Gold is recovering from its late-July lows & is up 2% this week
Gold’s continued recovery from its late-July lows carried the yellow metal to its highest level in a month over the past week. This largely reflected gold assuming its classic role as a safe haven amid geopolitical concerns, in this case tensions between the US and China as a consequence of US House Speaker Nancy Pelosi including Taiwan in her tour of several Asian countries, a stopover to which China had objected. In addition to the safe-haven demand, gold was also buoyed by a weaker greenback, as the US Dollar Index slid 0.7%. US Treasury yields were mixed and so not impactful. In the week to Thursday’s close gold gained 2.0%, leaving it down 2.1% this year (spot ref.: $1791).
The Reserve Bank of Australia kicked off the latest round of central bank rate hikes by raising its cash target 50bp to 1.85% on Tuesday. This was the RBA’s fourth rate hike in as many meetings since commencing a tightening cycle in May, and the third 50bp hike in a row; the inaugural hike was 25bp. The RBA in its statement described the latest move as “…a further step in the normalisation of monetary conditions in Australia”, and said it “…expects to take further steps…over the months ahead.” However, given its concerns around household spending and consumer confidence in light of high inflation and higher interest rates, the RBA qualified by saying policy “…is not on a pre-set path”. AUDUSD edged 0.3% lower over the week and Aussie 3y and 10y yields eased 6-8bp.
The Bank of England followed on Thursday with a 50bp hike in its Bank Rate to 1.75%. This was the BoE’s sixth hike in a row since commencing tightening in December of last year and its first 50bp hike since 1995. The BoE’s statement suggested a stagflation environment on the horizon, with the UK economy “…now projected to enter recession from the fourth quarter of this year” and inflation expected “…to remain at very elevated levels throughout much of 2023…”. Much of the BoE’s downbeat growth outlook stems from pressure on UK households’ finances as a consequence of significantly higher energy costs: “Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.” The BoE also said it is “provisionally minded” to begin actively selling Gilts currently held in its Asset Purchase Facility after its policy meeting in September; the sales are estimated at roughly ￡10bn per quarter. GBPUSD edged up 0.1% over the week and Gilt yields firmed: 2y +12bp, 10y +4bp.
The Reserve Bank of India capped off the week with a 50bp hike in its policy repo rate to 5.40% on Friday. This was the RBI’s third hike since commencing a tightening cycle with an intermeeting +40bp in May; it followed up with +50bp at its June meeting. The RBI kept its inflation and growth projections for the current fiscal year at 6.7% and 7.2%, respectively. Governor Das in his statement reiterated the desire to calibrate monetary policy so as not to threaten growth. USDINR ended the week -0.5% and India’s 10y bond yield -3bp. While the latest hike adds to interest-rate support for the rupee, there remains concern related to India’s external balances: the preliminary trade balance for July reached a record-wide $31.0bn deficit. Separately, outflows have depleted India’s FX reserves by roughly 11% (-$71bn) from the peak high of $642.5bn last September.
Eurozone data continued to paint a downbeat picture of growth prospects. The bloc’s July manufacturing PMI fell to 49.8 – below 50.0 signals contraction – from 51.1 in June, and the services PMI dropped to 51.2 from 53.0 in June. Eurozone retail sales in June were down 1.2% m/m and dived 3.7% y/y. Bloomberg on Tuesday reported that the ECB appears to have supported peripheral nations’ (Italy, Spain, Portugal, Greece) debt over June-July to the tune roughly €18bn; the ECB’s holdings of so-called donor nations’ (Germany, France, Netherlands) debt fell nearly the same amount. EURUSD ended the week up fractionally, +0.4%, and Germany’s 10y Bund yield little changed.
Switzerland reported July inflation at 3.4% y/y, the same as in June and so still holding near a three-decade high. The Swiss franc gained 0.5% versus the US dollar over the week. The yen gained even more versus the greenback, a hefty 2.4%, as fears of a recession in the US kept long-end Treasury yields suppressed (i.e., less-wide interest-rate differentials between Japan and the US). An element of safe-haven demand may also have boosted the yen given the US-China geopolitical concerns mentioned earlier.
Nominal US Treasury yields were mixed in the week to Thursday’s close, in the short end higher, 2y +18bp to 3.03%, reflecting comments from various Fed officials that more rate hikes are needed to get inflation down; but in the longer end contained, 10y unchanged at 2.68%, amid ongoing concerns about slower growth. Real Treasury yields (TIPS) rebounded mutedly, the 5y by 10bp to 0.12% and the 10y by just 2bp to 0.22%. At Thursday’s close, the CME Fed Watch Tool showed the probability of a 50bp hike at the September FOMC meeting at 64.5%. The probability of a 75bp hike was at 35.5%.
Recession fears worked to the detriment of oil prices. Brent lost about 12.0% and WTI nearly 10.0% over the week – even with OPEC+ on Wednesday announcing a mere 100k bpd production increase for September, much less than the 600k+ bpd addition for July and August. A sharp rise in US oil inventories, +4.5mn barrels versus a consensus for a 600k barrel draw, reported by the EIA a few hours after the OPEC+ announcement apparently carried more weight. A “sources said” report by Reuters on Thursday alleged that Saudi Arabia and the UAE were holding off from utilizing spare production capacity in case oil supply became more constrained later this year and/or into early next year.
Despite recession fears and concerns around high inflation haunting many countries across the globe, Middle East economies appear to be doing just fine. For example, Saudi Arabia’s preliminary estimate of GDP for Q2 was 11.8%, up from 9.9% in Q1. The S&P Global composite PMI for the UAE in July rose to 55.4 from 54.8 in June. As for inflation, Bahrain’s June CPI fell to 3.1% y/y from 3.5% y/y in May, and Kuwait’s June CPI edged down to 4.42% y/y from 4.52% y/y in May. Saudi Arabia’s Tadawul All Share and Abu Dhabi’s FTSE ADX General were up 2.0-2.5% over the week to Thursday’s close. Bahrain’s All Share and Kuwait’s All Share were marginally lower, by 0.2-0.4%.