This week left gold down 3.0% this year at $1,776
Direction in gold over the past week seemed more driven by risk appetite than moves in the US dollar or US Treasury yields. Low market liquidity into holidays/year-end likely contributed to two-way volatility. The first of gold’s two main catalysts was softer-than-expected US CPI, which sent it higher. The second was the Federal Reserve making clear that its fight against high inflation had more rounds to go, which not immediately but eventually turned gold back lower. The net result for the yellow metal in the week to Thursday’s close was a pullback of 0.7%, leaving it -3.0% this year (spot ref.: $1,776).
US November CPI was reported on Tuesday at 7.1% y/y, lower than the 7.3% y/y consensus forecast and down from 7.7% y/y in October. This outcome renewed hopes that the Fed might soon call time on its aggressive policy stance. Alongside a rally in equities (at least initially), gold traded up to within about $5 of where it started this year ($1,830). A day later, however, the Fed gave no indication of relenting in its fight against inflation. This was evident in not only hawkish remarks from Chair Powell at this press conference, but also in the new Summary of Economic Projections showing a rise in officials’ expectations for the federal-funds rate next year. Gold fell back below $1,800.
The Fed’s rate move Wednesday was a widely expected 50bp hike in the target range for its fed-funds rate to 4.25-4.50%. That was a downgrade from the 75bp rate hikes delivered at the last four meetings. The move brought cumulative hikes since starting tightening in March to 425bp. The statement leaned hawkish in again noting that “…ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.” The statement also said shrinking the Fed’s balance sheet would continue. From a peak of $8.965 trn in April, total assets on the balance sheet have come off to $8.583 trn, or by just 4.3%, as of Dec. 7. The new Summary of Economic Projections had the median fed-funds rate at 5.1% at the end of 2023, up from the 4.6% projected in September.
As is typically the case when the Fed moves its policy rate, those Middle East central banks whose currencies are pegged to the US dollar did likewise. Three examples this time are: 1) In Saudi Arabia, where the riyal (SAR) is pegged to USD around 3.75, the central bank upped its repo rate 50bp to 5.0% and its reverse repo rate 50bp to 4.5%; 2) In Qatar, where the riyal (QAR) is pegged to USD at 3.64, the central bank delivered 50bp hikes in its deposit rate to 5.0%, lending rate to 5.5%, and repo rate to 5.25%; and 3) In the UAE, where the dirham (AED) is pegged to USD around 3.6725, the central bank hiked its base rate on the overnight deposit facility by a similar 50bp to 4.4%.
The Fed, however, was only the opening act of a rate-hike drama featuring three other G10 central banks that would play out over the next 24 hours. That all three followed the Fed, in the respect of both rate hikes and hawkishness, further weighed on risk sentiment, and gold in turn. First up Thursday was the Swiss National Bank hiking its policy rate 50bp to 1.0%. This brought to 175bp the cumulative tightening since June.
In its statement, the SNB said “It cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term.” The SNB also reiterated willingness “…to be active in the foreign exchange market as necessary.”
Next was the Bank of England with a 50bp hike in its Bank Rate to 3.5%. In line with a three-way vote split among Monetary Policy Committee members – two for no change, one for a 75bp hike and the remainder for the +50bp that prevailed – the Monetary Policy Summary noted “The majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target.”
Last was the European Central Bank hiking all three of its policy interest rates by 50bp, deposit rate to 2.0%, main refi to 2.5%, and marginal lending to 2.75%. This brought cumulative hikes since July to 250bp. The ECB’s statement was very Fed-like in not only warning of further hikes but also saying policy rates needed to “…reach levels that are sufficiently restrictive…”. President Lagarde’s press conference was hawkish, too.
Versus the US dollar in the week to Thursday’s close, the Swiss franc gained 1.4%, sterling was little changed (-0.1%), and the euro was up 1.2%. The US Dollar Index retreated a further 0.5%, leaving it down about 8.3% from its late-September highs.
Also in the week to Thursday’s close, the nominal 2y Treasury yield was down 8bp to 4.23%, the 5y down 9bp to 3.62%, and the 10y down 4bp to 3.48%. Although lower yields might seem incongruent with the Fed not only hiking this week but also warning of more, there was likely a fair amount of safe-haven Treasury buying given the selloffs in equities, as well as on the view that Fed (over)tightening may cause a recession. Real Treasury yields (TIPS), were slightly firmer: 5y +6bp to 1.41%, 10y +8bp to 1.28%.
Oil prices rebounded after probing their lowest levels in a year. Both Brent and WTI crude gained a little over 5.0% in the week to Thursday’s close. Their comebacks might have gathered pace had the rate hikes from the Fed et al. later in the week not stoked fears of recession and, hence, rekindled talk of oil demand destruction once again. The International Energy Agency in its Monthly [December] Oil Market Report nudged up its forecast for oil demand growth this year 140k bpd to 2.3mn bpd. Similarly for next year, the IEA upped its forecast 100k bpd to 1.7mn bpd. Somewhat contrary to the market concerns about so-called demand destruction that have been around for a while, the IEA noted surprisingly strong oil consumption “…in non-OECD regions, including China, India and the Middle East.” OPEC in its Monthly [December] Oil Market Report kept its world oil demand forecast for 2022 at 2.5mn bpd, and for 2023 at 2.2mn bpd.
We are taking a publication break and so use this opportunity to wish our readers happy holidays and all the best in the new year. Our weekly commentary will resume Jan. 6.