Week in Review: Still in the Fight

US equity indexes were mixed on the week: S&P 500 -0.28%, NASDAQ +0.59%, and DJIA -0.13%. Late in the week, rising US Treasury yields weighed on equities, but despite this and some hawkish Fed-speak, US equity indexes remained fairly resilient.

Meanwhile, US economic data are demonstrating that the US economy is not "down for the count" and is still in the fight.

On the data front:?

January CPI headline and core month-on-month reads came in on expectations rising?0.5% and 0.4% respectively. Headline CPI ticked down to 6.4% y/y from 6.5% y/y and core CPI came in at 5.6% y/y vs 5.7% y/y in December. The increase in headline CPI was largely driven by shelter and energy.?The S&P 500 futures could not find direction immediately on the release indicating that this was not a clear cut result.?The Fed's favored super core measure (core services ex housing) improved a bit on a monthly basis (chart below). However, getting inflation lower will be a process that takes some time and will likely mean holding the Fed Funds rate at a higher level for longer if the labor market continues to hold up.

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January retail sales surprised strongly to the upside, rising 3.0% m/m for the headline (vs expectations of 2.0%) and 2.6% m/m ex auto and gas (vs expectations of 0.9%). Retail sales were supported by the strong January jobs gains that the US payrolls report showed. The retail sales control group, used to derive consumption in US GDP rose 1.7% against 1% expected.?

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On Thursday, two Fed officials who are known hawks said that they would have supported a 50bp rate hike instead of the 25bp rate hike delivered at the policy meeting earlier this month. “I saw a compelling economic case for keeping the pace at 50 [basis points] at that meeting. I didn’t see a change in my outlook, that the funds rate would have to go above 5%,”?said Cleveland Fed President Loretta Mester (non-voter). Separately, St. Louis Fed President James Bullard (also a non-voter),?as reported by Reuters, said "I was an advocate for a 50-basis-point hike and I argued that we should get to the level of rates the committee viewed as sufficiently restrictive as soon as we could."

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Market participants have priced in two more 25bp rate hikes by June. According to futures, the peak in the fed funds rate is expected to be 5.29% in July. Approximately 40bps of rate cuts are priced by the end of January 2024.?

Chart: US CPI & Retail Sales M/M%.?January US retail sales results jump. Headline CPI was boosted by energy prices.?

Turning to the Diamond Commodity:

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DIAMINDX?

DIAMINDX increased 0.2% this week to USD 5,410. A still strong jobs market supports the outlook for consumer spending including spending on diamond jewelry.?

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Main headlines in the diamond industry this week had to do with the De Beers contract renewal negotiations with the government of Botswana.??The negotiations are comprehensive spanning future mining rights and the sale of rough diamonds. The two parties signed a?10 year diamond sales contract in 2011. This contract was set to end in 2021, but has been extended/renewed 3 times. It is now set to expire in June 2023. In addition, the negotiation covers the extension of?mining rights that expire in 2029.

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For background, Debswana Diamond Company ("Debswana") is an equal partnership between Anglo American unit De Beers and Botswana's government. The company operates four diamond mines: Jwaneng (one of the richest diamond mines in the world), Orapa, Letlhakane and Damtshaa.?Currently, Debswana sells 75% of its output to De Beers with the balance taken up by the state-owned Okavango Diamond Company.?According to Debswana, it is the largest contributor to the De Beers Group rough diamond production.

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As reported by?Agence France Presse, late last week, Botswana President Mokgweetsi Masisi threatened to walk away from the negotiation unless Botswana received a larger share of revenue. It seems that President Masisi's concern is that Botswana is missing out on profits from its diamonds beyond the rough production stage.?

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President Masisi has previously praised the?Lucara and HB Antwerp sales agreement, which was extended in November 2022 and runs through 2032. Under the agreement, HB Antwerp will purchase all of Lucara Diamond’s +10.8 carat rough diamonds from the Karowe mine in Botswana: "Lucara's +10.8 carat production is sold at prices based on the estimated polished outcome of each diamond, determined through state-of-the-art scanning and planning technology, with a true up paid on actual achieved polished sales thereafter, less a fee and the cost of manufacturing." A key component of the agreement is that HB Antwerp pays Lucara polished prices on its larger diamonds rather than rough prices.?

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A De Beers company official?told Reuters?on Thursday that "De Beers is confident of maintaining its long-standing partnership with Botswana..but some of the negotiations to agree new terms were complex."

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Gold?

Gold fell 1.2% on the week to end at USD 1,843.20.?Hawkish Fed-speak and a relatively strong USD weighed on it.?

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Silver

Silver fell 1.1% on the week.?Silver broke downside support at USD 22.00 to end the week at USD 21.75. The next support is USD 21.00 (100 day movg).?

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Chart: DIAMINDX, Gold, and Silver

USD?

USD (DXY Index) traded in a 102.50 - 104.50 range this week, ending at 103.97 at the time of writing - slightly higher than last week. February has seen renewed USD strength after the greenback declined October - January. This strength is a result of the market re-pricing Fed rate hike expectations in a more hawkish direction. Previously, market expectations of a dovish Fed pivot weighed on USD.?

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JPY was the weakest G10 currency vs USD this week, falling 2.2%. USDJPY ended the week at 134.17. 135.00 remains resistance. EURUSD was relatively unchanged on the week, ending sub 1.0700 at 1.0689.?

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In other FX news, Hong Kong Monetary Authority ("HKMA") intervened in HKD for the first time this year on Monday in New York, selling USD to keep the value HKD within its trading band, after it weakened to HK$7.8500 vs. USD this week. Rising US yields had pressured USDHKD higher.?

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

Ahead next week - select events:?

Market participants look forward to the FOMC minutes with a potential discussion/debate about slowing the rate hike pace to 25bps and the US PCE data.?

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Tuesday, Feb 21

Germanu ZEW (Feb); Canada CPI (Jan)

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Wednesday, Feb 22

Germany IFO sentiment (Feb), US FOMC meeting minutes

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Thursday, Feb 23

BoE's Mann speaks on "the results of rising rates: Expectations, lags, and transmission of monetary policy."

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Friday, Feb 24

U of Michigan Sentiment (Feb F); US Personal Income and Spending (Jan), Fed Gov Jefferson and Cleveland Fed Pres Mester discuss managing disinflation, Fed Gov Waller discusses "Why did we miscast inflation?"