no script

Market Update: Hawks Flock Together

Written by Amelia Bourdeau
February 24, 2023
5 min read

US equity indexes were lower on the week: S&P 500 -2.7%, NASDAQ -3.3%, and DJIA -3.0%. With strong spending data and an acceleration in inflation data released this week, market expectations around further Fed rate hikes this year adjusted higher, weighing on US equity indexes.


Minutes from the Feb 1 FOMC showed that "a few" Committee members preferred a 50bp rate hike at that meeting instead of the delivered 25bp hike. As we wrote last week, Cleveland Fed President Mester and St. Louis President Bullard, both of whom are non-voters this year, acknowledged that they each favored raising rates by 50 bps on Feb. 1. All in all, the minutes were a bit outdated in that they did not reflect the pick-up in US economic data that came post the meeting. But even without those data points, hawkish voices emerged.

From the Minutes:

On US GDP growth: "In part reflecting the lagged effects of previous monetary policy tightening, the staff still projected real GDP growth to slow markedly this year and the labor market to soften."

On inflation: "Participants noted that inflation data received over the past three months showed a welcome reduction in the monthly pace of price increases but stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path."

On the rate increase: "A few participants stated that they favored raising the target range for the federal funds rate 50 basis points at this meeting...The participants favoring a 50-basis point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance, taking into account their views of the risks to achieving price stability in a timely way."

On the data-front this week:

US Personal Consumption Expenditure ("PCE") data were released Friday. January personal spending surprised to the upside, rising 1.8% m/m vs expectations of 1.4% m/m. This is on the back of a blockbuster January retail sales report. Inflation adjusted personal spending was strong as well, rising an on-expectations 1.1% m/m. Personal income growth accelerated to 0.6% m/m from 0.3% m/m in December, but was below market expectation of 1.0% m/m. Compensation of employees (+0.9% m/m) accounted for most of the growth.

On the inflation front, both the headline PCE deflator and core surprised to the upside accelerating on a year-on-year basis from December. The headline PCE deflator rose 0.6% m/m (vs. expectations of 0.5%) to come in at 5.4% y/y and the core PCE, the Fed's favored inflation gauge, rose 0.6% m/m (vs expectations of 0.4%) to come in at 4.7% y/y.

US consumers remain resilient, continuing to spend. These results add pressure to the Fed to get a handle on inflation and bring it lower towards its target. As Powell has emphasized - this will "take some time." DS Managing Director, Amelia Bourdeau, spoke with Seeking Alpha this week ahead of the release - see here (note - article behind paywall).

On Friday, the US 2 year yield broke topside 4.80% and is at 4.865% at the time of writing. The chart below shows the yield's climb since its low earlier in the month during the FOMC press conference. Markets have been meaningfully repricing the outlook for Fed policy throughout February. Post the PCE data, futures are pricing a peak fed funds rate of 5.42% in September 2023. Rate cuts for 2023 have largely, but not completely, been priced out.

Separately, in Friday headlines, getting attention - a paper presented at a conference in New York written by Wall St economists and academics ran a series of economic simulations and found that these "models suggested rates would peak at either 5.6%, 6% or 6.5% in the second half of 2023." Read more here.

Chart: US 2 year yield climbs throughout February - data releases noted Feb 24 - Chart 1

Turning to the Diamond Commodity:


DIAMINDX rose 0.2% this week to USD 5,420. Re-emerging strength in US consumer spending, the world's largest market for diamonds, supports the near-term outlook.

