The preferred inflation gauge watched by the FED, the Personnel Consumption Expenditure (PCE) index, rose less than expected last Friday, but it still rose.  The report also showed that consumer spending increased the most in over a year last month, highlighting the economy’s resilience. As a result, Fed Powell reiterated his stance that the Fed was in no hurry to ease rates. The market is expecting rates to ease three times this year with the first in June.  The much-touted economic recovery in China seems to be gathering momentum as the Chinese NBS Manufacturing PMI and General PMI both expanded at their fastest pace since February 2023. This was the first monthly expansion the economy has seen in 6 months, prompting investors to rethink China’s demand for inputs. Oil continued to climb on the back of this and the potential for the conflict between Israel and Hamas to intensify. OPEC meets this week to discuss the price rise. Brent Crude is trading close to a breakout level at US87.80. US Equity markets continue to trade to record highs, as do Gold and Cocoa. Although there are firm fundamentals backing Cocoa’s rally, Gold’s rally is less understood. It’s not the weakening USD; Inflations seem to be contained, and Geopolitical risks are understood. So what is driving Golds rally?

First, the performance of the Personnel Consumption Expenditure (PCE) index, which serves as a key inflation gauge monitored by the Federal Reserve (Fed), prompted a response from Fed Powell. The PCE index MoM rose less than expected at 0.3% last Friday. The fact that it still increased underscores the persistent inflationary pressures in the economy. Further, the YoY release had a rise of 2.5% a small gain on expectations. Despite concerns about rising prices, the report also revealed a substantial increase in consumer spending, the most significant in over a year. This suggests that despite inflationary pressures, consumer confidence remains robust, reflecting the resilience of the economy. Add to this some positive GDP growth numbers and a bullish picture emerges. For the US economy. 

In light of these developments, Fed Chair Jerome Powell reiterated the central bank's stance that it is in no hurry to ease rates. The market, however, anticipates three rate cuts this year, with the first expected in June. Our position suggests that we will have to wait longer. This discrepancy between the Fed's position and market expectations adds an element of uncertainty to monetary policy decisions and could influence market sentiment in the coming months. 

However, US equity markets have been trading at record highs, buoyed by positive economic data and investor optimism. Wall St is a few points off 40,000, and SP500 etched a record in morning trade, and price action for the Nasdaq suggests a test to its record of 18 465, which is only moments away. Expectations that this optimism could spill over to price pressures are a concern, especially and perhaps only for the Fed. Similarly, record levels for gold and cocoa prices have occurred, albeit for different reasons. While there are firm fundamentals backing cocoa's rally, the factors driving gold's rally are less clear.

Gold, traditionally seen as a safe-haven asset, has historically served as a hedge against inflation, currency depreciation, and geopolitical uncertainty. However, the current rally in gold prices is occurring in a unique environment where inflation seems to be contained, and geopolitical risks are understood. Moreover, it's not the weakening US dollar that's driving gold prices higher, as the dollar has remained relatively stable. This begs the question: what is fueling gold's rally in this particular scenario?

Central Banks have long been net purchases of the metal. In fact the US Government is the largest holder of Gold with 8133t. It far outways China at 2235t and Russia at 2332t. The Chinese Central Bank was the biggest buyer last year adding close to 225t. By contrast, China has the largest holdings of USD reserves, and Russia is the 5th largest holder. Interestingly, the US has placed many trade sanctions on those countries that don’t beat to its drum.  Comprehensive sanctions are currently in place targeting Cuba, Iran, North Korea, Russia, Syria, and certain conflict regions of Ukraine; these sanctions heavily restrict nearly all trade and financial transactions. Further, the US has imposed severe restrictions on targeting the core infrastructure of the Russian financial system. As a result of this, we suspect that Russian enterprises are swapping what USD they have into Gold and or diversifying holdings in anticipation that the relations between the two worsens. This could be a reason that underpins golds current shine.

Meanwhile, the much-touted economic recovery in China appears to be gaining momentum, as evidenced by the expansion of both the Chinese NBS Manufacturing PMI and General PMI at their fastest pace since February 2023. This marks the first monthly expansion the Chinese economy has seen in six months, prompting investors to reassess China's demand for inputs. The positive data from China bodes well for global economic growth and could provide a tailwind for commodity prices, particularly oil.

Speaking of oil, prices have continued to climb on the back of improving economic indicators and geopolitical tensions, including the potential for the conflict between Israel and Palestine to intensify. Additionally, the Organization of the Petroleum Exporting Countries (OPEC) is set to meet this week to discuss the recent price rise. Brent Crude, a benchmark for global oil prices, is trading close to a breakout level at US$87.80 per barrel. The outcome of the OPEC meeting and developments in geopolitical hotspots will likely influence oil prices this week.

It will be a very busy week in the United States, with investors focusing on the labour market report featuring non-farm payrolls and the unemployment rate. Other important data include JOLTS job openings, ISM Manufacturing and Services PMI, factory orders, and foreign trade data. Tuesday's ISM and PMI will be of special interest as the forecasts are expected to be soft. This may take the polish of recent moves in equities. Also, Friday sees important employment data, where traders are expecting a lift in non-farm payrolls to 275k. 

On the position front, we are still … USD/JPY at 147.36 and looking for another entry point. Our timing was not the best on this trade. We remain with … in the S+P (5303). In the other currencies, we are …, both the AUD/USD (US0.6770) and AUS/CHF (0.5707). In the bullion market, we … ; however, we … to the silver market as this remains undervalued, in our opinion. 

Trade Focus:

Fundamentals:

Oil: As the conflict between Israel and Hames intensifies, the market is concerned that …

Technical Analysis:

Brent crude is trading at close to highs not seen since 19th March this year … 

Support              …

Resistance         …

Momentum        …