Market Update: Goldilocks Number

US equity indexes were up on the week: S&P500 2.5%, NASDAQ 3.2%, and DJIA 1.4%. The US yield curve shifted lower this week, with bond yields off their recent highs on more subdued economic data (see below). Lower yields supported stock market performance.

US Economic Data:

US payroll employment for August came in above expectations at the headline - jobs rose 187k vs 170k expected. However, there were downward revisions of 110k to previous months. The August unemployment rate rose to 3.8% from 3.5% - still historically low but higher than the consensus anticipated and moving in the direction that the Fed wants. Average hourly earnings ticked down to 4.3% y/y from 4.4% y/y - a bit of good news on the inflation front. All in all, the release was characterized by market participants as a "goldilocks number" as August results showed that the US jobs market is slowing in an orderly manner with enough employment to keep recession at bay (at least near-term).

Fed Pricing:

Market participants continue to expect a pause in the hiking cycle at the September FOMC meeting - a view reinforced by the August payroll results. The peak in the fed funds rate is priced as November at 5.43%. There are approximately 120bps of rate cuts priced in for 2024. Stronger growth in 2023 may cause sub-par growth in 2024.

Chart: US Payroll Employment and UR

Precious Metals:

Gold and silver remain capped due to high US bond yields and a strong USD. Precious metals would benefit from a dovish pivot in Fed language - signaling that rate cuts are ahead. However, last week in his speech at Jackson Hole, Powell continued to emphasize the need to bring inflation down to the 2% target.

A soft landing for the US economy could help support the US consumer into year-end and the holiday shopping season. This would be positive for diamond jewelry sales as they seasonally pick up into the holiday period and perhaps for diamond prices as well. We focus on the US as it is just over 50% of global diamond market demand.

With geopolitical risk, the timing of a US economic slowdown being fluid, and a US election year ahead, we continue to see an allocation to precious metals as both necessary and beneficial from diversification and safe-haven stand-points.

DIAMINDX fell 1.5% to USD 4,520. In industry news, the DeBeers Group released its Cycle 7 rough diamond sales. Rough diamond sales came in at USD 370mil. They fell 10% from Cycle 6 2023 and were down 42% from Cycle 7 2022 (year-on-year). It should be noted, however, that Cycle 7 2022 had a very strong result - sales then rose USD 638mil, making for an unfavorable comparable. Cycle 7 2023 results, however, were weak as they were the lowest result since the COVID-19 pandemic. In March 2020, rough diamond sales came in at USD 355mil before sites were suspended due to lockdowns.

Regarding Cycle 7 2023 sales, Al Cook, CEO, De Beers Group, said: “With the prevailing economic environment leading to softer end client demand for diamond jewelry in key consumer markets, and the traditionally lower levels of midstream trading during the summer period, Sightholders continued to take a prudent approach to their purchasing during the seventh sales cycle of the year.”

The hesitancy among the DeBeers Siteholders and the jewelry industry at large stems from the continued uncertainty about the purchasing behavior of the US consumer who is weary from nearly two years of high prices for consumer staples, competition from lab-grown diamonds, which for now, some consumers are finding intriguing due to their much lower price point, a weak China economic re-opening, and inventory build-up at the manufacturing and retail jewelry levels.

Regarding inventory accumulation: Due to the pandemic, consumers shifted their spending to goods, especially luxury goods, as services and experiences were not available. Diamond jewelry sales were exceptionally strong in 2021 and into 2022. It seems that manufacturers and retailers were a bit overzealous in inventory buying thinking demand would continue at those very strong levels.

However, US consumers generally have turned more cautious in their spending habits, running down savings, and perhaps have exhausted their need, at least temporarily, for diamond jewelry given such strong sales in 2021 and 2022. As a result, jewelers have ordered less polished diamonds and the manufacturers are left with excess polished diamond inventory, which is weighing on prices. The impact of this is trickling down to rough diamond demand and its prices as well.

Recently, the DeBeers Group announced that for this year’s remaining three sights — September through December — it would let Siteholders defer up to half of their 1-carat and larger purchases until early 2024 due to weak consumer demand (source: Rappaport).

Not all is news negative near-term, however. The US consumer, diamond jewelry's largest market, seems well placed heading into year-end with US employment lower but still robust. As we discussed in two recent WIR notes, high end global luxury retailers have been insulated from consumer hesitancy. LMVH recorded strong H1 revenue with the Watches and Jewelry category a main contributor (see here). Richemont had strong results for its quarter ended 30 June 2023. Growth across all business areas was led by the Jewellery Maisons, Buccellati, Cartier and Van Cleef & Arpels, rising 24% y/y at constant rates (see here).

Chart: DIAMINDX (which is polished price) vs DeBeers Group Rough Prices. Both are impacted by current macro and diamond market factors. Both are reverting to their pre-pandemic levels.

Gold and Silver

While Friday's US August payrolls were the main data release this week, gold and silver received a boost on Tuesday from lower than expected August US Conference Board Consumer Confidence and US JOLTS data, showing how sensitive the yellow and white metals are to any data that may cause the Fed to definitively signal the end of its tightening cycle.

August Conference Board confidence fell from 117 in July to 106.1, which was much lower than expectations. US Job Openings and Labor Turnover Survey, or JOLTS, showed that job openings declined to 8.83 million - the lowest since early 2021. These weaker than expected results pushed gold above USD 1,930 and silver topside through USD 24.40. Gold held onto its gains throughout the week, but silver reverted by the end of the week. At the time of writing, gold rose 1.2% on the week to USD 1,937 and silver was flat at USD 24.22.

Chart: Gold and Silver 3 mo mov Vol. Silver vol is traditionally higher than Gold vol due to its smaller market size and industrial component. Recently, silver vol has been trending higher while gold vol has been trending lower. This may have to do with uncertainty regarding silvers very short term outlook with regards to its industrial uses given China's economic slowdown.

USD

USD (DXY Index) was relatively unchanged on the week at 104.17 at the time of writing. In reaction to US payrolls, USD fell briefly before rising once again above 104.00 perhaps on thin markets heading into the holiday weekend.

In general, G3 currencies have been largely range-bound throughout August. Of late, the DXY Index has been trading in a narrow 103.00 - 104.45 range. EURUSD has been trading in a 1.1060 - 1.0765 range and USDJPY in a 144.55 - 147.35 range. Overall, USD (DXY Index) remains well within its larger trading range on the year so far: 106.00 - 100.00. A sustained USD decline is not likely until the US gets a much lower than expected inflation print, employment print, and/or the Fed firmly signals it is done raising the policy rate (start of a dovish pivot in language).

Chart: USD (DXY Index) Ranges and US 10 year yield

Ahead next week: US ISM Services Index. Its underlying employment index will be of interest. In the UK, BoE Gov Bailey testifies before Parliament on the economy.

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Disclaimer: 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.