LAWRIE WILLIAMS: Gold drifts downwards – equities worse
Fed chair Jerome Powell’s speech to the Kansas City Fed’s Jackson Hole economic symposium of a week ago certainly seems to have been having a lingering effect on the markets. Precious metals and equities mostly turned considerably weaker last week as the dollar indexes have advanced, although some sharp recoveries in gold and silver in particular were seen towards the end of the week. Bitcoin (BTC) initially fell back too, but managed a small recovery, but has since drifted downwards again and seems to be marking time just below the $20,000 level as the week drew to a close.
In his address to the symposium, Powell effectively averred that the Fed would do whatever it takes to bring inflation down to its target level of what we still feel is an unattainable 2% - unattainable for as long as the Russia/Ukraine war continues to keep global oil and food prices elevated. Worryingly, there seems to be no sign of an end in sight to that particular conflict in the near future. Powell’s predicted soft landing aims look to have been dropped altogether in favour of an enhanced shock to the economy to help reduce inflation – but even that may not be enough.
Proposed interest rate rises and associated data releases suggest that the U.S. and the world economies are definitely now headed for recession and nearly all markets are suffering accordingly. The Chicago Mercantile Exchange (CME)’s Fedwatch Tool, which provides a guide to the U.S. market’s expectations on the sizes of likely Fed rate increase impositions had seemed to be moving ever further towards predictions of higher rate rises ahead for the next few FOMC meetings. The likelihood of a 75 basis point rise at the September meeting, as opposed to the previously anticipated 50 basis point increase, at one time rose to around 75:25 at one time but has since moderated to 57:43. The predictions looking ahead to both the November and December FOMC meetings are currently also veering towards the likelihood of highish increases being imposed by then.
Only a distinct turndown in inflation data, showing that the Fed’s rate rises are having an effect in bringing inflation down, is likely to reverse this trend, and in our view this may well not occur as long as the war in Ukraine continues. The prospect is, therefore, for a continuing slump in equity prices. Gold may, or may not, follow suit, but probably remains a better investment diversifier in any case. It has definitely been suffering over the past few days falling back below $1,700 at one time, although again recovering considerable lost ground to close well above that level as the week came to an end. Silver had, if anything, been performing even more badly and settled comfortably below $18 an ounce midweek, but it too was showing something of a recovery at the week’s end. Equities had seemed to be making something of a recovery too, but turned lower again in later trading on Friday.
The next major data point which could have an impact will be the estimate of inflation in August when the latest Consumer Price Index (CPI) figures are announced on September 13th. While this may well show a fall in the year-on-year inflation growth rate, this should probably be ignored as inflation was already beginning to rise from mid-year 2021 and thus year-on-year inflation rate increase comparisons are almost certainly going to show smaller falls as the year progresses. Much more important will be the comparative month-on-month core inflation figures. In relation to those of the previous month this will show whether the inflation rate is really rising, falling or remaining much the same. In almost any scenario, though, inflation will remain well above average until at least the middle of next year, if not for longer. Once prices rise, they seldom seem to fall back again!
Perhaps a positive point which has recently emerged has been some fairly sharp reduction in global oil and food prices – the latter declining as some Ukraine grain shipments have resumed. But earlier big rises in price have meant that consumers are still paying much more for food and energy than they were only a few months ago. Inflationary pressures may thus be being reduced, but still remain a significant problem for many, if not most, people.
Perhaps of even more significance will be the next Q2 GDP assessment from the Bureau of Economic Analysis (BEA) which is not due until September 29th. This third, and final, calculation of Q2 GDP will determine whether the U.S. economy is currently in recession or not. Preliminary figures have suggested that the U.S. is already in a technical recession, although many economists as well as President Biden and Fed chair Powell dispute this on the grounds that employment figures remain strong enough to suggest that a true recession is not yet with us. These employment figures may well not be quite so strong by late September, though, particularly if Fed rate increases develop as currently anticipated.
By the time this new GDP assessment comes out, the next FOMC meeting will have already taken place and if the Fed decides to raise interest rates by 75 basis points this surely will be more than enough to drive the U.S. economy into definite recession if it is not there already. It is increasingly looking like the Fed sees a period of recession as yet another weapon in its inflation-busting armoury, although it will probably deny this. Such is central bank double-speak these days.