The Precious Metals Week in Review – March 10th, 2023

1. A “perfect storm” is brewing, and markets this year are going to get hit with a recession, a debt crisis, and out-of-control inflation, the economist Nouriel Roubini said. Roubini, one of the first economists to call the 2008 recession, has been warning for months of a stagflationary debt crisis, which would combine the worst aspects of ’70s-style stagflation and the ’08 debt crisis. “I do believe that a stagflationary crisis is going to emerge this year,” Roubini said Thursday in an interview recently. With consumer inflation still sticky at 6.4%, Roubini said he estimated that the Federal Reserve would need to lift benchmark rates “well above” 6% for inflation to fall back to its 2% target. That could spark a severe recession, a stock-market crash, and an explosion in debt defaults, leaving the Fed with no choice but to back off its inflation fight and let prices spiral out of control, he added. The result would be a steep recession, anyway, followed by more debt and inflation problems. “Now we’re facing the perfect storm: inflation, stagflation, recession, and a potential debt crisis,” Roubini said. He has remained ultra-bearish on the economy, despite the market’s growing hope that the US could skirt a recession this year. Though more bullish commentators are making the case for a healthy rebound in the S&P 500, which fell 20% last year, Roubini has previously said the benchmark stock index could slide another 30% as investors battled extreme macro conditions. “They will continue to go down,” he said of stocks, pointing to the recent sell-off as investors priced in higher interest rates from the Fed. “The market is already correcting.” He urged investors to protect themselves by choosing inflation hedges, such as gold, inflation-indexed bonds, and short-term bonds. Those picks are likely to beat stocks and bonds, he said, which could suffer.

2. The Eurozone is on the verge of stagflation, renowned US economist Jeffrey Sachs has warned. Stagflation refers to a period of stagnant economic growth combined with persistently high inflation and a sharp rise in unemployment. According to Sachs, who was the mastermind behind “shock therapy” reforms in the 1990s in Russia, the recent slowing in headline inflation in the euro area is a temporary occurrence, as it includes highly volatile fresh food and energy prices, which change quickly. However, core inflation, which excludes these readings and therefore gives a clearer picture of underlying pressures within the economy, surged to a new record last month, signaling that the Eurozone economy may be headed into a crisis in the long run. “Core inflation in Europe just keeps rising, despite headline slowing as the economy tips into recession. Get ready for stagflation!” Sachs said. Headline inflation across the 20 countries of the euro area slowed to 8.5% in February from 8.6% the month before, according to Eurostat data. Experts attribute the trend to the decline in energy prices brought about by unseasonably mild weather and, later, lower demand. Core inflation, on the other hand, rose by 5.6%, a new historic high for the indicator. The surge in core inflation is likely to force the European Central Bank to keep raising interest rates, which often stalls economic growth or even pushes the economy into a recession, a period of negative growth. Sachs is not the first to issue warnings about looming stagflation. Another renowned economist, Nouriel Roubini, has been saying for months now that the world economy is headed into what he calls “a global stagflationary debt crisis,” noting that with interest rates at their current levels, the debt ratio is quickly becoming unsustainable.

3. Despite higher prices, consumers are still spending, although not as much as they were a year ago, which is giving their budgets some breathing room. As of January, 60% of all U.S. adults, including 45% of high-income earners, were living paycheck to paycheck. That is down from 64% a year earlier, suggesting that last year’s spending cutbacks have improved some consumers’ financial situations. “Consumers have accepted that inflation is part of their everyday lives, and they are actively making behavior changes, especially during the 2022 holiday shopping season, to adjust their spending and better manage their cash flow,” said Anuj Nayar, LendingClub’s financial health officer. Yet the latest inflation reading from last Friday’s core personal consumption expenditures index was hotter than expected, showing some spending habits are hard to break. Consumer spending jumped 1.8% for the month compared to the estimate of 1.4%. To make ends meet as prices increase, more Americans are leaning on credit cards. At the end of 2022, credit card debt hit a record $930.6 billion, an 18.5% spike from a year earlier, and the average credit card balance rose to $5,805. Total household debt also increased by 2.4% to $16.9 trillion in the fourth quarter of last year, the Federal Reserve Bank of New York found. Now, nearly half, or 46%, of credit cardholders carry debt from month to month on at least one card, up from 39% last year, according to another report.

