The Federal Reserve’s (Fed) higher for longer narrative received some dovish excrement this week when the US CPI results for June came in lower than expectations at 3.0%, year-on-year, down from 4.0% in May. The Fed’s “fight against inflation” seems to be going swimmingly and markets now seem to be fully-priced-in for a 25bps hike and then nothing to year-end, and then beginning to price in a rate-cut next year in January 2004. This led to a dollar sell-off and increased risk-on investor sentiment which gained momentum on Thursday with a lower-than-expected US PPI figures and a strong US initial jobless claims print, this past week.
The week ahead will start off early with the release of the latest China GDP results for the 2Q2023 in the early hours of Monday morning. Expectations are for a robust year-on-year growth rate of 7.3%, up from 4.5% in the 1Q2023. The CPI ball is in Europe’s court this week. UK and Eurozone CPI figures are expected to come in at elevated levels of 8.2% and 5.5%, respectively, year-on-year. Additionally, the health of the US consumer economy will be on the display with the US retail results for June.
We’re starting this week’s report with what I like to refer to as “God’s money.” The dollar was slaughtered last week, and the yellow metal climbed roughly 2.30%. Gold is currently testing its 50-day MA resistance rate and a break above the $1,954 per ounce mark will allow gold to climb to the 2022 peak of $2,070. The MACD is holding a strong buy signal and the RSI still has room to move higher before hitting the overbought range.
The stars aligned for a massive rand rally last week. Weak dollar, risk-on investor sentiment, bounce in precious metals particularly platinum led to rand gains of roughly 3.90%. The rand managed to pull the USD/ZAR pair below R18.00, onto the 61.8% Fibonacci retracement rate of R17.92, before closing the week at R18.09. I expect the 200-day MA of R18.87 to hold some support given the near oversold status of the dollar, indicated by the RSI. The MACD indicator is however holding a strong sell signal so a deeper drop onto R17.70 is looking likely.
Now, its dollar time. When in doubt, zoom out. The DXY has broken below our major support range and the 61.8% Fibonacci retracement level of 102.268 which places the 2022 low of 94.610 in the dollar bears’ crosshairs. But first, a break below 99.500 will allow the dollar to weaken towards 97.440. The DXY is however heavily oversold which could afford the DXY some breathing room which could see it claw its way higher towards 101.300.
I’m eating humble pie regarding my predictions for the equity markets. The double top structure was invalidated on the S&P500 after the index gapped up for two consecutive sessions which allowed it to close the week at a one-year high of $4,505.41. A failed break below the blue support range between $4,390.00 and $4,440.00 will allow for another leg higher towards $4,640.00.
Similarly, the JSE was also boosted by the rand, the risk-on investor sentiment and the pumping gold price which pushed gold stocks. The index blasted past the 50-day MA resistance at R71,820.00 after catching support on the 200-day MA support of R68,965.00.
I’d like to close this week’s report off with a bit of history lesson regarding the debt market. Economists like referring to the yield curve and the spread between long-term and short-term bond yields to judge the health of the bond market and the economy. The chart below shows the difference between the US 10-year bond yield and the US02-year bond yield. In a healthy and growing economy, the difference is positive, meaning that a longer-term bond yields more than shorter-term bonds.
Naturally the bond holder will be compensated more for holding a longer-term security. An economy that is in a recessionary period will however have a negative yield spread (longer-term bonds yield less than shorter term bonds). This happens because money in leaving short-term markets and running to towards the safety of long-term securities largely due to short-term uncertainty, which pushes long-term yields down. This is what is referred to as a yield curve inversion. While an inverted yield curve has often preceded recessions in recent decades, it does not cause them. Rather, bond prices reflect investors’ expectations that longer-term yields will decline, as typically happens in a recession.
The Federal reserve responds to an inverted yield curve and a recession by dropping the short-term interest rates, as you can see on the Federal Funds Rate at the bottom of the chart. I will leave you with the words of Mark Twain, “history doesn’t repeat but it often rhymes.”
