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 appear to be wrapping this truncated trading week at a slight loss compared to Monday evening, but having demonstrated some valuable resolve above $1700 in the face of a US Dollar that continues to run rampant on Fed forecasting.
So, what kind of week has it been?
Even accounting for the logistics of a week that is shortened by the Labor Day holiday in the US while also signaling the return of the majority of investors and traders back to the markets from the summer holidays, this has been an odd one for gold, as the yellow metal has shown a much wider variance than other major assets over four trading days. And yet, on Thursday we saw what’s become a very “normal” function for gold in 2022: a deep impression being made in markets by communication from the Federal Reserve and its impact on US Dollar trading.
While other major asset classes had a mostly uneventful start to the holiday-shortened week, gold prices immediately felt pressure from a US Dollar that was gaining momentum from the very start on Tuesday as markets began re-thinking earlier bets that improving inflation data might draw the Federal Reserve to slowing the pace of rate hikes, as the clear strength of other economic measurements appear to pave the road for the Fed to continue to be super-aggressive instead. The drag exerted by the Dollar on Tuesday saw gold prices fall steadily through the session, even briefly below $1700 during the overnights.
Following a tepid return from the holiday for stocks, Wednesday’s session saw positivity and momentum from investors driving not only US equities to a strong performance, but also gold. The NASDAQ, which has been a bit of a laggard compared to mostly flat runs by the other key stock indexes as higher Treasury rates dragged on growth names, finally turned around a losing streak that totaled seven sessions; the S&P and the Dow caught their strongest days in weeks. Most surprisingly—especially relative to the Tuesday out—gold prices rallied in the US trading hours to well above $1715/oz. All this happened despite a steady flow of hawkish Fed Speak from key FOMC participants.
Brainard raises risk of overdoing it on rate hikes, not something we heard in Powell's uber-hawk speech two weeks ago.https://t.co/f0KNUgRa81
— Neil Irwin (@Neil_Irwin) September 7, 2022
The thrust of Wednesday’s comments from Fed officials landed primarily on the well-worn point that the central bank is “fully committed” (or some similar description) to battling down the decades-high consumer inflation despite the steeper risks to economic growth that an aggressive campaign on hiking rates and otherwise tightening monetary conditions could bring about. What was more notable was an assertion to the point that the FOMC does not see the framework as “slow the economy just until some downward velocity is achieved on inflation data, then mellow out,” but rather that it will take a more sustained period of higher interest rates to ensure consumer prices return to the Fed’s mandated target of 2% (on average.)
If this seems like it would be objectively “bearish” for gold— and for US stocks, and, really, the markets for any financial commodity that typically moves in inverse proportion to a strong US Dollar, because, as we’ve seen all year, even the suggestion of Fed hawkishness kicks off another leg of 2022’s bull run for the Greenback—you would be correct. And Wednesday did see the Dollar notch new 20-year highs against its primary trading partners. However, investors may have latched on to the comments from Fed Vice Chair Lael Brainard that more directly acknowledged the reality that the longer the Fed keeps its foot on the gas, the greater the risk of more severely negative impacts on the US economy as a whole. Markets appeared to read these remarks from such a prominent FOMC participant less as a warning of rough waters that are certain to come, and more as an acknowledgment that the Fed will, at some point, need to exercise more caution. On this note, despite the Dollar strength, gold climbed out of the canyon, and US stocks made hay.
Thursday, however, and a scheduled appearance by Fed Chair Jerome Powell, had a very “wait until dad gets home” feeling to it as US trading hours finally got frothy. The Wednesday/Thursday overnight sessions were dominated by expectations of a record interest hike from the ECB, which Frankfurt delivered on Thursday morning by matching the Fed’s +0.75% increments and bringing rates in the Euro Zone back above 0.0% for the first time in roughly a decade. In the build-up, London-based trading pushed the Euro to its strongest peaks in recent sessions, which had the effect of cooling the Dollar’s surge; on the charts, we saw EUR/USD once again rotate back above parity and gold spot prices moved as high as $1725 with relative ease. Following the actual announcement from the ECB, and then exacerbated by the comments from Powell later in the US morning, the respite from the Dollar’s reign was reversed as gold slumped back (but, importantly, exhibited better support at $1705,) US Treasury yields spiked again with a confident eye on a 10-year yield over 3.3%, the Euro slipped back below Dollar-par, and equities seemed devoid of Wednesday’s momentum.
“I can assure you that my colleagues and I are strongly committed to” bringing inflation down, says Fed Chair Jay Powell. “We will keep at it until the job is done.” https://t.co/izsTVU8fhG pic.twitter.com/nymdk35dFM
— CNBC (@CNBC) September 8, 2022
Powell didn’t have much that was “new content” compared to the FOMC officials’ remarks earlier in the week. But what has left the biggest impression on the collective psyche of the market—as evidenced by a look at the headlines that Powell’s interview has generated-- is Powell’s reiteration of Brainard’s point (also made by others) that the Fed will continue with their path of rate hikes, and then will hold higher rates in place “until the job is done.” The most direct impact this had in markets was to push the consensus pricing of the Fed Funds Futures curve to assume another “jumbo” hike of +0.75% this month, reversing the drift in the curve that we’ve seen as some analysts and investors bet that the Fed might ease back to +0.50%. The sentiment shift represented by this shift in the Fed futures market is the same that has boosted the Dollar back near its weekly highs, clawed gold prices back to flat for the week, and has made it difficult for any equity trader to express much optimism for near-term growth.
Gold has demonstrated an interesting dynamic at the end of this week, as a relatively new market focus on the Euro Zone and its currency during London trading hours has, in the early hours of Thursday and Friday morning, driven EUR higher at the Greenback’s expense and opened up a channel for gold to rise—ahead of Friday’s New York open, gold spot traded to a weekly peak near $1730/oz—before the advent of US trading desks has driven the Dollar back into the catbird seat.
It would be interesting to see if this new paradigm-in-miniature might persist for the yellow metal’s trading patterns, but the focus will surely shift early next week as investors receive the newest data set on US consumer inflation (on Tuesday.)
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.