???? "Gold Bugs" go big! ?? Also: Credit Crunch or Squeeze? German Recession, Higher Oil ??? What IS a central bank?

• US large-cap S&P 500 closed 0.05% UP ▲?
• Tech-heavy Nasdaq Composite closed 0.18% UP ▲?
• Pan European STOXX Europe 600 closed 0.34% UP ▲?
• HK's Hang Seng Index closed 1.24% UP ▲?
• Japan's broad TOPIX closed 0.21% DOWN ??

?? Focus

• "Gold Bugs" go big!

?? In the Markets

• Credit Crunch or Squeeze?
• German Recession, Higher Oil

?? MoneyFitt EXPLAINS

• ?? What IS a central bank?

?? Focus

"Gold Bugs" go big!

The price of gold is continuing to surge and is now approaching an ALL-TIME HIGH after a six-month rally, boosted by massive buying from Chinese consumers and rising fears over the health of the US banking system. According to the World Gold Council, consumers in China started piling into gold bars, coins, and jewellery in the first three months of the year after Beijing lifted its zero-Covid policies. "Gold bugs", the name for long-time (often long-suffering) believers in "the yellow metal" are feeling vindicated, at last.

.....? Besides Chinese consumers, central banks ?? --particularly non-Western ones-- have been piling into gold at a record pace in a bid to counter their reliance on the US Dollar after Washington "weaponised" its currency in its sanctions against Moscow (see MFM on USDedollarisation).?

.....? Investors have also been using gold (which is priced in US dollars) as a way to play the increasing likelihood of US interest rates peaking and declining. Adding fuel to this has been last week's comments from the Fed hinting that its latest rate rise might be its last. Markets then extrapolated that after a pause, rates would start crashing down, particularly with the increasing likelihood of a bank-turmoil-led credit crunch (see below) tipping the economy into a recession. High interest rates on bonds suck demand away from gold as gold generates no income, so a reversal of that would lead to demand flowing back to gold as a store of value in an uncertain world.?

.....? Lower US interest rates are also usually associated with a weaker US Dollar, which itself is correlated with higher prices of commodities, like gold, which are priced in Dollars. This inverse relationship is not perfect, but basically, it's because when the Dollar weakens, commodities become cheaper and more attractive for buyers in other currencies.

Or he could have bought S&P500 ETFs

- Image credit: Ducktails / Disney via Tenor

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.....? But in the grand scheme of things, even with the gold price knocking on the door of a nice and shiny all-time high, the longer-term performance against equities remains pretty dull.

And 15 years isn't even a particularly long time

- Image credit: FinanceCharts

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?? In the Markets

Asian and European stocks rose on Monday, taking the lead from sharply higher US markets on Friday, led by a wild rally in regional banks and strong non-farm payroll data. This data suggested a resilient economy, though they also raise the chance of a longer pause in interest rates before a decline as the Fed attempts to squeeze out any remaining inflation. In another sign of easing inflationary pressures in the value chain, Tyson Foods, the world's second-largest producer of chicken, beef and pork, tanked 16% on weak company forecasts. Pork and beef prices compared to last year are down 10.3% and 5.4% and chicken prices could be much worse (or better if you're buying), though input prices like feed, grain, livestock and wages remain high.

..... ? Shares of recently hammered regional banks like PacWest and Western Alliance that had shot up on Friday continued to rally, though that faded by midday. But they didn't collapse! It's too soon to tell if last Friday's short covering rally was just "a dead cat bounce" (below) or a floor to the troubles in the space. Traders then turned their attention to a worrying Federal Reserve survey on bank lending that warned of tighter standards this year (see below.) This added to fears about a looming credit crunch that could potentially push the world's largest economy into a recession in the second half of the year.

??Dead Cat Bounce - a mini-explainer

• A dead cat bounce is a short and sometimes powerful rally interrupting a longer price decline before continuing its slide.?
• It's sometimes also known as "a sucker's rally" but at the time can be extremely hard to differentiate from a true market bottom, the end of a bear market (when prices keep going down) and the start of a new bull market (when prices keep going up.)

