Tariff Deferral in The U.S. is a Spoon of Honey in a Barrel of Tar

This news provoked a strong positive reaction from the markets, allowing the U.S. indices to recover from the downturn at the beginning of the week. China’s HangSeng and ChinaA50 turned to growth, moving away from multi-month lows. The psychological effect is also important for the markets. Many times, we have seen how a sharp escalation of trade disputes is replaced with some relief. However, the general trend is still in the direction of tightening, although the mood is still far from panic.

An alarming surge of inflation in the U.S.

Trump’s reason for postponing the introduction of tariffs was to take care of consumers so that they could avoid a price spike before the high pre-Christmas season, as the tariffs promise to result in higher prices. Indeed, the tariffs would be bad news in light of the already rising inflation. Fresh estimates of consumer inflation in the U.S. have exceeded expectations. The core price index (excluding food and energy) grew 0.3% in June and July consecutively (the sharpest two-month increase since 2005) and accelerated to an annual rate of 2.2%, where it was last year when the Fed raised rates quarterly. This is a clear argument against the Fed’s rate cuts, which could further spur inflation.

German economy turned down

Separately from the U.S. data, it is worth noting a sharp decline in business sentiment in Germany, where the ZEW index collapsed to its lowest level in 8 years. In addition, wholesale prices are declining to last year’s levels, while consumer inflation is growing by 1.7% YoY.

China slows down again

The data that came out of China in the morning is also more pessimistic: after the spike in June, the growth rate of the production sector slowed down to 4.8%, the new 17-year lows. Investment and retail sales also disappointed, returning to a slowdown. At the same time, consumer inflation is gaining momentum, according to last week’s data.

Mild stagflation?

In normal times, rising inflation is an important indicator of economic health and consumer demand. However, in this case, there is a risk of a soft form of stagflation developing, as price increases are spurred by tariffs. At the same time, central banks are unable to hold back price rises through rate increases, so as not to hamper the already weak economic growth.

Budget is full of debt

Separately from the inflation and production sector, the budget policy should be mentioned. Both in China and the United States, the authorities have tried too hard to stimulate growth in “normal times,” so that now the gunpowder reserves are depleted. The U.S. budget deficit since the beginning of the year has already exceeded last year’s levels, and the total debt exceeds 105% of GDP or 22.5 trillion. China’s national debt is not so great – 9.5 trillion or 62% of GDP, but most experts point to the debts of provinces and cities that are not visible on the surface but also deplete resources for growth.

This article was written by FxPro

Gold Rush Puts XAU/USD at Fresh Highs, US CPI higher than expected

The gold rush, bonanza, the king Salomon mines, yes, but it is all about risk aversion my beloved FX Emperors.

Fears of a global recession are rising all over the markets as investors are digesting Hong Kong violent protests, Argentinian electoral results, and the 2-year to 10-year yield spread which has narrowed to 4.68 points on Tuesday.

Risk aversion is on the market, and it is fueling gold and silver to fresh highs.

Are bonds ready to signal recession?

2-year and 10-year yield spread

One of the most critical recession signals in the market is the difference between 2-year and 10-year bonds. Well, the yield between these two bonds has narrowed to only 4.68 basis points on Tuesday, driving the curve to its flattest level since 2007, adding more risks to potential inversions.

Remember that inversion in the 2-year and 10-year bonds is a critical indicator as it has preceded every recession over the past 40 years.

The market is also watching the 30-year Treasury bond as it is trading near to its all-time low at 2.116. In that framework, fears of a recession are fueling gold and silver to fresh highs.

US CPI reports faster core inflation than expected

CPI data July - August 13

Prices in the United States rose faster than expected in July as the Bureau of Labor Statistics reported a 0,3% increase in prices between June and July. Inflation rose 1.8% from July 2018, above the 1.7% expected by market.

However, the more important CPI ex-food and energy rose 2.2% YoY in July, above 2.1% expected by market.

Hong Kong and Argentina political turmoils add pressure to markets

Protests in Hong Kong with the close of one of the most important airports in the world have sparked concerns about political stability in China. Everybody remembers what happened in Tiananmen square in 1989, something that would put China in a delicate position if it occurs again.

China is in the middle of a trade war with the United States. Every movement from both countries is being watched closely.

