Market Update: A Respite
US equity indexes were up on the week: S&P 500 3.5%, NASDAQ 3.4%, and DJIA 3.2%. This week, markets saw a respite from the banking sector turmoil that had impacted them since March 8.
The VIX Index fell below the key 20 level to end the week at 18.7. The BoA MOVE Index, which measures implied volatility of one month treasury options, fell to 135.9 vs 173.6 Friday, March 17 (chart below). The KBW regional bank index was flat to slightly down (-0.05%). The wider KBW bank index was up 4.7%, outpacing the broad market gains. The return of relative calmness to the banking sector supported US equity indexes and pushed US bond yields higher. The US 2 year yield and 10 year yield rose 25.7bps and 9.1bps respectively on the week.
Chart: Volatility lessens - VIX and MOVE Indexes
In Congressional hearings on Tuesday and Wednesday, Fed Vice Chair for Supervision Michael Barr said, "Our banking system is sound and resilient, with strong capital and liquidity. The Federal Reserve, working with the Treasury Department and the Federal Deposit Insurance Corporation (FDIC), took decisive actions to protect the U.S. economy and to strengthen public confidence in our banking system...We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools for any size institution, as needed, to keep the system safe and sound."
On SVB, Barr said, "SVB failed because the bank's management did not effectively manage its interest rate and liquidity risk, and the bank then suffered a devastating and unexpected run by its uninsured depositors in a period of less than 24 hours." Barr is heading a review of the Fed's supervision of SVB, which is due by May.
Fed-speak this week stressed its data dependent stance and uncertainty about how tight financial conditions are. Fed Governor Lisa Cook (voter) stated: “I am weighing the implications of stronger momentum in the economy against potential headwinds from recent developments...If tighter financing conditions restrain the economy, the appropriate path of the federal funds rate may be lower than it would be in their absence.” NY Fed President Williams (voter) said, "The economic outlook is uncertain, and our policy decisions will be driven by the data and the achievement of our maximum employment and price stability mandates." He went on to say that it was unclear how much the strains in the banking sector will affect credit conditions.
On the data front:
US PCE prices for February rose 0.3% m/m on expectations to come in 5.0% y/y down from 5.3% y/y in January. Core PCE prices rose 0.3% m/m as well, which was a bit below expectations of a 0.4% rise, to come in at 4.6% y/y down from 4.7% y/y in January. The Fed favorite measure currently - core PCE services ex housing rose 0.27% m/m to come in at 4.6% y/y relatively steady from the January read. While market participants took the below consensus result on core PCE prices as positive news, the readings are still well above the Fed 2% inflation target and the Fed's favored measure currently, core PCE services ex housing, has not been moving lower (chart below). It is not clear from these inflation readings that rate cuts will commence this year if the banking sector remains stable and credit conditions tighten only marginally further.
In a sign that US consumers are perhaps not so unnerved by the banking sector turmoil, US Conference Board consumer confidence rose in March to 104.2 from 103.4 in February. Its gain was driven by the consumer expectations component.
Chart: US PCE Prices Y/Y%
Turning to the Diamond Commodity:
DIAMINDX was down 0.4% on the week to USD 5,340. In diamond industry news, it was Israel Diamond Week - a conference was held along with meetings of the World Federation of Diamond Bourses, and the International Diamond Manufacturers Association. Rapaport analyst Ari Krawitz reported that the topic of lab grown diamonds featured prominently. "The discussion centered around "trying to understand the dynamics of the lab grown market as supply rises, prices drop, and the product continues to gain market share," said Krawitz.
