Market Update: Inflation Watch

US equity indexes were up on the week: S&P500 2.4%, NASDAQ 3.3%, and DJIA 2.3%.

Markets were driven this week by the milder than expected US June CPI release. Headline and core CPI readings both rose 0.2% m/m - less than expected. Headline CPI dropped from 4.0%y/y to 3.0 y/y in June and core CPI moved from 5.3% y/y to 4.8% y/y. The sub-5% core CPI got the attention of market participants. This is lowest core inflation read year-on-year since October 2021. US equity indexes rallied and the US yield curve shifted lower. However, Treasuries paired some of their rally on Friday with a stronger than expected July University of Michigan sentiment read and inflation expectations that ticked up for both the 1 year and 5-10 year ahead results. Inflation has become the critical variable market participants are watching.

It is important to note that the milder than expected June CPI did not change market expectations for a 25bp rate hike in July. However, market participants do see an additional 25bp rate hike in September as a low probability - less likely than last week (see Fed pricing section). The bond market remains volatile - the US 2 year yield has been moving around with each Tier 1 US data read. This shows the heavy data dependent stance of both markets and the Fed.

Fed Pricing: The peak in the fed funds rate is priced as November at 5.39%. Market pricing has converged to the Fed's forecast of no rate cuts this year. Market participants are onboard for a 25bp rate hike in July (92% probability priced in) but are questioning the need for an additional 25bp rate hike in September (only a 15% probability priced in vs 25% last Friday). Currently, there is approximately 158bps of rate cuts priced for 2024. More rate cuts for 2024 were priced in post the downside surprise to June core CPI.

Chart: US Core CPI and Core PCE prices Y/Y%. Core CPI moved lower than expected in June to 4.8% Y/Y. Core PCE prices are also sub-5% Y/Y but have remained stuck around 4.6% since early this year.

Precious Metals:

Gold and silver rallied this week on a lower US yields and a weaker USD driven by the US CPI result. Precious metals investors are keeping an eye out for the peak fed funds rate, which they hope will be followed by a "pivot" in the Fed's narrative on inflation (to less hawkish) and, as a result lower, US yields and further USD decline, all of which would support precious metals prices. However, market participants have repeatedly had to revise their views on the timing, the level and the duration (time from last hike to first cut) of the peak fed funds rate.

Though the soft landing narrative for the US economy is strong this week, the US economic outlook remains uncertain and fluid. This is one of the reasons we continue to see the need for an allocation to precious metals in a portfolio both as a safe haven investment and for diversification to hedge against macro risk.

DIAMINDX fell 0.2% on the week to USD 4,860.

Tenoris, a trend analytics company for the jewelry industry, aggregates and examines individual transaction data from a set of US specialty jewelry retailers. In its June report, Tenoris noted that US consumer demand remained soft. Overall jewelry and diamond unit sales were down 4.6% y/y in June. The combined value of jewelry and diamond sales were down 11.2% y/y. Diamond sales have been reverting back to pre-pandemic levels.

Looking at lab-grown diamond sales, Tenoris reports that "In June, lab-grown diamond value sales fell 24.2% y/y. The average price per carat declined 4.9% compared to May, and down a large 22.1% y/y." Rapidly increasing lab grown supply has weighed on prices. Changing topics, in last week's WIR edition, we wrote about the Botswana and DeBeers Group resolution to the multi-year negotiation regarding the joint sales and mining agreements. This was an announcement that was much anticipated by the diamond industry. You can read the summary here under the DIAMINDX section.

Gold rose 1.6% on the week to USD 1,955 on the back of lower US yields and a weaker USD. This was its best weekly performance since early April. At the time of writing, gold was sitting just above its 100 and 200 day moving averages. In order to lift gold above USD 2,000 and subsequently to a new high, it will need inflow from institutional investors.

In Episode Five of our podcast Clarity, released this week, we are joined by Philip Newman, Managing Director at Metals Focus. In a wide-ranging discussion, we talk: The Metals Focus gold report, the price forecast for gold in 2023, central bank gold buying, Central Bank of Turkey selling gold, gold investment demand and institutional allocations. Links to listen to the podcast are here.

Silver rose a strong 8.1% on the week to USD 25.01 at the time of writing. Silver broke out of its narrow USD 22.35 - 23.35 range, breaking topside both USD 24.00 and USD 25.00. This is silver's largest weekly move since the mid-March banking turmoil.

Chart: Gold, Silver, US 2 year yield (inverted). Lower US 2 year yield boosted gold and silver.

USD

The USD (DXY Index) fell heavily on the week, down 2.3% due to the friendlier than expected June CPI read. The DXY Index broke key support level 100.00, falling to 99.96 at the time of writing, though it got as low as 99.77 during the week. These are levels not seen since April 2022. USD weakened against all G10 currencies.

EUR gained 2.4% vs USD. EURUSD broke topside 1.1200, ending the week at 1.1234. GBPUSD was up 2.1%, breaking above 1.3100, and JPY gained 2.5% vs USD on the week, breaking downside 138.00 but ending the week at 138.76.

Chart: USD (DXY Index, purple, ls) and EURUSD (black, rs)

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.