In this regard, USD/CNY is advancing again on Tuesday after a brief setback on Monday. The yuan is performing near to its weakest level against the dollar since March 2008. USD/CNY is 0.13% positive on Tuesday at 7.070.

In Argentina, the overwhelming victory of the Peronismo against current president Mauricio Macri in the first round of election left the country in uncertainty as another government from party-backed by Cristina Fernandez de Kirchner would delay the recovery of the country. Stock markets and the peso in Argentina were collapsing on Monday, and fears of default are over the table.

Gold jumps to fresh highs since April 2013

XAUUSD daily chart August 13
XAUUSD daily chart August 13

Gold advanced on Tuesday as investors are in a rush for the metal due to its safe heaven condition. However, XAU/USD is now moving back down to more moderated prices.

XAU/USD jumped to trade as high as 1,535 on Tuesday, its highest level since April 2013. But, US CPI is pushing prices down, and it is currently trading at 1,521, 0.66% positive on the day.

The unit is well supported by the 1,520 area, which previously acted as a resistance.

Silver breaks above 17.30 and trades at 18-month highs

XAGUSD daily chart August 13
XAGUSD daily chart August 13

After several sessions testing the 17.30 area, silver finally broke above that level, and it jumped to trade as high as 17.50, its highest level since January 2018.

Silver is now trading off highs at 17.35, in a consolidation pattern but still adding a 1.90% daily gain.

Technical conditions remain favorable for the metal with the 16.80 acting as strong support and now the 17.20 level working as a new floor for another bullish leg.

Remain Cautious, The Worst is Not Behind Us

Market participants have enough complexity in their trading without having to assess how assets will react to news when often logic means little. So, the fact that bonds rally (yields lower) on bad news and subsequently we see equities trade lower, makes life a touch easier. The TINA trade is seemingly over, and the equity market is sensing a message from both from the bond market, which to be fair isn’t particularly upbeat right now.

Economic data and the S&P 500

If I look at the relationship between the S&P 500 and the Citigroup US economic surprise index, we can see an interesting correlation. I have flipped the S&P 500 to highlight the relationship, but as US data has come in slightly hotter than expectations in recent weeks, with the Citigroup surprise index (white) increasing, equities have still struggled.

(White – 30yr Treasury, orange – 30yr Treasury implied volatility)

The question is, why are stocks falling when data is coming in somewhat better and failing to rally when the data comes in worse? Well, firstly the flow into longer-maturity bonds has been relentless, as we can see here from the US 30-year treasury (white). The buying in the long-end has been one-way, with yields now at 2.14% and about to test the 2016 low of 2.08%, and as we can see US 30-year Treasury implied volatility has pushed to the highest levels since early 2018.

Equities are no longer rejoicing at the lower yield environment, in fact, with the Fed’s recent formal communication, detailing a bank that is still reluctant to ease for a sustained period, any positive economic data that threatens the four rate cuts that are priced over the coming 12 months is seen as risk negative.

US CPI is near-term event risk

With this in mind, keep an eye on US CPI due at 22:30 aest, with the consensus calling for headline CPI to push to 1.7% (from 1.6%) and core CPI to remain at 2.1%. The risks seem symmetrical, but the market will be sensitive to this, and from a simplistic perspective, a hotter number only reduces the need for the Fed to ease in September and this will be a headwind for equities. Put USDCHF (see below) on the radar with a weak CPI print likely pushing yields lower with the probability of a 50bp cut in September increasing from 31%.

With inflation on the mind, we can also see US five-year inflation expectations holding in at 1.80%, and until we see this instrument trending lower the market will demand more from the Fed, but they may not get what they want.

Happy to stay cautious on risk assets

As previously stated, I think that while the Fed would be influenced by external factors, they are watching US and global inflation-expectations and financial conditions very closely. Neither variable, if we take these in isolation, are giving us any reason for the Fed to ease aggressively, and that in itself makes me feel caution is still warranted and the likes of gold, the JPY and Treasury’s, despite being incredibly well-loved, have further to go.

If I look at the S&P 500, it feels as though the risk is, we head back to the August lows and a re-test of 2820. I would expect the bulls to defend this area again, but that depends on the news driving at the time, and if I knew that news flow that was driving us into that support zone then I would share. If I look at the S&P 500 high beta index vs low volatility index (denominator) ratio, which is a good way of visualising how defensive stocks are outperforming the theoretically more riskier stocks, we can see this working in favor of defensive stocks.

