FXT foreign exchange analysis of the latest trend of precious metals in August
Since late July, economic data such as PMI, employment, and inflation in the United States have successively rebounded slightly, and real GDP performance in the second quarter has greatly exceeded market expectations. At the same time, the Federal Reserve's July interest rate decision meeting raised interest rates by 25bp as expected by the market, and Federal Reserve Chairperson Powell handed over future interest rate decisions to data decisions. The market has resumed correcting interest rate path expectations. It is expected that there is a high probability that the year will enter the interest rate cycle, and the first quarter of 2024 will enter the interest rate cut cycle at the earliest. In addition, the US Treasury plans to issue more bonds than expected in the third quarter, causing both the real interest rate and nominal interest rate of US bonds to hit a new high since the current round of interest rate hike cycle. The dollar index has rebounded to the early July position, and the price of precious metals has been adjusted in August. CMX gold fell 4.26% in August, and CMX silver fell 8.56%.
II. Review of key points
The real GDP of the United States in the second quarter exceeded expectations, avoiding a recession during the year
On July 28, the United States released the real GDP data for the second quarter of the year. After the quarterly adjustment, the growth rate was recorded at 2.56%, which greatly exceeded the market expectations and the previous value. The growth rate increased for two consecutive quarters during the year. The nominal GDP growth rate was recorded at 6.28% under the action of falling inflation, which was still significantly higher than the federal funds rate of 5.08%. The strong economic data reversed the market's previous expectations that the US economy entered a recession in the third quarter. It further confirmed that the US consumer is not afraid of the impact of sharp interest rate hikes and credit tightening. The existence of the labor gap has made residents' wages and incomes very resilient, so that consumer spending is still supporting broad economic growth. Business investment was also significantly stronger than expected, driven by the return of manufacturing and technological innovation, except for the export and residential markets, which were restrained to some extent by high interest rates. The US economy continues to grow above its potential trend level, presenting the Federal Reserve with a difficult choice as to whether it needs to do more to curb economic growth and long-term inflation resilience. The market, on the other hand, raised the probability of further interest rate hikes by the Federal Reserve based on strong economic data. CMX gold and silver prices entered an adjustment cycle after the data arrived.
Figure 2: Nominal GDP and Real GDP in the United States
2. The US July interest rate agreement confirms the cooling cycle, and the interest rate path depends on the actual data
The Federal Reserve held an interest rate decision meeting on July 27. If the market expects a unanimous interest rate hike of 25bp, the target range for the federal funds rate will reach 5% -5.25%, a new high since 2001. In a subsequent press statement, Federal Reserve Chairperson Powell stopped providing guidance on the future interest rate path, claiming that the future interest rate hike path still relies on data, which brings great uncertainty to the market. From the speech, investors can still glimpse some information, such as reaffirming that inflation in 2025 is expected to return to the 2% policy target, and monetary policy will always be implemented around this goal; short-term inflation decline is optimistic, but core inflation is still high, the Federal Reserve based on core inflation to judge the trend of inflation, suggesting that interest rates will not be cut this year, and there is a high probability that the market will enter the cooling cycle as expected; the labor gap continues to ease, but the Federal Reserve believes that the US economy will not decline. Overall, the Federal Reserve no longer mentions the expectation of two interest rate hikes in the previous year, and the market fully anticipates the high probability of entering this round of interest rate hikes during the year. According to the CME FedWatch tool, the market's probability of suspending interest rate hikes in September remains as high as 89%. For November and December, there is still a small probability (about 30%) of another interest rate hike, and interest rate cuts will begin as early as March and May 2024.
We believe that the Federal Reserve's July interest rate decision meeting is generally nothing new. Federal Reserve Chairperson Powell no longer mentions forward inflation expectations, but also fully considers the reality of a sharp slowdown in short-term inflation. He leaves complex issues to future data decisions, which brings strong uncertainty to the market. The path of interest rates during the year depends on the actual trend of inflation. If actual inflation rebounds slightly in the second half of the year, the Federal Reserve's policy may mainly wait and see, waiting for the transmission of the lagging effect of monetary policy, and there is a high probability of entering a flattening cycle during the year.
