Recession Risk

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All the economic and market chatter through the final summer months seemed focused on whether a recession is looming, and whether it will be a result of policy missteps (potentially led there by one global superpower and their bombastic president). It seems somewhat pedantic waiting for a shoe to drop as we’ve seen global economic indicators signal factories and manufacturers output cutting back and other signs that often precede recession. Still, the ace in the hole has been, and (for now) continues to be the strength in the US labour market.

For many, this had been the conundrum over the summer months. In aggregate, the US economy (and here in Canada) continue to look relatively strong. We can also cite indicators that show reason for concern, and those seemed to be concentrated around the business sector and their spending and investment plans, but job market activity has yet to exhibit signs of weakness.

As the discussion continues over what extent US President Donald Trump is successful in jawboning the US Federal Reserve and influencing the direction of their policy, he’s made the epiphany that all he had to do was intensify trade negotiations with Chinese officials. Essentially, the twitter tirades and press conferences criticizing Federal Reserve Chair Jerome Powell made for good headlines, but the ongoing unresolved trade dispute may prove more effective in forcing the Fed to cut interest rates.

Additionally, the escalating back-and-forth tariff announcements through August only further prompted financial market volatility and saw a surge in demand for safe-haven assets. US government debt traded back to record levels and the US yield curve has inverted to the worst level since 2007. Similarly, precious metals proved once again the thought-after asset in volatile markets as gold made multi-year record highs and surpassed all-time highs in Canadian dollars.

The ultimate question is, what’s it to us here in Canada?

One US investment bank suggested that although the Canadian economy looks relatively unscathed to this point, as a commodity exporting nation, we will ultimately be impacted by waning global demand. Furthermore, the Bank of Canada will have no choice but to follow the US Fed and cut interest rates. This will then translate to a weaker Canadian dollar. CIBC economists, however, suggested focus really needs to stay with the United States (and not global events) as we’ve yet to see a recession in Canada without there being one in the US.

Bank of America CEO Brian Moynihan recently said in an interview that he’ is not worried about a slowdown as long as the U.S. consumer remains strong. Of all the indicators, it’ll be the US job market that will paint the picture.

The Week Ahead in Gold

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The gold market ended last week with a bang, finishing higher by nearly two percent on the final trading day of the week. The market currently has upside momentum on its side and could potentially test the $1700 region in short order. The metal has numerous issues that may continue to provide strong tailwinds. The ongoing trade war, Hong Kong unrest and increasingly dovish central bank commentary may all keep the metals markets on the offensive.

 

The ongoing U.S./China trade war remains at the center of attention. Late last week, China announced that it would implement retaliatory tariffs on about $75 billion of U.S. goods. China’s finance ministry announced that it would place an additional tariff of 5 or 10 percent on U.S. imports starting September 1. The ministry also announced plans to resume tariffs on U.S. imports of autos and auto parts starting in mid-December.

 

President Donald Trump was quick to respond via twitter-his seemingly preferred vehicle. He has said the U.S. would respond, and markets will be watching closely this week for any further action taken. The President went on to add by tweet that: “We don’t need China and, frankly, would be far better off without them.”

 

The clear escalation of both action and rhetoric between the two superpowers had an extremely unnerving effect on the markets. The benchmark Dow Jones Industrial Average sank over 600 points while the tech-heavy Nasdaq declined by a solid three percent. It appears that there is not only a lack of progress at this point, but that the gap between the two sides is growing even wider.

 

Commentary from Fed Chairman Jerome Powell at Jackson Hole, Wyoming may also be a source of concern. Powell acknowledged that the economy is in a good place, and that the Fed would act as appropriate. He did, however, also highlight some key risks that could force the Fed’s hand. The Chairman’s speech seemed to back up the notion of another 25-basis point rate cut next month while easing expectations for a larger, 50-basis point reduction.

 

As some members of the Fed have sounded increasingly hawkish in recent weeks, Powell’s comments-which were largely construed to be dovish-may set some minds at ease. Powell seemed to grasp the significance of recent events and key issues such as Brexit, trade, Hong Kong and the global slowdown could force the Fed to have to maintain a large degree of flexibility regarding monetary policy.

 

Although trade may be a primary focus this week, markets will also be getting some key data points that could be significant heading into the next FOMC meeting. The latest figures on Q2 GDP, Durable Goods, Consumer Confidence, Core Inflation, Consumer Spending and more are all set for release.

 

Recent strength could keep the market moving higher in the next week, and any further negative developments surrounding the war on trade may keep buying interest on the rise. With little overhead resistance to speak of, the market could see another rapid and substantial run higher if new tariffs or other action is taken by either side. Any corresponding declines in stocks may also keep the yellow metal on the move.  Although the chart is highly constructive, the market could see a minor pullback in the sessions ahead. The market appears to have set a new, higher bar, however, and any dips may be shallow and aggressively bought.

