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 the future.
Gold prices are down significantly at the end of a week in which the FOMC came out considerably more hawkish than markets expected, to the expense of any asset class that struggles in the face of King Dollar.
Other than that, what kind of week has it been?
While most major asset classes, like US equities, have not endured quite the same bombastic fallout that an an over-heated inflation report drove into the markets last week, the gold market has been smacked (technical term) and sold off as a result of another US Dollar super surge. If we were ever looking for a clean demonstration of gold and the Dollar's inverse relationship, it's here: as the US Dollar has reached the highest level (per the US Dollar Index) in 20 years, gold prices have sunk to their lowest mark in two. Very clearly, similar to last week, this week's trading and activity across most of the major asset classes have still been dominated by the ripples from a single point in the calendar. This time, it was the FOMC's latest action and commentary.
"No one knows whether this process will lead to a recession, or if so, how significant that recession would be," Fed Chair Jerome Powell says of the U.S. central bank's tightening campaign
— Matthew B (@boes_) September 21, 2022
Investors and money managers, by and large, sat on their hands ahead of the Wednesday's Fed meeting. The early run of the week followed the expected pre-FOMC path without really disappointing the gold markets, as the losses taken were generally expected a week ago. The most aggressive movers in a stretch without much competition, regular readers will not be surprised to hear, were the US Dollar and yields on US Treasury debt. "King Dollar" continued to reign and rise, setting marks for the USD Index at multi-decade highs above 111; meanwhile, the benchmark 10yr yield pushed easily above 3.5% while the 2yr climbed towards 4% and the "doom signal" of an inverted yield curve, and the "doom signal" of an inverted yield curve. The opposing pressure from the Dollar not only dragged bond prices lower but immediately weighed on commodities as well, gold as much as any, with the yellow metal slipping steadily Monday and Tuesday. Albeit buffered at times by a renewed thrum of geopolitical unease coming from Moscow, gold spot prices had fallen as far as $1660/oz on Monday before enjoying a brief (and brittle) rebound on Tuesday morning before easing again. Equities had mostly mild sessions pre-FOMC. The core indexes made gains on Monday, although not of much substance; Tuesday brought losses-- deeper, as an effect of Treasury yields really picking up steam, nothing that was too concerning (perhaps because the market was already anticipating the rough waters just ahead.)
In that sense, Wednesday's market reaction to the FOMC was roughly an amplified repeat of Tuesday's rolling-off. After the eerie calm that markets often fall into on the morning of, the Federal Reserve's announcement of a third-consecutive 75 basis point hike -- very predictably-- goosed the Dollar higher. At the same time, everything else went in the other direction. Gold spot prices shed another $10/oz immediately, as falling Treasury prices nudged yields above the key markets of 4% and 3.5% for the 2yr and 10yr, respectively. Equities dropped immediately, en route to a day of nearly -2% losses across the S&P, NASDAQ, and Dow Jones Industrials. Gold prices spiked higher again for a time between the FOMC's statement and the closing questions of the Chair's press conference, but shortly after resumed a slide that hasn't slowed down since.
The net losses for gold on just Wednesday (really, the downside moves for everything that trades opposite of the Dollar) was clearly muted due to the fact that this rate hike--even the messaging from Powell & Co.-- was essentially telegraphed and priced in by investors well ahead of time. This is worth noting because it seems like we're moving closer and closer to a true period of uncertainty on what the Fed will do and "the next meeting," so this cushioning effect won't always be in play. Gold might find an even tougher time finding support levels next time the Fed "goes."
Beyond lifting their key policy rates by another +0.75%, the signals sent from the Fed-- in the committee's statement, the updated economic projections, and Chair Jerome Powell's post-meeting Q&A press conference-- all pointed in one clear direction: The FOMC remains committing to "tightening monetary conditions" (read: slowing down the economy as a whole) as the central bank prioritizes tamping down on inflation above all other objectives. The rate hikes will continue coming (at one pace or another), and rates may be left hanging at the eventual "terminal rate" for longer than previously expected.
As straightforward as it gets: Wednesday's speech by Powell registered lowest Flesh-Kincaid score (measures number of years of school needed to comprehend a statement) since 1994
@biancoresearch @ReadableHQ pic.twitter.com/A81QERfTli
— Liz Ann Sonders (@LizAnnSonders) September 23, 2022
- The FOMC's statement clearly outline's the central bank's comfort with continuing to hike rates through the end of the year and, almost certainly, at this point, into 2023. · Often the most-discussed aspect of the Fed's quarterly "Staff Economic Projections" report, the anonymous dot-plot yesterday pinned the "terminal rate" higher than before, at 4.6%. Accordingly, investors and money managers are starting to bake at least one "extra" hike in 2023 into their models for the near- to medium-term. · At different points in his presser, Jerome Powell touched on two key points that haven't been so clearly underlined before now:
- The Fed acknowledges the increasing likelihood, at this point, that their efforts to slow the economy enough to quash inflation will result in a period of "below-trend growth" for the US. This is generally interpreted as the FOMC's new euphemism for some kind of recession.
- More specifically, Powell explicitly acknowledged the Fed would not hit the brakes on its hiking cycle at the first sign of pain in the (currently very strong) labor market.
On Thursday, markets "stabilized." Turmoil and confusion in European markets appeared to stimulate some strong risk aversion in global investors that allowed gold prices to recoup big chunks of the post-FOMC losses. Ahead of the US open that day, the spot price had returned to $1680/oz and higher. However, with the start of cash trading in New York, the new Fed narratives returned to the fore: gold's rally tailed off, flattened out, and weakened in the afternoon. Equity markets were mixed but much less volatile; other commodities stabilized, with some materials having made solid recoveries from the midweek beating. Even the Dollar's most recent rally is cooling a bit.
In Friday's business, however, the uncertainty in European markets spun out into what looks more full-blown flight, particularly in the UK markets.
UK market is imploding. Sterling is plunging to its lowest since 1985. Yields are surging higher -- 5 yr set for biggest move on record.
Traders are giving their verdict on Kwartang's budget, and it isn't pretty. pic.twitter.com/vWjvGpTit3
— Dani Burger (@daniburgz) September 23, 2022
Sharp declines in GBP and the Euro have had the immediate effect of-- you guessed it-- driving the US Dollar higher and higher, with the greenback reaching its highest marks in more than 20 years. Predictably, gold prices have collapsed again, with spot trades booking below $1650 midday (more than $20 off the pace of Thursday's closing price.) Similarly, equities are having a rough go. In light of the Fed clearly outlining their hawkish intent, any asset that doesn't have George Washington staring back at you is having another no-good, very-bad week.
Without a major driver expected to come down on Friday, the expectation is that investors will continue to digest Wednesday's FOMC news. Next week, with a similar lack of market movers on the schedule, this revised near-term path for the Fed (and, undoubtedly, public remarks by Fed officials in the days ahead) should continue to fuel the pulse of trading across the major asset classes.
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.