Powell's speech to pacify the market, gold prices usher in the dawn again

On Wednesday, the Fed announced after the meeting that the members of the Monetary Policy Committee (FOMC) voted unanimously to raise the target range for the policy rate, the federal funds rate, from 0.25% to 0.50% to 0.75% to 1.00%. This is the first time the Fed has raised interest rates by 50 basis points since May 2000, and it is also the first time since 2006 that the Fed has raised interest rates twice in a row.

​​

Fed Chairman Powell said at a press conference after the meeting that it was a general consensus to raise interest rates by 50 basis points in the next two meetings, and did not actively consider the possibility of raising interest rates by 75 basis points. He also said that there is no sign that the United States is approaching a recession or vulnerable to recession.

​​

The U.S. dollar index and U.S. Treasury yields dived during the session, and spot gold fluctuated upwards and then closed at $1,882 per ounce. Overall, the Fed's statement was no more hawkish than expected. Although the FOMC also hinted at further aggressive interest rate hikes and reiterated its willingness to raise interest rates to a neutral level as soon as possible, the market has already priced in a substantial rate hike, and the threshold for a Fed hawkish surprise is high.

​​

So, while the Fed's decision itself was hawkish, it was a bit dovish compared to the market's high expectations, leading to the typical buy expectations, sell facts.

​​

The U.S. ADP employment report released on Wednesday evening recorded an increase of 247,000 in April, far below expectations for an increase of 395,000 and the smallest increase in employment since April 2020.

​​

The U.S. labor market recovery is showing signs of slowing as the economy nears full employment, and while hiring demand remains strong, labor supply shortages have slowed job growth in goods producers and service providers,

​​

Consumption dominates the U.S. economic system. As an important leading indicator of consumption, the job market can directly reflect changes in the economic climate. Historical retrospectives show that the year-on-year trend of private income, especially salary income, is in sync with or slightly ahead of private consumption year-on-year. Trends in core employment indicators such as the number of new jobs created by farmers and weekly earnings can directly capture changes in the economic climate.

​​

In the employment analysis system, non-agricultural new employment is the core, and indicators such as job vacancies and weekly wages are also worthy of attention. Among the employment indicators, compared with the unemployment rate, the US non-agricultural employment is more responsive to the economic climate, and the trend changes are obviously leading. Focus on the performance of this Friday's non-agricultural employment data.

​​

The U.S. ISM manufacturing data shows that the U.S. ISM manufacturing PMI in April unexpectedly hit a new low since September 2020, and the new orders index and production index hit the lowest level in May 2020 when they hit March, reflecting signs of weak commodity demand. The employment index is sluggish. The price index is still high, indicating that the pressure of high prices has not eased.

​​

And employment in the ISM service sector is now contracting, which, combined with negative GDP, means the Fed's tightening cycle will be very short-lived,

​​

​​

In April, under the triple pressure of rising Fed tightening expectations, high inflation and growth concerns, global markets were generally hit hard, with the exception of the US dollar index and a few commodities with a supply premium such as natural gas and soybeans, all other assets fell. , the volatility of major assets is also very violent, the U.S. stock VIX index, U.S. bond MOVE index, and U.S. dollar volatility have all hit new highs in stages.

​​

U.S. bond interest rates and the U.S. dollar index rose sharply, reflecting the tension in global financial conditions and liquidity. Looking at the situation since April, the situation in Russia and Ukraine has not improved but has not deteriorated sharply, but the rapid rise in U.S. bond interest rates has caused A series of chain reactions such as the inversion of the U.S. bond curve, the inversion of the Sino-U.S. interest rate differential, and the strengthening of the U.S. dollar are equivalent to the fact that in the context of inflation pressures that have not yet improved significantly, tightening and growth pressures are constantly squeezing, old worries remain unresolved, and new ones are added. worry.

​​

The current situation facing the global market is that when some major macro constraints and directions are basically determined, can the market find subtle room for maneuver like walking a tightrope, such as seeing inflation fall before the tightening pressure is so great that it destroys the growth prospects The dawn of time requires the cooperation of multiple factors.

​​

In the medium term, weak growth expectations will suppress commodities, unless the supply of products with strong premium constraints, so remain neutral, and the next catalyst will come from China's steady growth. Gold remains relatively bearish against the backdrop of a strong dollar and strong real interest rates.

​​

The pressure on the international dominance of the US dollar is partly due to the US foreign policy choices, especially the active use of extraterritorial financial sanctions by the US. Given that all transactions in U.S. dollars ultimately go through the U.S. financial system, preventing U.S. banks and their subsidiaries from transacting with a sanctioned entity effectively excludes that entity from the global financial system.

​​

Even if this is legal under EU domestic law, EU companies could be banned from doing business with Iran because it could violate US sanctions. For this reason, the European Commission has said that U.S. sanctions and trade disputes with other countries pose a threat to the EU's economic and monetary sovereignty.

​​

The excessive use of sanctions by the United States may prevent other countries from using the dollar for transactions in the first place, and countries currently hold foreign exchange reserves to preserve their value in times of crisis. But when the Russian government recently needed to tap its foreign reserves to stabilize the country's financial system, Western sanctions prevented it from doing so. This has led to concerns in other countries that the stability of the value of their dollar-denominated financial assets would be tied to U.S. ties, which could prompt investors there to look for other assets, including a more diversified portfolio of foreign exchange holdings.

​​

The dollar continued to appreciate as the market priced in further monetary tightening by the Federal Reserve. In the near term, the prospect of higher U.S. interest rates relative to other economies is likely to remain the main driver of the dollar.