The Week Ahead in Gold

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The gold market is seeing some mild pressure to kick off the new trading week as investors take profits and as appetite for risk sees a bit of a surge. Over the weekend, The People’s Bank of China took action that could boost its economy. That measure, combined with a renewed optimism over U.S./China trade talks, has stock investors eager to buy at Monday’s open.

 

The People’s Bank of China unveiled a key interest rate reform designed to lower interest rate costs. The PBOC said that it would improve the mechanism used to establish the loan prime rate this month which should lower corporate borrowing costs. The move came following weaker than expected economic data for July that showed the Chinese economy stumbling more than expected. The data clearly demonstrates the negative effects of the ongoing war over trade which drove growth to almost a 30-year low.

 

Talks over trade could potentially be turning a corner. U.S. Economic Advisor Larry Kudlow suggested that recent telephone conversations between U.S. and Chinese negotiators had been positive. Further talks are planned over the next 7 to 10 days and if successful could lead to higher level discussions in short order.

 

In addition to ongoing trade talks, markets will also continue to pay close attention to the yield curve. Inversion of the U.S. curve caused quite a stir in markets last week, and there was no shortage of headlines on the subject as major stock indexes declined by nearly 3 percent in a single day. Some analysts have suggested that risks of a recession are overblown, and that the inversion of the curve is due to alternative factors. Whatever the case may be, the curve could invert again and send markets into a frenzy. If consumers perceive a higher risk of recession, that can lead to a cutback in spending and increase the economy’s vulnerability to a policy mistake and overall global economic weakness.

 

The highly anticipated Fed symposium from Jackson Hole, Wyoming is also taking place this week. Fed Chairman Jerome Powell will have no shortage of issues worth discussing including effects of the ongoing trade war, negative yields and the rising risks of a U.S. and global recession. It is expected that Powell will do nothing to suggest that the Fed won’t cut rates again next month by 25-basis points. The bigger question may be if the Fed Chief decides to open the door to a 50-basis point cut or if the central bank signals that recent action is the beginning of a full easing cycle.

 

The numerous key issues including trade, interest rates, the global slowdown, Hong Kong unrest and even Brexit could keep the gold market well-supported in the weeks and months ahead. The yellow metal has been on the defensive in recent action since hitting a high near $1550 last week, although some back-and-fill trade should be considered constructive and is likely nothing more than a healthy pullback. The market remains in a strong uptrend and appears to be building a higher base of support around the $1500 region that could act as a springboard for the next major surge higher.

The Week Ahead in Gold

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The gold market is trading solidly above the key $1500 level as ongoing concerns over global growth and rising geopolitical risks fuel safe haven buying. The ongoing U.S./China trade war and increasing unrest in Hong Kong are at the center of attention as the new week kicks off.

 

Over the weekend, protests again took place in Hong Kong and concerns have been mounting about police handling of those protests. The weekend reportedly saw some of the worst unrest yet in the more than two months of demonstrations thus far, and allegations of police brutality are only aggravating the situation further. The Hong Kong airport authority was forced to cancel more than 120 flights on Monday as thousands of demonstrators filled the arrival and departure halls, joining a sit-in at the terminal that began late last week.

 

The Hong Kong airport is one of the globe’s busiest, and the shutdown shows just how much of an impact the protestors can have on the nation’s ability to function. The ongoing conflict is ratcheting up the pressure on authorities, who are growing increasingly concerned that the unrest could tip the local economy into recession. Hong Kong is already dealing with the effects of the U.S./China trade war, and analysts now wonder how much longer mainland China will allow the unrest to continue before a major crackdown is seen.

 

The trade war also continues to be a major influence on global financial markets and is the main culprit behind the recent volatility expansion. The most recent escalation saw China allow the value of the yuan to trade at the lowest level in more than a decade. The trade war could quickly become a currency war, and it has now been suggested that trade talks planned for next month may not take place at all. This has investors wondering not so much about when a deal may be reached, but rather what may happen if talks collapse completely.

 

If no progress towards an agreement is made, further tariffs and possibly even currency interventions could be seen. The global economy will almost certainly fall into a significant recession. The Federal Reserve will do what it can to combat the slowdown but may find its efforts largely ineffective as it can only cut rates so much. The central bank could then be forced to implement fresh QE or other measures to stimulate the economy, and it could potentially take years for activity to return to pre-crisis levels.

 

The current environment of economic and geopolitical risks, negative yields, central bank easing, and rising market volatility could continue to be very supportive of higher gold prices. The market has quickly and decisively distanced itself from the $1450 breakout region and could potentially see another rapid run higher if tensions escalate further. Against the current economic and geopolitical backdrop, a run towards previous all-time highs near $2000 per-ounce is not only plausible but increasingly likely. In the meantime, the market may need to spend some time digesting recent gains before forging ahead. Any dips in price are likely to be shallow and may be aggressively bought.

