What to know today

  • April PCE data is the thing.
  • The ECB is ready to cut.
  • Precious metals shine.
markets

A Game of Divergences

We’re separating the doves from the hawks.

It’s a holiday-shortened week following the unofficial start of summer in the US, but these four days will be rich with incoming data.

And we’ll hear from eight Federal Reserve speakers across nine scheduled events through Thursday.

The main event is the release of Personal Consumption Expenditure Price Index data for April at 8:30 a.m. ET on Friday. Core PCE is the Fed’s preferred inflation gauge.

And this particular print is as fraught as any, if not more so, with global central banks already easing into dovish policy regimes.

Minutes from the Federal Reserve’s April 30-May 1 policy meeting – reflecting as they did the then-current incoming data – had investors, traders, and speculators all up in their feelings for what they thought was lost hope of imminent easing.

They want at least in-line April PCE data and hope for a softer-than-expected reading that will provide offer reassurance of at least one rate cut this year.

Traders are beginning to price in a rate cut by the Federal Reserve to their US dollar forecasts versus the euro and the pound.

According to the most recent data from the Commodity Futures Trading Commission, bullish US dollar sentiment is waning.

Commercial traders held a net short position of $5.36 billion as of May 21, reversing a net long position of $2.02 billion as of May 14.

That reversal probably reflects a reaction to cooling US economic data. 

Before we get April PCE numbers on Friday, we’ll see a consumer confidence report from the Conference Board today, the Fed’s beige book for April on Wednesday, and initial jobless claims, first-quarter GDP, and pending home sales data on Thursday.

All that follows the first signs of cooling in six months in the April Consumer Price Index data as well as retail sales data suggesting waning consumer strength.

The Fed, of course, has always been about incoming data, even back in December when Jerome Powell first suggested that it may soon dictate a change in policy.

It’s important to remember that what moved the forecast up to as many as six or seven rate cuts in 2024 and back down again to maybe one or two are the vicissitudes of investors, traders, and speculators.

Price action, people, is all about us and our behavior, not central bankers.

deep dive

Central Bankers Speak of Rate Cuts

Potentially critical policy divergences are forming.

The European Central Bank is expected to cut its benchmark interest rate next week.

The Governing Council of the ECB will meet June 6 in Frankfurt. ECB President Christine Lagarde will host a press conference following the meeting.

In an interview with the Financial Times ahead of the meeting, ECB chief economist Philip Lane said, “Barring major surprises, at this point in time there is enough in what we see to remove the top level of restriction.”

Price action suggests investors, traders, and speculators expect to see the ECB cut its policy rate by 25 basis points from a record high of 4 percent.

Incoming data over there indicate inflation is falling toward the ECB’s long-term target of 2 percent.

The European Central Bank is expected to cut its benchmark interest rate by 25 basis points at its meeting on June 6, 2024.

Lane also suggested to the FT that the ECB’s restrictive policy must remain in place through 2025 because wage growth won’t normalize until 2026.

Central banks in Switzerland, Sweden, the Czech Republic, and Hungary have already cut their respective benchmark rates.

Ambiguity about next moves continues to surround major players, including most notably the Federal Reserve but also the Bank of England. The Bank of Japan is an outlier, with its next move likely to be a rate hike. 

In remarks to an audience in Dublin on May 27 Lane said the pace of the ECB’s easing “will be slower if there are upward surprises to underlying inflation” and “faster if there are downward surprises."

Lane’s commentary indicates the ECB is approaching its decision-making process in the same way as its peers: based on incoming data.

The economist was careful to underscore that a cut on June 6 is no “declaration of victory” and that the pace of easing will be determined by underlying inflation.

Olli Rehn, a member of the ECB’s governing council and the head of Finland’s central bank, has also said the time is right to ease policy, with eurozone inflation running below 3 percent for seven straight months.

A move by the ECB on June 6 would set it on a separate path from the Fed. A more aggressive approach to easing from there would further undermine the euro versus the US dollar.

It’s both a little bit dramatic and sort of spot-on to say the whole world will be watching that 8:30 a.m. ET April PCE release on Friday.

deep dive |
May 28, 2024

Central Bankers Speak of Rate Cuts

PRECIOUS METALS

These ETFs Are Precious

But they’re backed by hard assets.

In her May 20 Weekly Market Outlook Mish Schneider noted an emerging commodity supercycle highlighted by gold and silver taking flight.

Gold has backed off the fresh all-time high it established on May 20 at $2,449.89 per ounce, trading on Monday at $2,350.97. Spot silver has pulled back from a May 20 peak of above $32, its highest level since 2012.

That price action could present a buying opportunity, and, From the Research Desk, Bank of America has some ideas about how you can allocate available assets.

The spot gold price is up about 14 percent year to date, its rise supported by ratcheting geopolitical tension, macroeconomic uncertainty, and interest-rate fluctuations.

Non-Western central banks, led by the Peoples Bank of China, have been buying gold to diversify their US dollar-heavy foreign reserves.

Commercial traders raised their net-long position in gold futures and options to their highest level since mid-April 2020 during the week through May 21, 2024.

Silver has followed gold’s trajectory, enjoying similar catalysts.

BofA names the abdrn Physical Silver Shares ETF $SIVR, the lowest-cost physically backed silver ETF on the market, the iShares Silver Trust $SLV, the Invesco DB Precious Metals Fund $DBP, and the abdrn Physical Precious Metals Basket Shares ETF $GLTR.

All four funds are backed by physical precious metals, including gold and silver as well as palladium and platinum.

DBP is the most expensive of the precious metals funds on BofA’s rec list, though its heavy gold exposure has driven its outperformance versus other ETFs. DBP allocates 80 percent of its assets to gold and 20 percent to silver.

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