Gold hits record as net long positions jump

The US economy added 275K new nonfarm jobs last month, significantly more than around 200K new job additions penciled in by analysts. But happily, the unemployment rate unexpectedly rose to 3.9% and wages grew slower than expected on a yearly basis and were almost flat on a monthly basis. The fact that another strong NFP read didn’t translate into higher wages gave a peace of mind to investors. US yields fell and the US dollar index tumbled in the immediate aftermath of the US jobs data, the EURUSD spiked to 1.0980.

While I found that the dollar selloff was a bit exaggerated – given that the US economy still added 275K new nonfarm jobs and wages grew 4.3% on yearly basis, more than twice the Fed’s inflation target - Friday’s reaction to the jobs data revealed an important information: investors don’t care about the strength of the US economy and the labour market, they only care about inflation. And because the wages data was lower than expected, Friday’s jobs day wasn’t a disaster for the Federal Reserve (Fed) doves. The market still gives around 74% chance for a 25bp cut from the Fed this June.

This week, attention shifts to the US CPI print, due tomorrow. The headline inflation is expected to steady near 3.1% on a yearly basis, core inflation is expected to have eased from 3.9% to 3.7%. But the monthly figures could print another strong month. If that’s the case, we shall see a softening in dovish Fed expectations. Remember, Fed Chair Powell said last week that the Fed ‘can and will’ start cutting the rates this year, but he also said that they are in no rush.

The US dollar begins the week on a negative note, the EURUSD gave back all post-US jobs data gains as the European Central Bank (ECB) Chief Lagarde gave a strong signal at her press conference last week that the ECB could take the first step as early as in June. Pricing in the market suggests that the ECB will cut the rates by 100bp this year – versus around 80bp cut from the Fed. The ECB’s dovish divergence could limit the euro’s upside potential against the dollar into the 1.10 psychological mark – unless the inflation numbers from the US comes in surprisingly strong.

The euro and sterling recorded their best performance against the US dollar in months on expectation that the first rate cut from the Fed won’t be delayed beyond June, and gold hit another record on Friday. The price of an ounce climbed to $2195 as the market found comfort in the idea that the Fed will cut in June. Released last Friday, the CFTC data showed that money managers boosted their long gold positions in the week through March 5th and the net long positions jumped 35% from a week earlier as they were looking to hedge against a potential post-jobs data market selloff. Also, data shows that China has been increasing its gold purchases since the beginning of last year; the central bank probably wants to diversify its dollar holdings and households certainly want to seek refuge amid the property meltdown. The question is, could the rally extend beyond $2200? Yes, it could. The inflation-adjusted gold price is below the 2020 peak – which would stand at $2323 if the price is adjusted to inflation of today. In 2011, gold traded at $2581 and back in 1980, the price of an ounce went past $3000 in inflation-adjusted terms. There is never an upper limit when people want to buy. But any retreat in Fed expectations could cool down the short term price surges.

In equities, the decline in US yields and the dollar didn’t boost appetite in major US indices. The S&P500 hit another record but closed the session 0.65% down, while Nasdaq 100 fell more than 1.50%. Tech stocks saw their largest weekly outflow on record.

Elsewhere, inflation in China rose for the first time in 6 months thanks to the Lunar New Year holiday boost in spending, but producer prices fell 2.7%. Nearby, the Japanese stocks fell as the USDJPY sank below 147 on rising speculation that the BoJ could exit the negative rates as soon as this month. I still think that there is more chance of a hint regarding the first rate hike than a concrete action on the rates front at this month’s BoJ meeting, but even a good hint could help investors rush into a long yen trade and pull the USDJPY toward the 140 mark. Finally, in energy, US crude slipped below the 200-DMA this Monday following last week’s failure to increase gains above the $80pb psychological level.