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 this week well below last Friday’s final looks. It’s a result that was could have mostly expected ahead of Wednesday’s pivotal FOMC meeting, but the yellow metal’s slide below $1840/oz was much less direct than we might have anticipated.
So, what kind of week has it been?
Virtually all of the relevant market news for this week begin and ends in one place: The Federal Reserve on Wednesday lifted their overnight interest rate target range by a relatively massive +0.75%; the first time the Fed has issued such an aggressive hike at a meeting since the early 1990s.
The Fed approved a 75 basis point increase on Wednesday, the largest rate rise since 1994. All officials projected rates rising to at least 3% this year.
— Nick Timiraos (@NickTimiraos) June 15, 2022
The decision to “triple” hike was directly influenced by last Friday’s disappointingly hot CPI report, which presented an argument against the idea that the highest level of consumer inflation in the US in 40 years has peaked—an impression and/or hope that was becoming commonly held earlier in Q2. Following May’s +0.50% interest rate hike by the FOMC and the announcement of plans to begin letting the Fed’s massive balance sheet of bond holdings roll off this summer, the broad market consensus through last week was that the US central bank would go up by 50 basis points again this week; we were among the pack that felt that even Friday’s CPI miss would be “too ‘little’ and too late” to compel the Fed to make a different choice in June.
From about the time that trading opened for Monday this week, certainly for the US session, investors and managers began pulling back from the markets and positioning for the possibility of a +0.75% (which the Fed’s Chairman Powell had spent ink and airtime discounting, in previous weeks.) US equities—but, similarly, prices for gold and Treasury bonds—took their first Monday steps straight off of a cliff: within an hour of cash-trading in New York exchanges, gold’s spot prices had fallen nearly $40/oz from its opening bids and yields on the US 10-year Note soared well above 3%.
Put in the least technical way possible: Higher Fed rates (which set the baseline for all interest rates on Dollar-denominated transactions) make the debt more expensive for companies to take on and, in many cases, to serve in the case of already-issued debt. The development can dim the outlook for the many, many (many) large companies that have fueled their growth—and the growth over the US stock market overall—on more than a decade of bottom-barrel-cheap debt. Higher rates also, historically, dull interest in non-yielding assets like gold as investors prioritize investment in US government debt which (in theory) offers the same high degree of safety but also fixed returns. Across the board, then, gold, as well as the global stock market, reacted appropriately to the suspicion that interest rates could be lifted 1.5x higher than anticipated in the immediate term, with rates continuing to rise either faster or with a higher terminal rate in the medium term (if not both.) When Monday’s session wrapped, the spot price for gold had fallen below $1820/oz for the first time since February, and the S&P 500 Index had officially slid into a bear market and the lowest value of the year (to that point.)
It wasn’t just fear of higher rates that put so much pressure on gold at the start of the week. In a rush that would continue through Wednesday morning, US Treasury yields (an obvious proxy for interest rate expectations) and the US Dollar (most often benefiting from expectations that the Fed will hike because it allows the Greenback to carry a better yield than the currencies of its top trading partners) reacted just as we would expect them to both steadily climbing higher. The benchmark US 10-year yield climbed to a peak around 3.5% on Tuesday (for the first time in over a decade) while the USDXY continued to break through multi-year highs. With Treasury yields so high and the Dollar Index over 105, although stocks had a less awful day on Tuesday, gold prices remained pinned to the mat.
That same reaction function via the Dollar and UST yields put some wind at gold’s back immediately following the Fed’s big reveal, and through much of Thursday’s trading, too. Equities initially celebrated the signal from the Fed that it would do anything to quell the threat of valuation-threatening inflation (but on Thursday those same investors would reel back under the stress of remembering that cost for such action will be valuation- (and growth-)threatening monetary tightening, en route to one of the worst days for stocks on recent record.) The markets for the Dollar and for Treasuries—which typically take a longer view than stock investors—seem unimpressed with the lack of a clear commitment from Powell & Co. to continue crusading so aggressively through the rest of 2022 and into 2023. With the Greenback weakening from Wednesday afternoon through Thursday, and the 10-year yield cooling down from its eye-watering peak above 3.5%, the gold market found its legs for a bit post FOMC: spot prices for the yellow metal-stabilized around $1835 Wednesday ahead of a Thursday rally that peaked above $1850/oz.
Gold’s current trend on Friday is less rose-colored, of course. Most major assets have spent the final day of the week (ahead of a Federal US holiday to be observed on Monday) correcting the severity of this week’s swings. Equities are recovering modestly with the Dow regaining a perch of 30,000, but concerns about the Fed’s rate hikes impinging on growth in the medium-term remain, and the Dollar rebounded on Friday while bond yields creep higher again. All this has left gold with little in the way of positive signals, and the precious metal looks set to close the week below $1840 for its worst trading week out of the last month. Next week’s calendar is light on hard data, but congressional testimony from Jerome Powell midweek will ensure that the details and the decisions made around this week’s Fed Day will return to focus for the markets. As the outlook for interest rate policy and inflation expectations shifts in the week ahead, so will go gold’s chart.
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 Tuesday for our preview of the week ahead.