Week In Review - Will the Storm Hit?

S equity indexes were mixed on the week: S&P500 +0.69%, NASDAQ -0.57%, and DJIA +2.1%.???On Thursday, NASDAQ fell 2% impacted by declines in Netflix and Tesla due to disappointing earnings results.?There will be an out-of-cycle rebalancing in the NASDAQ 100 on Monday. In a case of good news is bad news, equity indexes were concerned about US labor market resiliency bolstering the Fed's case for rate hikes as initial jobless claims were lower then expected (less people getting laid-off).

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In general, more market participants are coming around to the view of a soft landing for the US economy. However, that is not a given and the US economic outlook remains uncertain due to the lags in monetary policy tightening's effect on the economy, especially as this was an aggressive Fed tightening cycle.?Market participants are asking - will the storm hit?

Fed Pricing:

The peak in the fed funds rate is priced as November at 5.40%.??Market pricing has converged to the Fed's forecast of no rate cuts this year.

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Market participants are onboard for a 25bp rate hike in July (FOMC meeting next week) - it is fully priced in.??However, they are questioning the need for an additional 25bp rate hike in September (only a 16% probability priced in). Currently, there is approximately 135bps of rate cuts priced for 2024.

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Chart: Fed's June forecasts of fed funds rate (black line) vs. fed fund futures (purple line).?For end - 2024, market has priced in 55bps more of rate cuts than the Fed's forecast. If the US economy soft lands, then perhaps that pricing has to adjust up to the Fed's forecast.?

Precious Metals:

Precious metals were mixed this week. Investors are keeping an eye out for the peak fed funds rate, which they hope will be followed by a "pivot" in the Fed's narrative on inflation (to less hawkish) and, as a result lower, US yields and further USD decline, all of which would support precious metals prices. Given the uncertainty in the US economic outlook, we continue to see the need for an allocation to?precious metals in a portfolio both as a safe haven investment and for diversification to hedge against macro risk.?

DIAMINDX fell -0.4% on the week to USD 4830.?It is earnings' season -and luxury group Richemont reported results for its first quarter ended 30 June 2023. Sales rose 19% y/y in constant currency terms. There was a strong rebound in Asia Pacific following the re-opening of China and the return of cross-border travel. Sales were muted in the Americas, down 2% at constant rates, on both high comparatives and the uncertain macro environment.

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Growth across all business areas was led by the Jewelry Maisons, Buccellati, Cartier and Van Cleef & Arpels, rising 24% y/y at constant rates. Regarding jewelry, sales progressed in all channels and regions excluding the Americas where sales were broadly flat. Richemont's stock price was down 10.4% on the earning's announcement (Monday July 17) as market participants were both concerned and disappointed with results from the Americas. The uncertainty of the US economy ahead weighs on sentiment.?

Gold?rose 0.4% on the week to USD 1,963.?Gold has been returning to its historical role as a reserve asset. In 2022, the World Gold Council reported that central bank net purchases totaled 1,136t - the highest level of buying on record.?Central banks have been buying gold to diversify their reserve assets given geopolitical concerns as gold offers autonomy.?Central bank buying provides a floor to the gold price.

Turning to this year, according to the?World Gold Council in Q1 2023, "Official sector institutions remained keen and committed buyers of gold, adding 228t to global reserves." April and May, however, have seen outflows. Global central bank gold reserves fell by 69t April (net sales) and 27t in May. May data are the most recent figures. The Central Bank of Turkey has been the largest seller. It is believed that CBOT is selling gold to shore up its diminishing FX reserves as the Lira under pressure and to meet domestic retail demand for the metal.?

In order to lift gold sustainably above USD 2,000 and subsequently to a new high, it will need inflow from institutional investors. As noted in the July 7 edition of the WIR note, June saw outflows in global gold ETF's.?

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Silver?fell 1% on the week to USD 24.68 after last week's strong gains. USD 25.00 is resistance.?

In its latest?Precious Metals Weekly (July 20), Metals Focus ("MF") notes, "During 2020-22, exceptionally strong demand for silver coins and bars by western retail investors was an important feature of the global silver market..."?This was led by the US market and in Europe by Germany.?

Looking at this year, MF reports: "2023-to-date, however, has witnessed sharply contrasting trends between the two regions. Demand in North America has remained robust... By contrast, European investment effectively collapsed in H1.23..." MF notes that the US regional banking crisis in March boosted demand for silver. Lower demand in Germany was due to a change in tax treatment - "all silver bars and coins are now subject to the same 19% VAT in Germany" as opposed to previously there was favorable tax treatment for non-EU silver bullion coins. (source: MF link to report above).?

Chart: Central Bank holdings of gold

USD?

The USD (DXY Index) rebounded this week rising 1.2%. The index is back above 100.00 - finishing the week at 101.09. It has not recovered yet to its 103.50-102.00 trading range it was in from mid-June to the second week of July. The next resistance is 102.0. The DXY Index has largely moved sideways this year: 106.00 - 99.0 after its decline in H2 2022.?

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EURUSD fell 1% this week and is back under 1.1200 at 1.1117.??UK inflation was softer than expected. As a result, UK yields and the pound moved lower. GBPUSD fell 2.1%, moved sub-1.3000 to 1.2848.??JPY erased last week's gains vs USD falling 2.1% on the week. USDJPY is now back above 141.00.?

Chart: USD vs US 10 year yield.?Sharp drop in USD was July 12 release of June US CPI

Ahead next week:

The main event is the FOMC rate decision. As stated above, a 25bp rate cut is fully priced in.?Market participants will pay close attention to Powell's press conference for signals as to what is ahead at the September meeting - pause or another hike. On the data side, US Q2 GDP and PCE will be released.

The ECB will hold its policy rate meeting and press conference. The consensus expects a 25bp rate hike. The BoJ also has it policy rate meeting. The consensus no longer expects the BoJ to tweak its yield curve control at this meeting