Figure 3: The FedWatch tool displays the rate hike probability matrix
3. The trend of non-farm payrolls in the United States fell in July, and the gap in the US job market narrowed month by month
On August 4, the United States released the July non-farm employment report. The number of non-farm payrolls recorded 187,000, lower than market expectations 200,000 and previous values 209,000, setting a record since December 2020. Among them, employment growth mainly appeared in the fields of health care, social assistance, financial activities and wholesale trade. Structurally, the labor force increased 152,000, and the number of unemployed decreased 116,000, resulting in the unemployment rate further falling to a low of 3.5%, which also shows that the gap in the job market in July is accelerating. At the same time, the change of small non-farm ADP employment recorded 324,000, which was much higher than market expectations 190,000 and lower than last month 455,000, which shows that the US labor market is in a comprehensive cooling process. In addition, the United States recorded 9.582 million JOLTS job vacancies in June, lower than the expected value 9.60 million and the previous value 9.824 million, a decrease of 242,000 from the previous month, and a difference of about 220 from the high point before the epidemic. According to the current speed, it is expected that the gap will be filled in the next 4-6 months, and the inflationary pressure of the service industry may weaken month by month. Overall, the US labor market has been better than market expectations for two consecutive months, further supporting the Federal Reserve to suspend interest rate hikes this year.
In the medium term, the US economy as a whole still shows strong resilience. The return of manufacturing drives the rapid growth of fixed asset investment, which will bring additional labor demand. In the process of solving the labor market gap, it is inevitable to face repeated fluctuations in the data of a single month. However, we believe that the overall downward trend has not changed. The number of employment in the service sector is the dominant part of the US job market, and the substantial increase in the number of employment is also an inevitable part of the process of solving the job gap. Generally speaking, the job market gap will be solved by two links. One is the decrease in job demand, and the other is the increase in the number of jobs. The increase in supply and the decrease in demand are the core points that drive the balance of the job market. The decrease in the number of non-farm payrolls indicates that demand is weakening, and the increase Under the influence of supply and demand, the labor market data in June and July further confirmed that the US employment gap is narrowing at an accelerated rate. Before the gap is filled, inflation will still show some resilience, especially the core inflation dominated by the service sector, but the intensity of inflation will gradually weaken.
Chart 5: U.S. nonfarm payrolls and job openings
4. US inflation rebounded as expected in July, and the strength of the future rebound disturbed market sentiment
On August 11, the United States released inflation data for July, with a year-on-year growth rate of 3.2%, lower than the expected value of 3.3%, rebounding 0.2% from the previous month, and core CPI growth of 4.7% year-on-year, in line with market expectations, down 0.1% from the previous month. Overall, this is a data that excites the market. The annualized core CPI growth rate fell to the lowest point since the current round of interest rate hike cycle of 3.25%. With July inflation driven by seasonal effects and a rebound in energy prices, core inflation is also expected to rebound slightly in August, indicating that long-term inflation in the United States still has some resilience. Daley, chairperson of the San Francisco Federal Reserve Bank of the United States, poured cold water on the CPI comment, saying that the CPI data does not represent a victory in the fight against inflation, and the Federal Reserve has not yet made a decision on when it will raise interest rates again and how long it will maintain interest rates. The Federal Reserve still has more work to do.
We believe that the July inflation data basically confirms that the Federal Reserve will suspend interest rate hikes in September. Whether it will raise interest rates in November depends on the performance of inflation data month by month. If the current monthly growth rate of 0.2% changes, we deduce that inflation will rebound in the second half of the year. The anticipated rebound peak is between 4% and 6%. The Fed's policy may be mainly based on observation, waiting for the transmission of the lagging effect of monetary policy, and there is a high probability of entering the calming cycle during the year. If the actual inflation rebound and speed exceed the expected performance, there may still be a probability of interest rate hikes during the year, and the fluctuation of inflation will repeatedly disturb the sentiment of financial marekt investors.
