Market Update: Focus on Jobs
US equity indexes were up on the week: S&P 500 +1.9%, NASDAQ +2.6%, and DJIA +1.8%.
For month-end February: The table below shows the reversal in US equity indexes and the move up in US bonds yields in February on the back of upward US data surprises and hawkish Fed-speak. Bonds and stocks were correlated, as such the 60-40 portfolio lost on the month. The USD strengthened, weighing on precious metals. DIAMINDX fell 0.7% on the month but outperformed gold and silver.
Table: Annual and monthly returns
The Fed has abandoned forward-looking guidance as it has moved to a data dependent stance. As a result, market participants remain hyper-focused on Fed-speak for clues as to what the terminal rate will be:
Speaking March 1, Minneapolis Fed President Neel Kashkari (voter) said: "I’m open-minded about whether it's 25 or 50 basis points [at the next meeting]." He went on to say "What's more important is what we signal in the dot plot." The FOMC will release new forecasts at its March 22 policy meeting announcement. Kashkari said that in December he thought the terminal rate would be 5.4% and hold there for an extended period.
Atlanta Fed President Bostic (non-voter), is hawkish but sees a lower terminal fed funds rate than Kashkari. He wrote in an essay released March 1, "...history teaches that if we ease up on inflation before it is thoroughly subdued, it can flare anew. That happened with disastrous results in the 1970s. After the FOMC loosened policy prematurely, it took about 15 years to bring inflation under control, and then only after the federal funds rate hit 20 percent."
"So, now we must determine when inflation is irrevocably moving lower. We're not there yet, and that is why I think we will need to raise the federal funds rate to between 5 and 5.25 percent and leave it there until well into 2024."
On March 2, Fed Governor Waller (voter) said: "If job creation drops back down to a level consistent with the downward trajectory seen late last year and CPI inflation pulls back significantly from the January numbers and resumes its downward path, then I would endorse raising the target range for the federal funds rate a couple more times, to a projected terminal rate between 5.1 and 5.4 percent. On the other hand, if those data reports continue to come in too hot, the policy target range will have to be raised this year even more..."
On Friday, fed fund futures were pricing a peak fed funds rate of 5.455% (higher than last week) in September 2023. Rate cuts for 2023 have been largely, but not completely, priced out.
The 10 year bond yield US bond closed above 4.00% on Thursday, a multi-month high and the 2 year yield climbed to 4.88% that day - the highest since 2007. But bond yields backed off and US equity indexes rallied post additional comments made by Atlanta Fed President late in the week. He said that the Fed could halt the interest rate hiking process by late summer. However, perhaps interpreting those comments as "less hawkish" is wishful thinking.
On the data-front this week:
February ISM Services, came in at 55.1 down from its previous read of 55.2 but stronger than the consensus estimate and indicating that the sector is still expanding. The employment index in that report, a potential leading indicator for US payrolls, released next week, rose as well to 54.0 from 50.0 previously. February ISM Manufacturing Index came in at 47.7 indicating that manufacturing is contracting. The prices paid index got a lot of attention as it jumped to 51.3 in February from 44.5 previously.
Turning to the Diamond Commodity:
DIAMINDX fell 0.2% this week to USD 5,410. Despite the re-emerging strength in US consumer spending, the world's largest market for diamonds, and the re-opening of China, the world's second largest market for diamonds, the diamond industry remains cautious - jewelers are being careful about holding inventory.
This is not something unique to the diamond industry - other US industries, Wall Street analysts and, of course, the Fed remain uncertain of the timing and magnitude of a US economic growth slowdown when the full impact of the Fed rate hikes are felt.
The diamond industry looked forward to the Hong Kong International Jewelry Show which kicked off this week and runs through March 5. This is the first indication of demand from China since the pandemic restrictions were lifted. Rapaport reports that the show opened to busy traffic and that the border reopening has enabled mainland companies to attend.
Anglo American held an analyst call this week and released transcripts. On De Beers Group, it was noted that "we are now seeing some Sightholder caution as a result of the weaker global economic outlook. Long term fundamentals continue to look very promising." In addition, "2022 holiday season was robust so while a lower sight 1, we remain hopeful things should pickup as the year progresses."
On the De Beers negotiation with the government of Botswana, it was mentioned that "everything was all most done." A Deutsche Bank analyst asked for an elaboration on this statement. CEO Duncan Wanblad answered: "On De Beers, it is a negotiation - one that happens every five years. And it is in both parties’ interests to come up with a value-accretive deal on both sides of the fence. We are in the middle of this negotiation at this point in time, but it is being done in good spirits on both sides of the fence."
Gold rebounded, rising 2.0% on the week to USD 1,848 as the USD declined. Resistance is at USD 1,850 and 1,867. Support at USD 1,800.
Silver rebounded as well rising 1.7% on the week - its first weekly gain in 7 weeks. It ended the week at USD 21.13. Support is USD 20.87 (200 day movg).
__Chart: DIAMINDX, Gold, and Silver __
USD - lower on the week
After falling 1.4% in January, USD (DXY Index) rebounded strongly in February, rising 2.7%. On the week, the DXY Index fell 0.5%. The index has been trading in a 104.00-105.30 range since late February. This week, it finished at 104.66 - under the key 105.00 level.
EURUSD gained 0.8% on the week ending at 1.0634. One might have expected that the single currency would have been higher this week with the upside inflation surprise in the Eurozone. February inflation rose 0.8% m/m vs expectations of 0.5% m/m to come in at 8.5% y/y, but rising US yields kept it in check.
JPY, the DXY Index's second largest component, gained 0.5% vs USD this week to 135.85. Market participants expect some additional volatility in USDJPY into next week's BoJ meeting (more in week ahead).
Chart: USD (DXY Index) and US 10 year yield - both backed off late in the week.
Ahead - select events include:
Next week sees two major events: Fed Chair Powell's semi-annual testimony and the much anticipated US February jobs report.
Sunday, March 5
The 14th National Committee of the Chinese People’s Political Consultative Conference begins on Saturday. On Sunday, the National People’s Congress (NPC) begins. Together the meetings are known as "Two Sessions". China set a growth target of “around 5%” for 2023, according to Premier Li Keqiang’s government work report released Sunday. This was on the lower-end of market expectations.
Tuesday, March 7
Reserve Bank of Australia rate decision: Bloomberg consensus expects a 25bp hike to 3.60%.
Fed Chair Powell before Senate Banking Committee: Semi-annual monetary policy report to Congress
Wednesday, March 8
Fed Chair Powell day 2 testimony before House Financial Services Committee Bank of Canada rate decision: Bloomberg consensus expects the policy rate to remain unchanged at 4.50%
ECB President Lagarde speaks
Thursday, March 9
US initial jobless claims
Friday, March 10
BoJ rate decision: Recently, Japan government bond (JGB) 10 year yields have risen at times above the 0.5% cap - a sign to some analysts that the Bank of Japan (BoJ) will have to abandon its yield curve control.
US Payrolls (Feb): Bloomberg consenusus expects +200k and the unemployment rate to remain at 3.4%
Canada employment (Feb)
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.