Idex reports that Bruce Cleaver, co-chairman of De Beers Group, spoke the first day of the conference and "was confident that a surge of interest in lab growns will have a positive knock-on effect on natural diamonds." Cleaver said that "lab growns are emerging as a distinct and separate category, with a 'totally different value proposition from natural diamonds.' "
Analyst Edahn Golan released a report looking at the increasing market share of loose lab grown diamonds vs loose natural diamonds at US specialty jewelry retailers. The US accounts for about 50% of global retail diamond sales. Last month (February 2023) loose lab grown accounted for 22.9%, by value, of diamonds sold by US jewelry retailers, and 46.6% by unit. The tipping point (over 50 per cent) by unit could come as soon as November, Golan said. Importantly, Golan noted that "I won’t venture into a prediction, really a guesstimate, as to when the value of loose lab-grown diamond sales will match or surpass that of loose natural diamonds. This is primarily because loose lab-grown diamond prices are falling rapidly, and no one knows when the avalanche will end."
Turning to natural diamonds, the DeBeers site 3 (rough diamond sales) is underway this week. Separately, in fancy stones, Sotheby’s revealed the world’s most vivid pink diamond, The Eternal Pink, will come to auction, and has the highest price per carat estimate ever placed on any diamond or gemstone ($3,311,258). The Natural Diamond Council states, "according to the Fancy Color Research Foundation, only 1 out of 1.783 Billion diamonds will have this diamond's unique combination of properties." The 23.78-carat rough diamond that yielded The Eternal Pink was recovered by De Beers at the Damtshaa mine in Botswana. (See The Eternal Pink here).
__Gold __ Gold fell 0.5% on the week to USD 1,969. It is ranging between USD 1,950 - USD 2,000. A less hawkish Fed, the likely near-term peak in the fed funds rate, and rate cuts priced in are supportive of gold and silver, to some extent, as well. Though, silver is more exposed to the industrial cycle.
Silver Silver rose 3.8% on the week to USD 24.09 - breaking slightly above resistance at USD 24.00.
Chart: Lab grown diamonds and natural diamonds value share of sales
USD lower but above 102.00 support
The USD was on its back foot. The DXY Index fell 0.6% on the week, but held above 102.00 support, ending the week at 102.52. All G10 currencies gained vs USD with the exception of JPY. JPY was down 1.6% vs USD as the rise in the US 10 year yield supported USD bringing it off of its weekly low. EURUSD, the DXY's largest component traded above 1.0900 on Thursday before backing off and ending the week at 1.0862. Headline inflation fell sharply in the Eurozone in March, coming in at 6.9% y/y from 8.5% y/y previously. This sharp fall on an annual basis was driven by a decline in energy prices, which surged in March last year after Russia’s invasion of Ukraine. However, Eurozone core inflation rose to 5.7% y/y from 5.6% y/y - a record high and an indication that the ECB will likely continue to hike its policy rate.
Chart: USDJPY vs US 10 year yield
Ahead - select events: The highlight next week is a key indicator - the US payrolls report for March.
Monday, April 3 US ISM Manufacturing (Mar) Discussion -- Fed Governor Lisa D. Cook (voter) on the US Economy
Tuesday, April 4 RBNZ policy rate meeting RBA policy rate meeting
Wednesday, April 5 US ADP employment (Mar) US ISM Services (Mar) ECB's Lane speaks
Thursday, April 6 St Louis Fed's Bullard (non-voter) discusses US Economic Outlook Canada Ivey PMI (Mar)
Friday, April 7 US Payrolls (Mar): The Bloomberg consensus expects a gain of 223k and the unemployment rate to hold steady at 3.6%.
This report has been prepared by the Strategy Team of Diamond Standard Inc. (“Diamond Standard”). This report, while in preparation, may have been discussed with or reviewed by persons outside of the Strategy Team, both within and outside Diamond Standard. While this report may discuss implications of legislative, regulatory and economic policy developments for industry sectors, it does not attempt to distinguish among the prospects or performance of, or provide analysis of, individual companies and does not recommend any individual security or an investment in any individual company and should not be relied upon in making investment decisions with respect to individual companies or securities.
Opinions and estimates offered constitute our judgement and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. Under no circumstances does the information contained within represent a recommendation to buy, hold or sell any security, and it should not be assumed that the transactions discussed were or will prove to be profitable.