In addition, the long-term inflation resilience brought about by the US debt ceiling breakthrough is expected to ferment in 2024, before which inflation expectations may maintain a volatile trend. Therefore, we believe that the negative probability of interest rate hikes in precious metals at the nominal interest rate end of the year has subsided, while inflation expectations remain resilient or may increase at any time. Real interest rates will eventually fall back from high volatility, driving the medium-term volatility of precious metal prices. However, during this period, the disturbances caused by inflation, employment, and economic data will still bring fluctuations to investors' expectations and bring certain uncertainty disturbances to financial marekts. The price trend of precious metals is expected to be dominated by repeated shocks.
Figure 7: The second half of the US CPI trend
5, the US Treasury issued bonds more than expected, and the new high real interest rate put pressure on the price of precious metals
US Treasury announced the quarterly update of the market financing plan (Marketable Borrowing Estimates) on July 31. It is expected to raise 1.007 trillion US dollars through financial marekt during July-September, 852 billion US dollars during October-December, and the third-quarter financing amount is greatly revised from the plan in early May to 274 billion US dollars, an increase of nearly 37%. On August 2, US Treasury announced the Quarterly Refunding Statement for various maturities in August-October according to the plan. Among them, the total amount of refinancing bonds issued in the week from August 7 to 11 was 103 billion US dollars. At the same time, the future implementation of the United States 2-year, 5-year, 7-year and 20-year maturity bonds invite tenders, the issuance of each term compared with the May plan increased by 10-3 billion US dollars per month, of which 2-year, 5-year and 10-year maturity bonds increased significantly by 3 billion dollars per month. The US Treasury said that due to the expected medium and long-term borrowing demand, the Ministry of Finance plans to gradually increase the scale of bond issuance, the US Treasury raised the expected size of net borrowing in the quarter to 1 trillion US dollars, far exceeding the expected 733 billion US dollars in early May, which ranks second in history, and has increased the quarterly issuance scale of longer-term bonds for the first time after two and a half years, so that the long-term interest rate is higher than the short-term interest rate, and the real interest rate of US bonds has risen passively. Since the beginning of August, both sides have risen unilaterally, setting a new high since the current round of interest rate hike cycle.
Figure 8: US Treasury plans to issue Treasury bonds of various maturities in August-October
Figure 9: US real interest rates on ten bonds and CMX gold prices
III. Fund position data
As of August 18, SPDR Gold Trust's gold ETF holdings were 890.1 tons, a weekly decrease of 9.5 tons, a decrease of 28.9 tons from late July. Meanwhile, Shares Silver Trust silver ETF holdings were 14,039.3 tons, a weekly decrease of 37.1 tons, a decrease of 60.2 tons from late July.
Figure 11: CFTC silver speculative net long positions and CMX silver price movements
Figure 12: CFTC gold speculative net long positions and CMX gold price movements
IV. Future Outlook
FXTForeign exchange investment pointed out that with the long-term impact of high interest rates and deep inverted yield curve, the financing demand of US residents and the corporate sector will continue to weaken, while the effect of US inflation suppression is optimistic, we deduce that inflation will rebound slightly in the second half of the year, the anticipated rebound high point is between 4% -6% range, the Federal Reserve policy is likely to enter the cooling cycle during the year, the pressure on the money supply is marginal weakening, therefore, the US Treasury's financing demand for more than expected bond issuance is not strong in nominal interest rate promotion. Superimposed forward inflation has shown some resilience. We believe that real interest rates will eventually fall from high volatility during the year, driving the price of precious metals to rise in the medium-term volatility. It is recommended that CMX gold prices pull back to around $1,900/ounce to lay out long-term opportunities, and CMX silver prices adjust to $22-23/ounce to lay out long-term opportunities.
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