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 on track to close the week considerably higher, after the key macroeconomic moments of the week unexpectedly created strong tailwinds for the yellow metal.
So, what kind of week has it been?
In Monday morning’s preview piece, it was a challenge to feel—much less sound—particularly optimistic about gold’s chances to put in a positive week: the Fed was poised to almost certainly hike by +0.75% again, attacking the case for gold by pushing the UST yield curve up and to the right while also gassing up the US Dollar’s strongest bull run in 20 years; Thursday morning’s Q3 GDP print had a chance of delivering news that could be destabilizing to markets in theory, but buy the start of this week might have already been talked-over to the point that impact would be minimal (robbing gold of what would normally be a strong catalyst for a risk-off rally.)
Funny enough, both of those macro events came to pass, more or less as projected by the consensus. In trading, however, it’s not just about calling the headline, but also predicting the market response. In both cases, the textbook expectation for how gold would react (which is to say, another quick slide) was turned on its head—Wednesday’s Fed Day did include some different rhetoric and changes than expected—and here we are. With the curtain ready to go up on the last day of trading for the week and for the month of July, gold spot prices have picked up more than $30/oz since Sunday nights open.
The Fed went Forward with a 75bps Hike; Looks to Back Off on Forward Guidance
After the gold market rode relatively flat through the first couple of sessions of the week while equities and other asset classes around the yellow metal fluctuated and (mostly) fretted about how aggressive the Fed might paint its future plans and/or whether Friday morning’s Wall Street Journal’s front page would just be “IT’S A RECESSION” printed in 124-point font, Wednesday was Fed Day. It was, in fact, the last formal FOMC meeting we’ll get until September, and the committee announced another interest hike of +0.75%, in line with the consensus expectations. Less in line with what might be expected on the heels of the Fed announcing another aggressive tightening step for financial conditions was the surge in gold price that lifted spot for the yellow metal by more than $20/oz at one point, before settling in the neighborhood of $1735. Similarly unexpected: a big rally in US equities, which was headlined by a +2.6% rally in the S&P and a NASDAQ surge that topped +4%.
These moves were less about what the Fed did on Wednesday (in which case further monetary tightening would be a mostly bearish input for stocks,) than about what Jerome Powell & Co. said. Rather, to the delight of writers who like to string repetitions together, it seems to be all about what the Fed said about what they’re not going to say much about anymore.
"We think it's time to just go to a meeting by meeting basis, and not provide the kind of clear guidance that we did on the way to neutral," Chair Powell says.
RIP forward guidance.
— Jeanna Smialek (@jeannasmialek) July 27, 2022
Although Powell, in his post-meting Q&A, hinted that a similarly “unusually large” rate hike could come around again in September, he indicated that the committee is going to be taking each move on a “meeting-by-meeting” basis rather than relying so heavily on forward guidance as the central bank has been for much of the last two-and-a-half years. The ripping rally we saw not only in gold prices to this news but in equities as well is attributable (as investors seem to see it,) to the idea that the removal of forward guidance cuts against the suggestion that the Fed will hike by 75bps again at summer’s end: Powell has now propped the door open to the possibility that the Fed might pause rate hikes sooner than later, without trying to hold off for a few meetings to “hint” about it.
GDP Went Down, Everything Else Went…Up?
The other big upside swing for the yellow metal this week—though lesser both in terms of the size of the lift and the shock that it delivered—came from Thursday’s reveal of the first calculation of GDP change in the US economy over Q2 2022. Investors, generalized into a whole, fretted for what seemed like the better part of a month over the possibility that second quarter GDP might reflect a second-consecutive fiscal quarter of economic contraction in the US, rather than growth, meeting the milquetoast, textbook definition of an economic recession. The big day came on Thursday morning and, to little surprise, the first pass at Q2 GDP lead with a contractionary number: -0.9% QoQ. Less severe than Q1’s final tally of -1.6% QoQ, but negative, still. And for all the handwringing in financial markets in the run-up about “are we really in a recession?,” US stocks on Thursday went…healthily in the green for the second day running. Hm.
It's not the most surprising reaction. After all, for as long as investors and pundits were ringing the alarm about “technical recession,” nearly as much energy was going towards asking if the indicators of a “technical recession” even matter given the counter-signals we’ve seen to the contrary: healthy headline number for the US labor market, and the recent season of strong quarterly earnings reports from big parts of the US economy (including a number of sectors that usually bear the brunt of a downturn in a real recession.
The first recession where leisure/hospitality companies are doing earnings beats and raises I guess: pic.twitter.com/HX8hpBJ5eW
— Conor Sen (@conorsen) July 27, 2022
Following the GDP print, the reaction in gold was what we would have expected, in a vacuum, on the back of negative GDP hit as spot prices took a second major step higher for this week, breaking above $1750/oz within an hour of the report. In the hours since gold has gone managed to consolidate new support around the same level. Investors have stepped into US Treasuries in a big way as well, knocking down yields. Both moves that kicked off on Thursday morning are traditional risk-off plays that we would expect from a destabilizing signal. The US Dollar remains (somewhat surprisingly) resilient following the news; this might be carry-over from the surge in Treasury bond prices, though—an interesting reversal of the recent trend that has seen the Greenback’s two-month bull run lifting bonds up alongside.
As gold looks to hold on to the majority of the week’s gains in Friday trading, the PCE Price Index report due this morning will likely just re-tread the same inflation data that the market has internalized since the CPI print earlier in the month. Instead, the next real test (and/or pivot point) for gold price looks like next Friday’s July Jobs report.
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.