The Week Ahead in Gold

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Stock markets have taken an ugly turn for the worse on Monday as risk aversion takes hold. Increasing worries over the U.S./China trade war, unrest in Hong Kong and concerns over Brexit are all playing a role in a major sell-off that has seen stocks trade lower by over 2 percent in early action.

 

Last week’s announcement by President Trump that he would add another 10 percent tariff on an additional $300 billion of Chinese goods is the latest action taken by the administration as ongoing trade talks appear to be largely fruitless. That decision has now been met with further action from China, however, as the nation has allowed its currency to take a drastic slide. The yuan recently traded at just over 7.08 against the dollar in offshore markets, and Monday marked the first time the yuan traded over the 7 per-dollar rate in over a decade. In addition to allowing its currency to fall, China has also reportedly directed state-owned companies not to purchase U.S. agricultural products.

 

President Trump accused China of currency manipulation, and the ongoing trade war could turn into a full-blown currency war. China’s recent actions suggest that they are comfortable allowing the yuan to slide even further, and both nations appear ready and willing to take increasingly drastic measures. With little progress being made in ongoing trade negotiations, the situation may get a lot worse before it gets better.

 

The heightened trade tensions come as markets are already battling several key issues. Last week’s interest rate cut from the Federal Reserve did little to appease stock market bulls. Although expectations for a 50-basis point cut had dwindled to almost zero, markets were looking for more dovish guidance from Fed Chief Jerome Powell. The Fed did not deliver such guidance, however, and left markets in a state of confusion. Powell’s remarks have led some to conclude that the central bank may not be as aggressive in its easing plans as previously thought, despite ongoing political pressure to lower rates.

 

Recent developments in the war on trade could potentially force the Fed’s hand, however. If China allows its currency to weaken further, the U.S. could be forced to cut rates and weaken the dollar. The greenback is already trading moderately lower today and could come under further pressure if markets begin to price in further easing by the Fed.  A sinking dollar and declining yields could be a major catalyst for sharply higher gold, which could already stand to benefit from falling equities and rising risk aversion.

 

Strong fundamentals and a bullish technical posture have already fueled a significant rise in gold that could see the metal challenge previous all-time highs in the months ahead. The metal has broken above previous resistance to carve out a fresh 6-year high, and with little overhead chart resistance going forward, it could see a swift and significant rise towards $2000 per-ounce or higher. The market is now in a strong uptrend, and any significant dips may be met with aggressive buying.

Confusion, Contradiction, and Chaos

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The financial press was referring to this week as the most important week for investors in all of 2019. At the center of it was the US Federal Reserve. Particularly, the interest rate announcement this past Wednesday where the US central bank opted to cut interest rates for the first time since 2008. It might go down in history as one of the best telegraphed rate decisions from the US fed, juxtaposed by confusion as to why they were shifting policy.

The month leading into the announcement, the debate ranged on one side from why the Fed would be cutting interest rates in the first place given the strength in consumer spending data and US labour market to overly dovish expectations of a new easing cycle beginning with a 50 basis point cut.

Given the market reaction into the end of the week, however, its not only safe to say that investors expectations for a renewed period of fed accommodation were not met, but also heightened confusion around the lack of clarity in the messaging from the US Fed Chair, Jay Powell.

Previous heads of the US Fed have used their opportunities to speak publicly to deliver a clear consistent message as it relates to their current policy approach. Ben Bernanke is associated with the attention he brought to the Jackson Hole Economic Symposium to preview the feds upcoming aggressive monetary policy in the heart of the financial crisis. Janet Yellen always seemed well scripted; albeit, concise and direct in her press conferences discussing normalizing interest rate policy and remaining data dependent. The current chair lacks that same level of clarity and direction in his messaging as his predecessors.

For this reason, focus may shift to what message he plans to deliver at their annual meeting in Jackson Hole at the end of this month. It is an opportunity for him to clarify the Fed’s stance regarding their outlook over the near term. Unfortunately, it seems he doesn’t have the luxury of everyone waiting patiently for his remarks.

It was very evident the US President was one of the people left most disappointed from the Fed announcement Wednesday. So much so, that when Jay Powell hinted that their outlook may improve because tensions between the US and China have eased, it was contradicted the next day with the announcement of new tariffs on Chinese imports for the beginning of September. Given previous interference from President Trump and attempting to influence the US Fed, it seems logical that this tactical announcement Thursday may have simply been attempting to force the Fed’s hand.

In these choppy investment markets, its sometimes easier to think about a thesis or investment approach and then step aside instead of trying to time every directional change. This next month should be no different. As the takeaway from the Fed Announcement was a lack of clarity, it seems they’ll be using their FOMC members to broadcast their policy approach into the latter half of this year. This could be sealed from a scripted speech from Jay Powell at the end of this month in Jackson Hole. The question, given the feds initial shift earlier this year that was questionably influenced by the sitting US president, is what level of interference he may play over the next month.

We’re still expecting a follow up rate cut; the question is how quickly?

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