This week saw the DeBeers second site of 2023. Though results have not been released yet, Rapaport reports that "De Beers has increased prices of small rough diamonds for the second consecutive sight, as a combination of demand and supply factors has created a hot market for the category." __ DeBeers Group released its preliminary financial results for 2022. Results were strong.__ Revenue increased 18% to USD 6.6bn. Earnings rose 60% to USD 552 mil driven by the average selling price increasing 35% to USD 197/ct from USD 146/ct. DeBeers noted that "the increase was driven by growth in the rough price index, as well as selling a larger proportion of higher value rough diamonds in the first half of the year." DeBeers hiked prices on strong demand early in 2022 and kept them relatively stable throughout the year. __ In light of the DeBeers negotiation with Botswana that we wrote about last week, total production was 34.6 million carats in 2022 of which Botswana accounted for approximately 70%. The deadline for that negotiation is June. Total production volume was up 7% in 2022. Production guidance for 2023 is 30–33 million carats.

DeBeers notes that "De Beers Jewellers have continued to focus on developing their geographic footprint in China, with underlying demand for branded diamond jewellery expected to remain strong following the removal of Covid-19 related restrictions."


Gold was down over USD 12.00 on the PCE release on Friday to USD 1,812. Rising US yields and a strengthening USD have weighed on the yellow metal. Gold fell 1.6% on the week for its second consecutive weekly loss.


Silver was down over 4% on the week at the time of writing, breaking downside support of USD 21.00 on Friday to come in at USD 20.77. Silver is now at levels not seen since the end of November 2022.

__Chart: DIAMINDX, Gold, and Silver. DIAMINDX starts to turn up a bit while gold and silver have turned down decisively . __

Feb 24 - Chart 2

USD - Strong in February

USD (DXY Index) continued its winning streak in February, gaining 1.3% on the week for its fourth consecutive gain. On Friday, the DXY broke topside 105.00 resistance and is at 105.18 at the time of writing. Every G10 currency fell vs. USD on the week. This is the largest weekly gain for the DXY Index since September 2022. A ratcheting up of Fed rate hike expectations have supported USD.

Turning to JPY, Bank of Japan Governor nominee Kazuo Ueda, in a parliamentary hearing to approve his appointment, stuck to the existing central bank script, saying the BOJ should continue with stimulus for now. JPY was the second worst performer vs USD this week, falling 1.7% to 135.49. Risk-seeking AUD performed the worst, falling 2.2% vs USD and breaking support at 0.6800. AUD was weighed down by falling US equity indexes on Friday. AUDUSD finished the week at 0.6725.

EURUSD, the DXY's largest component, fell 1.4% on the week to 1.0544. Note, it has been one year since Russia's invasion of Ukraine on February 24, 2022. In this blog, the ECB talks about the war's impact on Euro-area inflation. Though they could be tail risks, geopolitical risks remain present for 2023. As such, market participants could keep some focus on gold, the diamond commodity, and USD as safe-haven plays.

__Chart: USD (DXY Index) and US 10 year yield - Key levels: The US 10 year yield is approaching 4.00% - it would be significant if it broke topside. The DXY Index broke resistance at 105.00. __

Feb 24 - Chart 3

__Ahead - select events include: __ Fed-speak, US ISM Services, and ECB Minutes.

Monday, Feb 27 Fed Gov Jefferson speaks: "Recent Inflation and the Dual Mandate"; ECB's Lane speaks on "Macro-Financial Stability in the EU: some lessons on the occasion of Fifty Years of Irish Membership of the EU".

Tuesday, Feb 28 US Conference Board Consumer Confidence (Feb)

Wednesday, March 1 US ISM Mfg (Feb); BoE Gov Bailey: Speech at the Cost of Living Crisis Conference

Thursday, March 2 Fed Gov Waller speaks: "Economic Outlook"; ECB Minutes; ECB's Schnabel speaks at Money Market Contact Group (MMCG) meeting in Frankfurt

Friday, March 3 US ISM Services; BoE's Pill: Wales Week in London ‘2023 economic outlook – a year of growth or survival?’ ; Gov Bowman: Panel on Design Issues for Central Bank Facilities in the Future

Sign Up for Market Commentary: Weekly insights on global markets and commodities from Diamond Standard by Amelia Bourdeau

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.