Happy Friday, traders. Gold is back around $1300/oz once again—were the last couple weeks just fever dream? The result of (is there any other kind) bad Taco Bell before bed? How did we get back here?
What kind of week has it been?
Every month I routinely devote a couple of sentences here to the reminder that the correlation between Wednesday ADP and Friday NFP is not directional. But I’m also human, more or less, and so this week I was placing my bets on a lower than expected NFP number following a slight disappointment in Wednesday’s ADP release (183k vs. 189k.)
Only +120k! was my boldly negative prediction as late as 8:27am EST this morning. Pretty good work on my part. Was only off by exactly 100,000.
February payrolls expand 20,000, far below expectations https://t.co/nfmEfRxpVW
— Bloomberg Markets (@markets) March 8, 2019
In terms of parsing this month’s jobs report: it’s just an absolute mess. 20k jobs added (again, twenty. I’m not forgetting a zero) is a dramatically low number. But traders and investors—reasonable ones, anyway—know that the birds-eye view is more instructive: the job market is likely not as tight as 20k implies, but it also argues that last month’s gargantuan (and second consecutive) +300k number should be moderated a bit as well. Meanwhile, unemployment in February was lower than expected while wage growth was stronger. It’s going to take the better part of today—and probably this weekend, too—for the market to digest a report with such disparate numbers.
In the meantime, all gold and US Dollar markets seem to care about is the headline number. Having been re-elevated north of $1290/oz on the back of a horrible session for Chinese equities as well as reports that (surprise!) rumors of an immenent US-China trade truce had been greatly exaggerated, with the release of the jobs report gold spot prices immediately rocketed towards the heavy resistance line at $1300.
In the trading since (at time of writing,) while gold has failed at a few unenergetic attempts to breach the 13-handle, the yellow metal does seem to be holding solidly around $1298/oz heading into the weekend and setting up an interesting week ahead with US inflation—the acknowledged measuring stick of the current FOMC regime—on the calendar.
Before we get ahead of ourselves though, let’s go over some of this week’s macroeconomic happenings.
Gold Started the Week on the Wrong Foot
Gold prices started the week out on another bad foot, as markets digested another push of optimistic news of a lasting trade-peace between the US and China coming just around the corners. As a result, investors on Monday morning showed a decidedly higher appetite for risk and love for the US Dollar and gold’s primary negative-corollary of late was driven higher while yellow metal by the ounce fell as low as $1283 through the morning, firmly breaking the up-channel that had been in place in the month of February.
That desire for risk in the stock market quickly faded however, with no further developments actually materializing and every equity session this week—including Monday’s—has returned a loss. Frustratingly for gold bulls during the most of this week, the sag in stocks had failed to translate into gold strength until this morning’s jobs bonanza, due to the Greenback consistently finding new tailwinds to ride.
Housing Data this Week Was Surprisingly Strong, Boosting the Dollar
The biggest positive surprise for the US economy this week came from Tuesday’s shutdown-delayed release of New Home Sales data for the month of December. The headline number of 3.7% growth month-over-month was an impressive beat of expectations for a nearly -9% decline in home sales. An environment that has bread lower interest rates for buyers and reduced asking prices from sellers seems to have made it so. As one could expect, the report put a dent into gold prices on Tuesday morning (roughly $3 worth) although gold spot did recover $1285/oz fairly quickly.
Tuesday’s other US Dollar-positive news came from the release of ISM’s Non-Manufacturing PMI (or, “services PMI.”) After an ugly report on PMI for the Manufacturing sector (that pumped a brief bit of life into gold prices that morning,) January non-manufacturing PMI delivered a beat (59.7 vs 57.4 expected.)
It’s unclear weather Tuesday’s trading in gold and currency markets was influenced more by PMI or home sales data, but either way it was another bullish impulse for USD and negative for gold.
ECB’s Draghi is a Drag
Economic developments from the European continent have had much involvement in metals markets to begin the year in 2019, but this week’s ECB meeting provided a soft reminder of why the common currency economy is always worth keeping an eye on. ECB President Mario Draghi and his council, as expected, announced no changes to monetary policy (other than a new round of TLTROs) at this month’s meeting. Against expectations however, the council did make marked downward revisions to their forecasts for growth and inflation in the European economy. More dramatically, the ECB changed their forward guidance for rate hikes by pushing their projection for unchanged rates from “summer 2019” to “through the end of 2019.”
The ECB bits that matter
(Also ECB confirming that Mario Draghi will go full eight-year term without ever raising rates) pic.twitter.com/Eatrl0MStf
— Lorcan Roche Kelly (@LorcanRK) March 7, 2019
With his term ending later this year, Thursday’s statement means that ECB President Mario Draghi will serve out his 8-year term having presided over exactly zero rate increases. See our more in-depth recap of the statement, here.
The statement and the less-than-inspiring press conference that followed put immense pressure on the Euro currency, and the swing in its trade-weighted basket applied yet another hearty tailwind to the US Dollar. Gold prices initially fell in response to this dynamic, but what looked like a risk-off impulse (presumably from investors exiting EUR-funded positions) soon drove gold towards $1290/oz for the morning.
The gold rally would be short-lived as some modest, but better than expected productivity data added to the Greenback’s boost.
As I alluded to earlier, because of the emphasis on inflation data to the next step in the FOMC’s “wait and see” posture I think the big macroeconomic data point next week will be the February CPI report on Tuesday morning. We also have probably the UK’s last chance to get a Brexit deal passed before the still-in-place deadline of March 29 for leaving the block, so we’ll be watching the next movements in that melodrama as well as developments (if there are any) in the White House’s ongoing trade talks with China.
Until then, enjoy your weekend traders. I’ll see you on Monday.