FED: Hawks Musalem And Schmid Emphasize Signal From Hard Over Soft Data
May-23 14:53
St Louis Fed President Musalem (2025 FOMC voter, hawk) spoke alongside fellow 2025 FOMC voter, Kansas City Fed President Schmidt (hawk), at a panel event Friday. While there was almost nothing directly mentioning current monetary policy, it was notable that both appeared to assess "hard" data much more seriously than "soft" survey data. One possible takeaway from this is that the emphasis on incoming hard data means they are likely to want to wait for longer before making any decision to adjust rates.
- Musalem spoke at length about his concerns over inflation expectations amid tariffs, and the need to keep them anchored: "Expectations of inflation are rising for businesses and for consumers...there is also a higher expectation of higher prices going forward for inputs and for outputs. I'm watching that very carefully for consumers and for businesses, because we at the Fed don't want short term inflation expectations to rise to such a level that they could see seep into long term inflation expectations, which would make our job harder in terms of achieving maximum employment and price stability. We're focused on not allowing that to happen." He reiterated his previous view that GDP is very close to potential and the labor market is at or around full employment.
- Both he and Schmid placed emphasis on "hard" data, downplaying the importance of "soft" data in the rate-setting process. Schmid: "the soft is going to lean more toward the forecasting, whereas hard, you know what you've got... when it comes down to actually making policy for me, you've got this 24 hour market and news cycle and there's so much soft data in that, that you really have to be super careful about how you use that... we're anchored in the data that we use to try to drive that policy process. And for me, a policy has always been a longer term decision making. And so I think you have to be really careful with that soft data and kind of the reaction theory side of what happens as you do move rates. And I think that's why you'll see the Federal Reserve, at least from me and for our team, lean very hard on in the hard data sets because I think we can do much more effective modeling and make probably better decisions that are less maybe emotional or forecast based when when we actually get to the decision table."
- Musalem said he agreed, noting the analogy with 2020 when consumer sentiment was very low but actual consumption was strong. "We definitely take signals from the soft data. We don't dismiss it. We take signals from it. But we understand that every every forecast, no matter who's doing it, has a margin of error around it. And the soft data all the surveys that we take are basically impressions, opinions, right? ... we get all this survey input, which are just forecasts, and they have error bounds around them. And they're not necessarily going to be reality."
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GLOBAL: US Tsy's Bessent On China-US And European Rebalancing
Apr-23 14:51
Treasury Secretary Bessent in Q&A says that there is an "incredible opportunity" to make a deal with China that will benefit both them and the US, citing the example of Japan's reforms over a decade ago and the subsequent Japanese economic performance.
- On communicating with Beijing that they have to address "imbalances": "I think that our Chinese counterparts will come to this realization ... sometimes it takes an external push, right?... there is an opportunity for a big deal here that the US is looking to rebalance to more manufacturing. The identity of that would be less consumption. If China is serious on less dependence on export led manufacturing growth and a rebalancing toward a domestic economy - I think they use the term dual circulation. Well, right now, it's really singular circulation. And if they want to rebalance, let's do it together. This is an incredible opportunity."
- Bessent repeats that the US maintains its "strong dollar policy", and suggests that being the reserve currency has its "pressures", noting that while : "I think that the US will always, for my lifetime, be the reserve currency. I'm not sure that anyone else wants it. I can't remember. One of the European officials said today, maybe it was Mr. De Guindos, I can't remember, said, oh, well, the Euro could become a second reserve currency. Well, we just had a substantial appreciation in the euro for export economies. It's a lot of pressure."
- On European rebalancing via higher defense / German fiscal spending : "It's a combination of economic stimulus, and it is a combination of burden sharing on the European continent for defense. And as I said many times before, economic security is national security, national security is economic security. So if this European plan works, that I applaud it."
- Bessent also reiterates that a reduction in the US fiscal deficit is part of a rebalancing: "A trade deficit emanates from three things: external trade policies, which we are intent on addressing, and the external trade policies can be tariffs, non tariff barriers, currency manipulation and the subsidy of state, subsidy of labor and means of production - so trade, terms of trade, or trade regulation, is one. Two is our budget deficit. So the larger our deficit, the more the it creates a demand suck, also pushes up interest rates, and then three, the level of the dollar. We continue to have a strong dollar policy, and the dollar will adjust based on markets. Everyone asked me, well, what does a strong dollar mean? And to me, the strong dollar means having the policies in place to the deserve capital flows and have confidence. But it doesn't mean that the price on the Bloomberg screen every day, and it also has different meanings in terms of bilateral prices. ... I have talked about we did not get here quickly with the spending. The US does not have a revenue problem. We have a spending problem."
GOLD: ETF and CB Flows Supportive, But Price Rises Eat Into Jewellery Demand
Apr-23 14:45
While the US tariff uncertainty remains a key short-term driver of the gold price, medium/long-term drivers remain its use as a monetary inflation hedge in investment portfolios, a vehicle to build up/diversify central bank reserves and jewellery demand. See below for a summary of recent trends in these three key demand sources, using data from the World Gold Council (WGC):
- WGC data highlights a sharp increase in gold ETF flows since December 2024, most notably in February (100 tonnes) and March (92 tonnes). In the three weeks to April 18, we estimate an additional 108 tonnes of inflows as US reciprocal tariff volatility moved in focus.
- Central bank gold purchases increased slightly in January (20 tonnes) and February (24 tonnes), up from 13 tonnes in December. The PBOC has been in focus after restarting gold purchases in November, with 28 tonnes of gold acquired over the last five months. However, we note that between November and February, the National Bank of Poland also purchased 53 tonnes of gold.
- Jewellery accounted for 40% of total gold demand as of Q4 2024, spearheaded by the likes of India and China. However, there is evidence of demand destruction as a result of recent price rises, with total jewellery demand down 11% Y/Y in Q4 (and demand from Mainland China seeing a notable 28% Y/Y fall). In India, WGC wrote on April 17 that “Gold's steep climb and ongoing volatility are keeping many consumers on the sidelines, with demand for jewellery continuing to be limited to need based purchases, particularly for weddings“.
GOLD: Corrective Pullback On Tariff Optimism, But Technical Uptrend Dominant
Apr-23 14:43
The pullback in spot gold from yesterday’s $3,500.1 all time high has extended to ~6.3%, with the WSJ’s latest article on possible Chinese tariff rollbacks providing the latest source of pressure. Gold is down 3% on the session, currently at ~$3,280.
- The pullback has allowed an overbought condition to unwind, with gold piercing initial support at the April 17 low of $3284.0/oz. Firm support is seen at the 20-day EMA of $3184.2. Shallower selloffs will be considered corrective at this stage.
- A dominant uptrend remains intact, with moving average studies firmly in a bull-mode setup. Resistance levels to flag are:
- RES 1: $3500.1 - High Apr 22
- RES 2: $3547.9 - 1.764 proj of the Feb 28 - Apr 3 - Apr 7 price swing
- RES 3: $3578.0 - 2.000 proj of the Dec 19 - Feb 24 - Feb 28 swing
- Heightened policy uncertainty, risk-off dynamics and some questions around the integrity of the US dollar/USTs as reserve assets have proved supportive of gold since the turn of the year.
- With US tariffs expected to prove stagflationary in the short (and potentially medium) term, and policy volatility likely to remain throughout this US administration’s term, these tailwinds look set to remain in place
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