German Recession: Also flirting with recession is Europe's largest economy. After recently seeing factory order, retail sales and export numbers drop, Germany recorded a sharper-than-expected fall in industrial production, which is still below pre-pandemic levels. It was down 3.4% in March compared to February, the biggest drop in 12 months, and way weaker than the 1% drop predicted by Frankfurt's Finest. The worst hit was the country's carmakers, down 6.4%.?

..... ? Earlier reported March data shows that businesses and consumers are being hammered by surging inflation, sharply higher borrowing costs and weakening trade. Factory orders fell by 10.7%, the biggest monthly decline since the April 2020 pandemic lockdowns, retail sales dropped 2.4% and exports fell 5.2%, driven by weak shipments to both the US and China.

Higher Oil: Brent crude, the international benchmark, rose again on Monday, extending a 4% gain with another 2.3% to trade at $77 a barrel. Friday's strong US labour market data led to some easing of US recessionary fears, which had led to three straight weekly declines in the black stuff. Traders concluded that the selloff was overdone and started covering short positions ahead of the next OPEC meeting on June 4th.?

It's always driving season in California

- Image credit: Have you ever seen the rain / Creedence Clearwater Revival via Tenor

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..... ? The surprise production cut announced in early April by OPEC+ (see MFM) kicked in this month and we're approaching the US "driving season",? the period when Americans typically drive more for vacations and leisure activities. The peak driving season traditionally begins on the Memorial Day weekend at the end of May and ends on Labor Day in September.

Credit Crunch or Squeeze?

The US Senior Loan Officer survey conducted by the Federal Reserve shows that banks are worried about rising losses in their loan portfolios and --especially post-SVB etc-- that customers will continue to withdraw deposits. This has already led to a tightening of credit standards, and the recent/ongoing banking sector turmoil suggests this tightening will only accelerate. In other words, it will be harder and harder (and more expensive) for consumers and (especially small) businesses to get a loan, i.e. a Credit Crunch.?

..... ? US consumers have increasingly depended on borrowing to counter their dwindling savings in order to keep up their spending, which is more and more likely to take a hit, after a lag. Meanwhile, small businesses, which hire the majority of workers, will also feel the pinch and may feel increased pressure to downsize.

“The credit crunch, or at least the credit squeeze, is beginning... I think you have to say that recession is a possibility” - Austan Goolsbee, president of the Federal Reserve Bank of Chicago, speaking to Yahoo! Finance on Monday

..... ? The Fed concludes that in addition to the recent banking turmoil, worries about the “economic outlook, credit quality, and funding liquidity” could lead “banks and other financial institutions to further contract the supply of credit to the economy” and a "sharp contraction in the availability of credit would drive up the cost of funding for businesses and households, potentially resulting in a slowdown in economic activity.”

"I continue to think there’s a path to getting inflation back to 2% without a significant economic decline or significant increase in unemployment” - Fed Chief Jay Powell, speaking after the latest rate hike

..... ? Bond market prices have been indicating a recession for some time. The historically reliable indicator of "the inverted yield curve" (long-term US Treasury interest rates below short-term ones) has been flashing the signal since last July, only 4 months into the Fed's current rate hike cycle. Some (including the academic who first identified the relationship) say this should have been a sign for at least some caution in the pace of inflation-busting hikes… though the Fed still seems to think they will thread the needle and engineer a "soft landing."?

Inverted since last July and still at 40-year lows

- Image credit: St Louis Fed (FRED)

MoneyFitt EXPLAINS?

?? Central Banks

• A central bank is a financial institution that is responsible for managing a country's monetary policy and issuing currency. Central banks typically have a number of functions, including controlling inflation, regulating commercial banks, and providing financial services to the government. They are typically independent from political interference and are responsible for ensuring the stability of a country's financial system.?
• Central banks are different from commercial banks in that they are not-for-profit institutions and do not offer deposit accounts or other financial services to the general public. Instead, central banks provide financial services to the government and to commercial banks, such as lending money and acting as a lender of last resort.?
• Most money in circulation is created by commercial banks when they make loans to individuals and businesses. Central banks can control interest rates through the use of open market operations, which involves buying and selling government securities in the open market. This can influence the amount of money in circulation and the interest rates charged by commercial banks.