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MARKETS

Ahead of a bevy of potentially market-moving events highlighted by Chair Powell's speech on Capital Hill and the forever closely monitored US Non-Farm Payroll, the US market rally stalled to begin the week, tugging the S&P 500 and Nasdaq Composite off all-time highs despite a rallying group of technology stocks tied to the artificial intelligence boom.

Monday's downturn may reflect a brief pause in the market's upward trajectory, which has been fueled in recent weeks by growing excitement surrounding artificial intelligence (AI) technologies. The Nasdaq, known for its heavy weighting in technology stocks, notably reached a new all-time high last Friday, surpassing a record set in 2021. This milestone marks the Nasdaq as the final major stock index to achieve a record close this year.

Still, the pullback underscores a sense of policy caution among investors, who are taking a moment for pause. 

Given the persistent inflationary pressures, accommodative financial conditions, steady economic growth, and robust labour market conditions, it is reasonable to expect a more hawkish tone from Federal Reserve Chair Jerome Powell. However, it's challenging to envision a substantial departure from the recent guidance provided by other policymakers.

Hence, Powell's messaging may reflect a balanced approach, acknowledging the need for vigilance on inflation while emphasizing the importance of supporting economic recovery. Any shift in policy stance would likely be gradual and cautious, considering the uncertainties in the economic outlook and the potential impact of monetary policy adjustments.

The overreaching message among Federal Reserve officials is that while it's encouraging to observe inflation moderating and aligning with target levels on a three- and six-month annualized basis, this alone isn't sufficient. Despite the adage that one month does not establish a trend, the inflation data from January, as reflected in the CPI and PCE indices, serve as a reminder that navigating the proverbial "last mile" toward price stability is still likely to be a jagged one.

THE POLITICS OF RATE CUTS

Democratic voices are increasingly advocating for policy shifts to address the persistently high costs and inflationary pressures. Senator Sherrod Brown recently emphasized the need for alternative approaches, suggesting that traditional restrictive monetary policy may no longer be effective against inflation. He expressed concerns about the impact on working Americans and small businesses, highlighting the challenges posed by rising housing costs and reduced credit access.

This sentiment sets the stage for this week for Federal Reserve Chair Jerome Powell's appearances before the House and Senate. Republican lawmakers are expected to focus on inflation and deficits, pressing Powell for insights and responses. Powell is likely to acknowledge the unsustainability of the nation's fiscal trajectory while adhering to appropriate decorum and leave it at that.

However, Powell and his colleagues will likely maintain their stance against immediate rate cuts, reiterating that such measures are not imminent. Despite Democratic calls for action, the Fed is unlikely to implement rate cuts during the upcoming policy meeting or in May, barring unforeseen adverse developments in the labour market or the financial sector.

OIL PRICES 

Oil prices retreated despite initial gains, highlighting concerns about demand that overshadowed OPEC+'s widely anticipated decision to extend output cuts. The downward trend in oil prices signals unease among traders regarding global economic growth, with potential complications arising from China beyond current expectations. Additionally, the prospect of sustained higher interest rates in the United States may eventually dampen demand to the extent that oil prices experience a significant decline.

GOLD PRICES

Central banks continue to exhibit robust bullion purchasing activity while global geopolitical tensions and US domestic political concerns remain elevated. Gold acquisitions by central banks, notably China and India, have significantly supported gold prices. The recent absence of ETF purchases can be attributed to the already elevated levels of gold-ETF holdings, particularly in comparison to real (inflation-adjusted) interest rates.

When central banks buy, those 1000 oz bars are typically put in a vault to collect dust and are unlikely to see the light of day for several decades, potentially creating a vast and lasting chasm in global physical supply.

Historically, shifts in gold ETF holdings have frequently occurred during significant risk-off episodes, characterized by a decrease in risk appetite, and during periods of accommodative monetary policy. Our analysis anticipates a potential increase in ETF holdings once the Federal Reserve initiates rate cuts, a move that is likely to commence as soon as June. Hence, we are right on the cusp of trading that actionable window.

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