A Further Rise In Gold Is Very Likely, The Dovish Expectations Are Feeding Well Into The Bond Markets

There was good, and less good news for investors on the wire yesterday.  

The latest PPI data showed that the producer price inflation in the US fell way faster than expected. The expectation was a slowdown in factory gate inflation from 7.3% to 6.8%. And the data printed a sexy 6.2% for December – which meant a 0.5% retreat instead of a 0.1% decline. Core PPI also slowed. That's the good news.  

The bad news is the US retail sales fell 1.1% in December – marking the biggest monthly drop of last year.  

On the jobs front, Microsoft said that it will cut 10'000 jobs while Amazon started cutting jobs in the context of 18'000 job cuts announced a couple of weeks earlier. Exactly what the Fed wants. 

The bad news would normally be good news for the stocks, if the Federal Reserve (Fed) members weren't there to spoil the dovish Fed expectations by saying that the US rates should go higher. Loretta Mester said more hikes are needed, and James Bullard reminded that the rates would have to stay 'on the tighter side this year' to help the Fed reach its 2% inflation goal. 

S&P500 is an easy short at the current levels 

The S&P500 didn't like the mix of slowing economic data, and still a hawkish Fed, and dived more than 1.50% yesterday.  

And traders didn't hesitate much sending the index below the 200-DMA, and below the bearish trend building since the start of 2022, given that there is nothing encouraging for stock investors out there, other than the softening Fed expectations – which don't help filling the company's coffers. 

Stock/bond divergence is happening! 

The dovish expectations are, however, feeding well into the bond markets: the US 2-year yield is diving toward the 4% mark, while the 10-year yield hit 3.30%, the lowest level since September.  

This means that the positive divergence in the sovereign space, compared with the stocks, is happening. Investors return to US sovereign bonds on expectation that the Fed would soften its policy due to recession jitters, while stock markets don't benefit from the expectation of softer financial conditions, as slowing economic activity is bad for profits.  

And speaking of profits, Procter & Gamble and Netflix are due to release their Q4 earnings today!  

Crude oil swings between gains and losses 

US crude advanced past the $82 mark on Chinese reopening optimism and IEA predicting that the oil demand will hit a record in 2023, before falling back below the $80 on recession pessimism, and the news that the US crude inventories jumped by 7.6 million barrels last week, while the expectation was a drop in inventories.  

The more official EIA data is due today, and the expectation of a 2.1 million barrel fall will likely disappoint the bulls. But I continue believing that the bulls will take the upper hand and carry the rally higher, though on a bumpy road.  

Falling stocks + falling yields: a boon for gold diggers 

Gold is bid above the $1900 level, and the positive pressure is supported by lower US yields – which decrease the opportunity cost of holding the non-interest-bearing yellow metal, and the softer US dollar.  

The overbought conditions hint that we could see a minor downside correction in the short run, but levels between $1855 and 1900 are interesting for amassing gold.  

There is potential for a further rise in gold, especially if the stocks fall, while the US yields continue easing.