Market Update: Hawks Flock

US equity indexes were down on the week: S&P500 -1.4%, NASDAQ -1.4%, and DJIA -1.7%. All three indexes broke multi-week winning streaks. Equity indexes were weighed on as markets focused on hawkish talk by Fed Chairman Powell (see Fed pricing section), and larger than expected rate hikes by the BoE and Norges Bank. These monetary policy moves signaled that the global inflation fight is not over and, as a result, brought market participants' recession fears to the forefront.

Fed Pricing:

We heard from Fed Chair Powell at his semi-annual Monetary Policy Report testimony to Congress. Powell was hawkish, emphasizing that inflation is still well above the Fed's longer run 2% goal and that labor market conditions remained tight. While the Fed paused its rate hiking cycle in June, "Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year," said Powell in his prepared remarks.

Fed fund futures pricing places the probability of a 25bp rate hike in July at 76%. The peak in the fed funds rate is November at 5.34%. Only 21 bps of rate cuts are expected by January 2024. Market pricing has been converging to the Fed's forecast and narrative of no rate cuts this year. However, market participants aren't fully onboard with the Fed's forecast of two more 25bp rate hikes this year.

Chart: NASDAQ vs US 2 year yield. This week, the rise in the US 2 year yield and concern about recession capped NASDAQ's gain.

Precious Metals:

Precious metals corrected sharply this week on the back of more hawkish than expected central banks. In addition, market participants are all ready looking ahead to the July FOMC meeting (announcement July 26th) in which a 25bp rate hike is expected. With all of the economic uncertainty ahead, throughout the remainder of the year, in terms of what levels inflation will return to and the timing of recession, precious metals are needed both as a safe haven investment and for portfolio diversification. However, in the short-term, precious metals may need to see US equities sell-off in a sustained way in order to gain fundamental support via a safe-haven bid and attract institutional investment.

DIAMINDX fell 1.9% on the week to USD 4,990. Prices are falling due to cautious US consumers and jewelers (the US world's largest diamond market) and a China re-opening that fizzled out. In Episode Three of our Dimond Standard podcast Clarity, we are joined by Paul Zimnisky, a leading independent diamond analyst. We talk: diamond demand during the pandemic compared to now; lab grown vs natural diamonds; where Paul thinks the lab grown diamond industry is headed. You can listen to the episode on Spotify, Apple Podcasts and on our Institutional Media page.

In industry news, DeBeers Group reported a 31.5% drop year-on-year in its Cycle 5 (June) rough sales and a 6% drop from the previous sale (Cycle 4).

Al Cook, CEO, De Beers Group, said: “Following the JCK Show, and with ongoing global macroeconomic challenges continuing to impact end-client sentiment, the diamond industry remains cautious heading into summer. Reflecting this, we saw demand for De Beers rough diamonds during the fifth sales cycle of the year slightly softer than in the fourth cycle.”

Gold fell 1.9% on the week to USD 1,921. Gold is down about 7.4% from its peak in early May. Over that time period, the US 2 year yield (which indicates near term policy expectations) has increased approximately 100bps - weighing on gold as it increases the opportunity cost of holding it. USD 1,900 is support.

Silver fell 7.4% on the week to USD 22.41 - its largest weekly drop since October. So far, silver has held above support at USD 22.00

Chart: US 2 year yield (inverted) vs Gold and Silver. Higher US bond yields have weighed on gold and silver

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USD

The USD (DXY Index) rose 0.6% on the week to 102.90 at the time of writing. The DXY has been holding above 102.00 support since mid-May. EURUSD fell on Friday as German 2 year yield lowered on the back of a weak purchasing managers report which indicated Euro-Area activity stalled in June. EURUSD fell 0.4% on the week to 1.0893 at the time of writing.

The BoE hiked its policy rate 50bps to 5.00% on the back of a much higher than expected inflation read for May. This was an upside surprise as market participants expected only a 25bp rate hike.

The UK is facing a cost of living crisis with high energy and food prices and also a potential mortgage crisis as fixed rate mortgages expire and re-set at much higher rates. BoE Governor Bailey speaking Thursday said, "I know this is hard...Many people with mortgages or loans will be rightly worried about what these changes mean for them. But if we don't raise rates now, higher inflation could stay with us longer.”

Even the larger than expected rate hike by the BoE was not enough to support the pound this week as market participants focused on the alarm bells regarding recession ahead. GBPUSD fell 0.8% on the week and briefly traded below 1.2700 support and is holding just above market that level at the time of writing.

Diverging monetary policy expectations have weakened JPY vs USD. JPY fell 1.3% vs USD this week. USDJPY is rising quickly, ending the week at 143.72.

Chart: USDJPY vs US 2 year yield. Rising US bond yields have pulled USDJPY higher. The pair is approaching levels in which Japanese policymakers intervened in October 2022.

Ahead next week:

US personal income and spending is released for May along with the PCE and PCE price deflators.

On June 28th, the ECB will host its Central Bank Forum in Sintra, Portugal and will have a panel on monetary policy with Fed Chair Powell, BoE Gov Bailey, ECB president Lagarde, and BoJ Gov Ueda - which will be closely watched for comments.

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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.