We can look at the US 10-year ‘real’ (or inflation-adjusted) Treasury, yielding 4bp and, about to turn negative. We can see the US 2s vs 10s yield Treasury curve now a mere 5.9bp from inversion, with long-term yields lower than short-term yields. It’s obviously a global issue, with Australia’s yield curve (2s vs 10s) now at 19bp and at the lowest since 2010, with calls for inversion here growing by the day. Hardly a development in which equity is going to shine and further confirmation the T.I.N.A trade is waning.

The geopolitical argument is real and another reason why equities are failing to rally when we see any better data. Traders are currently treated to a whole barrage of negative themes. At the epi-center is an ever-deteriorating US-China trade relation, with Trump putting on the façade that he’s happy either way if the talks take place in September. The narrative in local Chinese press is defiant, with calls they can “defeat any challenge”, and that the “US should not underestimate China’s will”. Talk is we could see China place new restrictions on exports of rare-earth to the US.

We have developments in Argentina, which is weighing on EM, while Hong Kong is clearly a bigger market issue and we watch to see how this unfold. Traders are so short of GBP, with GBPJPY or GBPCHF getting taken to the woodshed and chopped up and we watch with bated breath at the reaction from Corbyn when the Commons comes back from Summer reassess on 3 September as a vote of no confidence seems almost inevitable.

Italian politics, or the woeful chart set-ups in the European banking, are also in the headlines, and it’s hard to see how any of these factors give us a belief the worst is behind us.

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Chris Weston, Head of Research at Pepperstone.

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Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain?

Is Really Inflation Muted? Core CPI Rises

The CPI rose 0.1 percent in June, by the same amount as in May, the government said on Thursday. However, the core CPI, which excludes food and energy prices, jumped 0.3 percent following a previous increase of 0.1 percent. So, the core rate scored the biggest gain in a year and a half, which suggests that the Fed’s fears about tame inflation might be exaggerated.

More importantly, over the last 12 months, consumer prices increased 1.6 percent, compared to 1.8 percent jump in May. It means that annualized inflation has softened further. But, again, the index for all items less food and energy edged up from 2 to 2.1 percent. It shows that the muted overall inflation resulted from the falling gasoline and oil prices, not from a weakness in the aggregate demand or something else. As the chart below shows, the core CPI is now again above the Fed’s target.

Chart 1: CPI (green line, annual change in %) and core CPI (red line, annual change in %) over the last five years.

Maybe this is because we are not working at the central bank, but we struggle to see why lower energy prices should be negative for the economy and the reason for the Fed to adopt a more accommodative monetary policy. Shouldn’t the central bank focus on core inflation, which strips out volatile food and energy prices? After all, this is what the FOMC does when the prices go up, but apparently it does not work the same way both ways.

Something Is Not Quite Right, Mr. Powell

Wait a minute. The recent nonfarm payrolls were strong, so the labor market remains healthy. The overall inflation is 1.6 percent, while the core index is 2.1 percent, and the Fed is signaling a cut in the federal funds rate at the end of this month? Just how does it all go together? We are not the only ones who ask this question. On Thursday, Senator Toomey asked Chairman Powell what the heck is he doing, given the fundamental strength of the economy.

Powell said that the U.S. economy was hit by a severe “confidence shock” in May from which it has only partly recovered, but only after the Fed “stepped forward”, announcing that it is ready to act if needed. Our heroes!

It might be the case, of course. However, we see a few other possible explanations why the Fed is likely to cut interest rates despite the fundamental strength of the economy. The first is the simplest: they are just a bunch of doves, especially after Richard Clarida joined the Board of Governors. So they want the Fed to be always accommodative and muted inflation readings are a great excuse. If true, that would be great for gold. The more dovish the U.S. central bank, the better the prospects of the yellow metal.

Second explanation is that the U.S. central bank got joined at the hip with the Wall Street. So it must do whatever the markets tell them to do. It is plausible explanation, but the markets expected higher interest rates for years during the ZIRP period, and the Fed did not do anything about it.

The third potential reason is the poor economic outlook outside the U.S. America’s economy might be great, but – given the international role of the greenback – the Fed is the central bank for the whole globe. Remember taper tantrum? Maybe the cost of dollar liquidity got too high and the Fed had to react, to avoid global turmoil. Powell admitted in his testimony before the Senate that his main concern was the poor outlook for manufacturing “around the globe.”

