Market Update: Holding Pattern

US equity indexes were mostly flat to down on the week: S&P500 -0.1%, NASDAQ -0.7%, and DJIA 0.0%.?Equities, especially technology stocks, were under pressure as inflation concerns remain a key focus ahead of the FOMC meeting next week. With the Fed wanting to collect more data, however, markets are likely to be in a holding pattern - reacting to individual data points. Upside surprises to inflation readings this week pushed the US 10 year Treasury yield up 23bps to 4.3112% and the 2 year yield up 25bps to 4.7307%. Separately, this past week marked the one year anniversary of the failure of Silicon Vally Bank.

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US Economic Data and Fed Pricing:

US CPI for February was released, coming higher than consensus expectations, especially for the service results.? February CPI rose 0.4% m/m to come in at 3.2% y/y - ticking up from 3.1% in January. Core CPI was up 0.4% m/m vs expectations of 0.3% to come in at 3.8% y/y vs 3.9% y/y in January. Core Services ex housing (ie super core) rose 0.5% m/m (rounded) after rising a strong 0.9% m/m in January. Both months came in at a still high 4.3% y/y. Services inflation remains sticky.

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February PPI readings also came in on the high side, with the headline rising 0.6% m/m - double the consensus estimate, and PPI ex-food and energy up 0.3% m/m vs expectations of 0.2%. Fed funds futures pricing (discussed below) shows that these readings are strong enough to keep the Fed on hold in March and May, with June becoming more questionable.?

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Fed funds futures pricing?has converged to the Fed's forecast of 75bs of rate cuts this year.?Consensus is forming around an initial 25bp rate cut in either June with approximately a? 50% probability of that priced or July with? a 47% probability priced.?

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Next week is the March FOMC meeting?and no rate cut is expected by consensus or priced. The market focus will be on Chair Powell's press conference, and the release of the Fed's updated Summary of Economic Projections. The main risk is that in light of the higher inflation data, the Fed could scale back its 2024 rate cut projection from three 25bp rate cuts to two. In this writer's opinion, however, it would be premature and not prudent from a credibility standpoint for the Fed to do so this early in the year.?

Chart: US CPI "Super Core" Services Prices are Moving Sideways

Precious Metals:

We continue to favor an allocation to precious metals including the diamond commodity for diversification and safe-haven purposes. Financial markets could be impacted by several potential sources of volatility this year including, geopolitical tensions, global elections, and both growth and inflation shocks. These potential financial market disruptors should create demand for precious metals as a hedge. In the second half of the year, Fed easing should support gold and silver. A strong to steady US consumer is a positive for the diamond market.

Diamond Industry

DIAMINDX is largely trending sideways at USD 4,300, up 2.6% from its low the first week of November 2023. The natural diamond industry is emerging from the supply overhang which hindered it in 2023 and is starting 2024 with a sense of equilibrium. The US economy, the world's largest consumer of diamonds, remains strong. There is increasing push-back on the lab grown diamond industry regarding questionable descriptions of the diamond product and claims of sustainability. Independent diamond analysts believe that demand for lab grown diamonds is leveling off as their prices are falling heavily.

The DeBeers Group 2024 Cycle 2 rough diamond sales rose to USD 430 million, up about 15% from the Cycle 1 results for the third consecutive rise - a sign of improved demand. Results were down only 13% year-on-year (from 2023 cycle 2).

Commenting on the results, Al Cook, CEO, De Beers Group, said: “I'm pleased to see a further increase in demand for De Beers rough diamonds during the second sales cycle of 2024. However, ongoing economic uncertainty in the US has led to retailers restocking conservatively after the 2023 holiday season. Consumer demand for diamond jewellery is growing in India but remains sluggish in China. Overall, we expect that the ongoing recovery in rough diamond demand will be gradual as we move through the year.”

To expand a bit on Cook's points:

-- The consumer in China has retrenched with slowing economic growth and trouble in the property sector, which is a main way consumers invest and save in China. Demand from China is unlikely to be a tailwind to the diamond sector this year.

-- The US consumer, while still strong, is concentrating spending in the services sector - travel/experiences. However, it is possible there could be a gradual shift in spending back to the goods sector. It is positive that natural diamonds' largest market has a strong economy.

Turning to lab grown diamonds ("LGD"), Tenoris, a data firm that analyzes a comprehensive set of US jewelry sales data, reports that LGD average retail price keeps falling, down 1% m/m and 28% y/y in February. Key LGD sizes are falling even faster - for example, prices of 2 carats declined 4% m/m and 29% y/y.

Tenoris notes, "these declines underscore two issues: Items in lab grown items in high demand are also subject to consumer price pressure because they comparison shop. Also, supply is so abundant that price reduction is almost necessary to get product moving." Finally, Tenoris analyst, Edahan Golan, notes that importantly loose LGD sales revenue year-on-year is now in decline. He says, "The drop in lab grown prices is so deep that the rise in unit sales is not making up for the loss in revenue."

Gold and Silver

Gold has surged in March so far, reaching continuous highs. XAUUSD has gained 5.6% month to date, and broke well through topside resistance USD 2,100, moving to USD 2,159 at the time of writing. It is nearing another important resistance level - USD 2,200. Gold was boosted by a weaker USD, lower US 10 year yield, an uptick in market volatility, a push topside through technical resistance levels (ie momentum) which drove tactical investor interest. In addition, the World Gold Council noted that "there’s also activity in the OTC market that may not be reflected in COMEX positioning or gold ETF flows but that likely provided further fuel to the market."

Silver, XAGUSD, has gained an outsized 11% on the month so far, breaking topside through USD 25.00 resistance to come in at USD 25.25 at the time of writing. The gold-to-silver ratio has fallen from 90 early in the month to 85.53 currently. Support comes in at 84.90 (200 day movg) and 84.00.

Chart: Bitcoin and Gold (XAUUSD) Rally Together. Bitcoin rallies on wider adoption with inflows to spot-Bitcoin ETFs and gold on central bank buying and geopolitical and macro risk.

USD

USD (DXY Index) is down in March so far. The DXY Index broke downside support at 103.00 recently, dipping to 102.71 last Friday but rebounding somewhat this week to 103.43 at the time of writing. For March, the USD is lower against all G10 currencies. A big mover has been USDJPY, with JPY strengthening as market participants believe that the Bank of Japan could exit its negative interest rate policy at next week's BoJ meeting. The DXY Index remains within its 105.00 - 102.00 trading range and is largely driven by US data and interest rates. While volatility for USDJPY ticked up ahead of the BoJ meeting, volatility for EURUSD and GBPUSD remain low.

Chart: DXY Index Within Range and USDJPY Strengthening

Ahead:

Next week's main event is the March FOMC on Wednesday - see discussion in the Fed section above. Also, the Bank of Japan meeting will be of interest. The BoJ may exit its negative interest rate policy. If it does so, this will be the first rate hike for the BoJ in 17 years.