Happy Friday traders, unless you’re only reading this after coming out of the cave of NCAA Tournament first-round games. In which case, happy…Monday?
Gold prices are completing another constructive week, trading in spot markets at the time of writing at $1312/oz. With equity markets throughout the US and Europe stumbling today while their corresponding treasury yields are also at the lows, it looks like we can lock-in at least at $10 pickup for shiny yellow metal on the week thanks mostly to another solidly dovish turn from the FOMC.
So, what kind of week has it been?
For metals traders, the events of this week can definitively be divided into two groups: The Fed; and the Everything Else. Gold prices, having done well to hold above $1300/oz after surpassing that level during Monday trading, drove through $1310 as investors struggled to realign their positions in response to a second dovish statement in a row from the FOMC, along with what appears to be a very dovish set of refreshed economic projection for the US economy. (More on “appears” in a moment.) Once Asian markets had a chance to react to Jerome Powell & Co’s Wednesday, gold by-the-ounce even briefly tested resistance at $1320.
As we discussed more in-depth in Wednesday’s FOMC wrap up, the headline takeaway from the March meeting was the committee’s revision of their median expectation of the number of rates hikes this year to zero; December’s Staff Economic Projections’ median estimate was for two hikes in 2019. Along with downward revisions to projections for 2019 growth, and more importantly to 2019 headline inflation, as well as acknowledging the creeping risks to global economic growth that may be posed by slowdowns in China and Europe, the shift in the Fed’ “dot plot” brought a tremendous amount of selling pressure into US Dollar and rates markets, driving gold prices higher in response.
— Christophe Barraud? (@C_Barraud) March 21, 2019
These large single-day market moves within gold and two closely correlated assets (US Dollar and Treasury rates) were the result of a large amount of repositioning in the wake of the Fed’s dour revisions to their near- to medium-term projection. It’s here that I want to offer a word of caution reframing one’s outlook for 2019 based on this particular set of economic projections from the Fed; this is why I said earlier that the projections—particularly the dot plot—“appear” very dovish: I believe the immediate reaction to the (admittedly jarring) headline of “Fed Sees No Rate Hikes in 2019” was overdone. Especially when it comes to projections and rhetoric, strong responses are so often the result of a sudden shift in differential. In the case of this week: the differential between how “the market” and many analysts perceive the Fed’s view of the near-term future of the yield curve, versus how The Fed themselves say they view it.
I’m generalizing here for the sake of brevity, but it would be fair to say a baseline view form many analysts ahead of Wednesday’s Fed meeting saw the market pricing in a single rate hike in 2019, and another in 2020, with the 2019 most likely coming at the December meeting. While the markets this week seemed to react so strongly to the Fed’s median projection calling for 100% fewer rate hikes in 2019 than the market had priced-in, I believe that for currency markets and more importantly for gold markets, the differential between the Fed raising rates in December of 2019 vs. January of 2020 is fairly minimal from here and not the flashing-red warning of an economic downturn that the market seemed to be reacting to this week. Whether that’s how the individual members of the FOMC view the curve isn’t laid out in the economic projections and can really only start to be discerned through the flood of Fed Speak that we’ll get next week.
By Thursday morning, US Dollar markets seemed to come around to this idea as the Greenback rebounded (even if rates did not) and gold gave back a good cut of it’s Wednesday gains before rebounding to settle near the $1310 mark.
Today’s #PriceAction should remain very interesting as a number of these themes remain unsettled. A big takeaways in the aftermath of #FOMC has been a clean topside breakout in #Gold prices.Get your $GLD #TechnicalAnalysis from @JStanleyFX here: https://t.co/pCuslUeaTY $XAU pic.twitter.com/rbk83Fg87y
— DailyFX (@DailyFX) March 21, 2019
The only macro data of any real import before Wednesday was the release of the NAHB’s Housing Market Index on Monday morning, and even it was fairly uneventful while sending conflicting signals. While the “sentiment” reading of 62.0 was unchanged from the prior month (higher than 50.0 indicating that a majority of homebuilders see home sales conditions as “good”) and below the March 2018 print of 70.0, the current level is still as high as any read since October of last year.
The data that followed the Fed on Thursday and Friday had some out-sized positive surprises, but none that could really wrestle away the FOMC-driven narrative in gold markets. Thursday’s Philly Fed Manufacturing Index rose a surprising 17+ points for March, and that positive sentiment may have contributed to the morning’s re-balancing as gold sold-off and the Dollar rebounded from Wednesday’s extremes. On Friday, the delayed release of Existing Home Sales numbers for the month of February were likewise a much better result than what was broadly anticipated. Even such a strong beat wasn’t quite enough to effect US Dollar or gold markets in any meaningful way given how late the data arrived post-shutdown. Any impulse I could’ve created in the markets was overmatched by concerns over US and European equity weakness that drove a $4 bid into gold.
With another Fed Week falling away in the rear view, we head into a well-earned weekend and on to next week. The upcoming calendar for data releases is pretty light, with the important exception of the on-rush of public comments from FOMC members that always follows a meeting like this week’s. The quieter schedule will give us the opportunity on Monday to discuss recent developments in US-China trade talks as well as in Brexit dealings, both of which seem to be just around the corner from inflection points that could play a part in gold markets in the weeks to come.
For now, enjoy your weekend traders. I’ll see you all back here on Monday.