Last but not least, the U.S. central bank might know something us, mere mortals, are not aware of. Maybe the Fed officials saw the recessionary signals, so they decided that a preventive cut in interest rates is in place? We informed our Readers about the inversion of yield curve immediately when this happened. And now it turns out that the Fed has also acknowledged it. This is at least something the recent FOMC minutes suggest:

Many participants noted that the spread between the 10-year and 3-month Treasury yields was now negative, and several noted that their assessment of the risk of a slowing in the economic expansion had increased based on either the shape of the yield curve or other financial and economic indicators.

Implications for Gold

What does it all mean for the gold market? Whatever the reason, the Fed became more dovish despite core inflation being still around the target, which is a fundamentally bullish factor for gold. Of course, the expectations of the interest rate cut are already priced in, but the new climate sounds supportive for the gold market. We mean here the inverted yield curve and the resulting expectations of the upcoming recession. Remember the pre-Great Recession period? In 2006, the yield curve inverted and the Fed cut interest rates in 2007. It did not prevent the financial crisis from unfolding, and gold shined. In the upcoming edition of the Gold Market Overview, we will write more about the inversion of the yield curve and the 2007 Fed cut – stay tuned!

Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Thank you.

Arkadiusz Sieron

Sunshine Profits‘ Gold News Monitor and Gold Market Overview Editor


 

Futures Rise as China Takes Steps Towards Trade War Resolution

Futures Point to a Slightly Higher Open

The Wall Street Journal reported that China is ready to settle its trade dispute with the US. However, Chinese President Xi has some terms to present to President Trump.

China wants the US to lift its ban on the sale of US technology to telecommunications company Huawei Technologies Co. Another condition is for the US to remove all punitive tariffs and stop efforts to get China to buy more US exports than previously agreed.

Treasury yields have been range bound for most of the week with the 10-year yield continuing to range just about 2%. Gold prices have been drifting lower since hitting multi-year highs earlier in the week. The yellow metal was last seen hovering around the psychological $1400 for a second consecutive session.

US GDP Rose an Annualized 3.1% in the First Quarter

The third reading of US GDP came in as expected, at an annualized 3.1% for the first quarter. Unemployment claims were a bit higher than expected, with seasonally adjusted initial claims at 227,000 last week. Analysts called for 220,000 claims. Pending home sales are scheduled for release shortly after the market open.

Oil prices are diverging somewhat from the well-known correlation with equities. WTI Crude oil is down 0.4% at the time of writing. Some technical resistance is in play as both the 100 and 200-day moving averages are interesting right around where the instrument currently trades.

The S&P 500 is down on the week, and has erased about three-quarters of last week’s gains in the week thus far. The index stalled out briefly trading at fresh record highs last week.

The Federal Reserve provided a catalyst for downside pressure in equities following two Fed member speeches earlier in the week. The speeches readjusted market expectations for easing measures in the United States. Ahead of the speeches, speculation had been growing that the central bank will cut 50 basis points in July.

European Indices Mixed at Midday

The German Dax is up ahead of the US market open, however, the UK FTSE, French CAC 40, and Euro Stoxx 50 are all in the red. Volatility has been subdued for most of the week and all indices are trading not too far from where they started the week out.

Inflation figures out of Spain came in softer than expected. The National Statistics Institute reported year over year CPI to rise 0.4% in the flash reading versus an analyst estimate of 0.8%. It was the second consecutive report where the figure fell short. The consumer price index in Spain has been on a steady decline after topping at 2.3% around summer time last year.

Consumer prices in Germany were reported to rise ahead of expectations. Destatis showed preliminary CPI rising 0.3% in June, ahead of an expected rise of 0.2%. The figure was

Asian Equities Rebound

The Japanese Nikkei rebounded sharply on Thursday, closing for a gain of 1.19% on the day. The index is in green territory for the week following today’s rise. However, it remains within the limits of a broader three-week range.

A weaker Japanese yen boosted the Nikkei as USD/JPY crossed above the 108 handle in early day trading. Despite a pullback in the currency pair back below the psychological price point, the yen remains the weakest major currency in the day thus far.

The article was written by Anthony Darvall, Chief Market Analyst at easyMarkets

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