward guidance from the FOMC or through a decidedly negative (or positive!) shift in key macroeconomic data like Jobs gained/lost or inflation stats, the market will have to react one way or the other. Presuming that markets remain subdued again through Friday’s session, next week looks like as good an opportunity as any for investors to re-enter the game. The data calendar is fairly light again—the most important number on offer might come from Friday’s assessment of growth in US manufacturing—but the rolling of the calendar as we move into a new month, a new financial quarter, and the second half of 2022, acutely, will drive added volatility as large options blocks expire and managers are forced to lock-in gains or losses on commodity futures positions. More broadly, turning the page is likely to force a resetting of priorities and positioning that may return a sense of momentum to the gold market.
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.