Job data sends yields higher; a new guide to the Gold Price

Oil Price Troubles Investors

Market Overview:

It was a choppy start to the second quarter as heightened tensions in the Middle East drove the Oil price higher and a blowout jobs report added to inflationary worries. Bonds sold off and the US 10 year yield finished the week up at 4.4%, a level not seen since November of last year. Volatility picked up and the complacent optimism of the first quarter has been replaced by a sense of uncertainty about market direction from here. Gold continued to break in to new territory, heading over $2300 an ounce for the first time in its history, with no one being able to offer a convincing reason why. Does it know something the rest of us are missing !?

US Update

Equity investors are currently scratching their heads, trying to work out the likely direction of monetary policy from here and the implications for both the bond and equity markets. Only a month or two ago it had looked like a shoo-in we would get a June rate cut, J Powell had pretty much tipped the markets off that was likely to happen. But following the release of strong job numbers on Friday, the mood music has changed and it is a flip of a coin if we will see one in June as expectations have dropped to 51% and forward market expectations of more rate cuts are now less than Fed projections.

Now, you might have expected equity markets to sell off alongside the bond markets on confirmation of the strength of US employment, but a curious thing happened, as we saw the S&P 500 finish the day over 1% higher. Was that just a knee jerk bounce after a couple of bad prior days, or could it be that investors are waking up to the fact that a strong economy might actually be good news for share prices, even if reduces the chances of rate cuts. I hope so, as I really think the economy might be picking up steam. In fact, last year’s real GDP growth of 3.1% matched the 48-year average. Fiscal stimulus has helped, but the major engine has been robust consumer spending as Baby Boomers spend their wealth and real wage growth supplements covid savings. With consumption per household near its record high, Americans arguably have never been better off and there is no better cohort of the world population at spending. Corporate America is thriving too, with record cash flow, capital spending, and profits rising as productivity improves.

Anyway, lets take a look at what the actual job numbers were, as it wasn’t all bad news for those hoping for rate cuts. Nonfarm payrolls advanced 303,000 last month following a combined 22,000 upward revision to job gains in the prior two months. This was way ahead of market expectations and at a headline level inflationary, but the good news was that the unemployment rate fell to 3.8%, with more people joining the workforce and able to find a job. Growth in March was led by faster hiring in health care (baby boomer spending), construction, as well as leisure and hospitality (more baby boomer spending), which has now bounced back above its pre-pandemic level.

Now, I am convinced that J Powell (if not all of the Fed committee) wants to get a June rate cut in ahead of the Presidential election, but this data is going to leave him with a headache as Fed officials have flagged moderation in job gains as a possible precursor to interest-rate cuts. This data is going to undermine that stance, so next week’s inflation data is starting to look ever more important as unless we see some unexpected cooling, I don’t quite see how the Fed can justify cutting rates any time soon, especially if the Oil price is heading higher.

Here is what Bloomberg economists think we will get with next week’s data, ‘We expect the March CPI report to show a modest slowdown in the monthly pace of core inflation to 0.3% — which is still consistent with the Fed’s annual core PCE inflation target of 2.0%. Even if annual headline inflation flutters around 3.0% through year-end, persistent disinflation in the core should allow the Fed to cut rates this summer’.

Gold

I haven’t written about the gold price for a long time, but given that it has just broken above $2300 for the first time, I think it is more than entitled to receive some column inches. But the problem is it is very difficult to find any conclusive reason for the move other than the cliché, ‘more buyers than sellers’. The recent surge hasn’t sparked the usual buzz within the gold investment community or prompted significant discussion about the implications for the US dollar. Unlike previous peaks, this rise has been relatively under-the-radar, possibly overshadowed by excitement in other asset classes like the S&P 500 and Bitcoin. Even seasoned market analysts are puzzled by gold’s ascent, noting a lack of enthusiasm for gold ETFs and an unclear shift in speculative interest. Factors like central bank purchases and Chinese demand may be influencing gold prices, alongside algorithmic trading strategies or perhaps Gold isn’t buying in to the notion that inflation is on its way down. Nevertheless, it has now overtaken the S&P 500 for gains in 2024 and not many asset classes can claim to be doing that.

In truth gold has always confused me, I was raised on the notion that it was a solid hedge against inflation, or a hedge against geopolitical tension or that it would do well if money was cheap (interest rates were low). These arguments would have worked occasionally, but they have been just as likely not to. I think the best explanation I have ever heard for why you should hold gold in your portfolio, came from Martin Taylor the ridiculously gifted hedge fund manager of the Nevsky Capital fund. He was asked why he always held 5% of his portfolio in Gold, his response was ‘I don’t know’. I think I have to agree with him, but decided to see if artificial intelligence via Chat GPT could help at all …

Chat GPT – ‘the gold price often correlates with other price indices and economic indicators. One notable example is the U.S. dollar index; typically, there’s an inverse relationship where a stronger dollar leads to lower gold prices and vice versa. Additionally, gold prices can also correlate with inflation rates, where higher inflation can increase gold prices as investors look for value stores. Treasury yields and interest rates also have a relationship with gold prices, where lower interest rates can boost gold’s attractiveness as an investment’.

I didn’t find that particularly insightful, so continued my search hoping to uncover something the rest of the world had missed and I think I might just have done that . With a very high correlation R Squared score of 0.98 (above 0.75 indicates a meaningful correlation) the Gold Price appears to be following the volume of Google searches for ‘how to go to space’. I am not completely sure what to do with this information, but given global warming and Elon Musk’s desire to head to Mars, I think it is a fairly sure bet that the number of searches on this topic is likely to increase, ergo Gold is heading higher !! (caveat emptor)

In the absence of any other meaningful economic data or moves in markets in the European or Asian markets, I will sign off this market matters. Company earnings start next week, as well as the US inflation data, so let’s see how markets react. I expected a choppy second quarter after the strong first one and I see no reason to alter that view.