Week In Review: The Forest and The Trees

US equity indexes were lower on the week:?S&P 500 -1.1%, NASDAQ -2.4%, and DJIA -0.17%. The US 10 year yield finished the week at 3.73%, having moved up from 3.52% last Friday. The rise in yields weighed on tech, as NASDAQ underperformed.?Volatility is rising with the VIX Index up above 20 from a low of 17.87 last week.?

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After strong US equity index gains in January to start off the year, market participants digested some hawkish Fed-speak and continued to contemplate the much stronger than expected US January payroll result. Markets are tactical as the Fed is data dependent. There is disagreement among market participants regarding the path of the US economy: a recession, a soft landing, or no landing. This is a case in which we seemingly have to watch the trees (ie the data points which have been surprising) and put them in context to see the forest (which economic landing scenario). We can't see one without the other currently.?

Table: Annual and January 2023 Returns

Some hawkish Fed-speak this week:

Last week, the FOMC hiked the Fed Funds rate 25bp rate to a range between 4.5% and 4.75%. This marked a slowdown from the previous rate hike paces of 0.50bps and 0.75bps. However, subsequently, the US had a strong January payrolls result of +517k vs expectations of +190k. As a result, market participants were eager to hear Fed Chair Powell's thoughts this week.?

On Tuesday, Powell participated in a discussion at the Economic Club of Washington D.C. Right out of the gate, Powell was asked "Had you known that the jobs reports was going to be as strong, would you have done 25bps or something different?"

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Powell responded along the lines of the FOMC statement, saying that disinflation has begun in the goods sector, but that "it has a long way to go." He noted that the services sector is not really showing disinflation yet.?As a result, further rate increases are likely and the Fed will have to hold policy at a restrictive level for a period of time.?Powell stated "we didn't expect the payroll report to be that strong. It kind of shows you why we think this will be a process that takes a significant period time."

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On Wednesday, NY Fed President Williams (voter) also suggested that the Fed Funds rate could be higher for longer, stating:?"...we need to retain a sufficiently restrictive stance of policy,?we're going to need to maintain that for a few years to make sure we get inflation to 2%..."

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Prior to the FOMC and Powell comments, futures anticipated the fed funds rate peaking at 4.90% followed by approximately 50bps of rate cuts in H2 2023.?Subsequently, re-pricing took place. As of Friday afternoon, the fed funds futures show that the Fed Funds rate will peak in July at around 5.17% and then approximately 45bp of rate cuts will occur by the end of January 2024.?

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Turning to the Diamond Commodity:

DIAMINDX?fell 1.3% in January. The declines in December and January were less than the monthly declines throughout H2 2022.?IDEX notes that polished prices for 1.0-ct and 1.5-cts were the worst hit, while 4.0-cts goods were resilient. On the week, DIAMINDX fell 0.9%.?

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Turning to the first De Beers site of the year,?De Beers brought in $450 million at its first sales cycle of 2023, a decline of 32% year-on-year, as the start of 2022 was strong. The result was up 8% from December’s revised total of $417 million. Rapaport, speaking with market insiders, noted that "De Beers reduced prices of 0.75-carat and larger stones, reflecting weakness in that category, while prices for in-demand smaller stones increased."

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Bruce Cleaver, CEO, De Beers Group, summed up the outlook for De Beers, and the perhaps diamond industry also, saying?“Consumer demand for diamond jewelry over the 2022 end-of-year holiday season performed well. As expected, given the macroeconomic outlook at the time, Sightholders took a cautious approach in late 2022 in planning their 2023 allocation schedule, with a greater weighting of goods to be purchased as the year progresses. While there is still some uncertainty over the macroeconomic environment, we see cautious optimism for demand to increase as China continues to reopen and inflation rates start to decrease in many major economies.”

Note, energy executive Al Cook will formally take over the role of De Beers Group CEO on 20 February, with Bruce Cleaver moving into the role of Co-Chair on the same date.?Read Bruce Cleaver's "exit interview" part 1?with JCK Online where he discusses the management transition, challenges and opportunities for De Beers, and how he will remain involved with the contract negotiations with Botswana.

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Gold?

After a solid start to the year in January (see table above),?the recent strength of US economic data and a resurgence in the USD put gold on its backfoot. Gold fell 0.14% on the week. The larger down move took place last week - gold fell 3.3% and moved sub-USD 1,900, breaking to the downside of its most recent trading range after the strong US payroll report.?

Silver

Silver fell 1.5% on the week for its fourth consecutive weekly decline. Silver fell 0.9% in January.?At the time of writing, silver was testing support at USD 22.00. The next support is the 100 day moving average at USD 21.74. The gold to silver ratio moved up to 84.58 vs 83.43 last Friday.?

Considering the recent better than expected US economic data, in the soft landing or no landing US economic scenarios, gold would likely underperform the diamond commodity and silver. Solid US consumer demand could support diamond jewelry consumption and a better economic outlook could boost silver from an industrial use standpoint. However, gold with its safehaven properties, would likely be the laggard of the group.

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Chart: DXY Index, DIAMINDX, and Gold.?A resurgence in the USD and US 10 yr yield has weighed on gold and silver.?

USD Strong in February

After a weak January?(see table above), the USD (DXY Index) gained approximately 0.7% this week - its second consecutive weekly gain. So far, so good in February for the USD as it has remained supported by a higher US 10 year yield. With the strong payrolls result last Friday, USD broke into a higher trading range of 102.50-103.90. 104.00 is resistance.?

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EURUSD fell 1% this week and moved sub 1.0700 for the first time since early January to ending at 1.0680. SEK was one of the stronger currencies vs USD in the G10 this week, gaining 0.7%, due to a hawkish Riksbank outcome at its policy meeting. Riksbank raised its benchmark rate by 50bp to 3.00%, signaled more tightening to come and somewhat surprisingly pledged a more active start to selling of their QE-related bonds, and said that it wanted a stronger SEK.?“If the krona continues to be weak, it will be considerably more difficult for the Riksbank to sustainably return inflation to the target...A stronger krona would be desirable," Riksbank officials said.?CAD was also a strong performer vs USD this week gaining 0.4%. Most of that gain came on Friday with a stronger than expected Canada January labor market report. Canada's jobs rose 150k vs 15k expected with most of the jobs being full-time.

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Chart: USD (DXY Index) and US 10 year yield.?A rise in the 10 year yield has supported USD.?

We spent last week at the iConnections Global ALTS 2023 conference in Miami.?Here is an article?by Reuters Reporter Jamie McGeever on investor participants' collective mood.?

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Ahead next week - select events include:?

A light data week - the highlight is US CPI for January.

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Monday, Feb 13

Japan GDP Q4P

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Tuesday, Feb 14

Eurozone GDP Q4P,?US CPI (Jan), Philly Fed President Harker speaks on the economic outlook, NY Fed President Williams speaks at event hosted by NY Bankers Association.?

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Wednesday, Feb 15

US Retail Sales (Jan),

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Thursday, Feb 16

ECB January Economic Bulletin; ECB's Panetta speaks on "Monetary Policy after the energy shock", St. Louis Fed President Bullard speaks on US economy and monetary policy, Cleveland Fed President Mester speaks on the US economic outlook.?

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Friday, Feb 17

Richmond Fed President Barkin discuses the US labor market.?

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