4. US banks are being forced to do something they haven’t done for 15 years: fight for deposits. After years of earning next to nothing, depositors are discovering a trove of higher-yielding options like Treasury bills and money market funds as the Federal Reserve ratchets up benchmark interest rates. The shift has been so pronounced that commercial bank deposits fell last year for the first time since 1948 as net withdrawals hit $278 billion, according to Federal Deposit Insurance Corp. Data. To stem the outflows, banks are finally starting to lift their own rates from rock-bottom levels, particularly on certificates of deposit, or CDs. More than a dozen US lenders are now offering an annual percentage yield of 5% on CDs maturing in around a year, a rate that would have been unspeakably high two years ago. Even the big banks are feeling the heat. At Wells Fargo, 11-month CDs now pay 4%. The jump in rates on CDs and other bank deposits has been a boon for consumers and businesses, but it’s a costly development for the US banking industry, which is bracing for a slowdown in lending and more write-downs. And for smaller regional and community banks, losing deposits can be serious and weigh heavily on profitability. The very biggest banks can afford to slow-walk their rate increases, simply because they still have relatively high deposit levels. Overall, the average rate on a one-year CD is roughly 1.5%. That’s up from 0.25% a week before the Fed began raising rates a year ago, but still well below inflation. After a year of record profits, the foot-dragging has earned banks plenty of ire from politicians globally.

5. SVB Financial Group shares extended their plunge before being halted in premarket trading for pending news as prominent venture capitalists recommended companies withdraw their money from the lender, sparking further worries over its financial health and liquidity in the wider banking sector. The stock, which fell by as much as 69% premarket on Friday, has tumbled following a surprise announcement Wednesday from the Santa Clara-based bank holding company that it was issuing $2.25 billion shares to bolster its capital position after a significant loss on its investment portfolio. The blow triggered a sharp selloff in US lenders, which sank Thursday by the most in almost three years and extended losses in US premarket trading on Friday. Adding to SVB’s woes, venture capitalists including Peter Thiel’s Founders Fund urged portfolio businesses to limit their exposure to the firm. Meanwhile, analysts cut their ratings on the stock, with Raymond James downgrading the bank to market performance and Truist Securities lowering it to hold, citing concerns over clients pulling funds and the pressure from higher interest rates. “With the increasing risk of accelerated deposit outflows, we believe there is too much uncertainty to recommend the stock to investors,” Truist analyst Brandon King wrote in a note.

6. Exxon’s CEO slammed Europe’s windfall profit tax on oil and gas producers, saying it drives away investment and undermines energy transition efforts. The EU slapped the new tax on oil companies last year after Russia’s invasion of Ukraine caused fuel prices to skyrocket, squeezing consumers already enduring surging inflation. The tax would wipe out years of profit from recent refining investments and means Exxon plans to pull back future spending on the continent in favor of the US, Darren Woods said. The CEO also criticized “ideologues” who want to get rid of oil and gas for driving the climate debate. Such policies have created unintended consequences, such as countries burning more emissions-intensive coal to meet consumers’ energy needs when supplies fell short after the Ukraine war started, Woods said. International buyers are increasingly seeking US crude grades such as West Texas Intermediate and West Texas Light as a replacement for Russian Urals oil.

7. The bond market is doubling down on the prospect of a US recession after Federal Reserve Chair Jerome Powell warned of a return to bigger interest-rate hikes to cool inflation and the economy. As swaps traders priced in around a full percentage point of Fed hikes over the next four meetings, the yield on two-year Treasury notes touched 5.08% on Wednesday, its highest level since 2007. Critically, longer-dated yields remained in check, with the 10-year rate under 4% and the yield on 30-year bonds lower. As a result, the closely watched spread between 2- and 10-year yields this week showed a discount larger than a percentage point for the first time since 1981 when then-Fed Chair Paul Volcker was engineering hikes that broke the back of double-digit inflation at the cost of a lengthy recession. A similar dynamic is unfolding now, according to Ken Griffin, the chief executive officer and founder of hedge fund giant Citadel. “We have the setup for a recession unfolding” as the Fed responds to inflation, Griffin said in an interview in Palm Beach, Florida.

8. In the week ending March 4, the advance figure for seasonally adjusted initial claims was 211,000, an increase of 21,000 from the previous week’s unrevised level of 190,000. The 4-week moving average was 197,000, an increase of 4,000 from the previous week’s unrevised average of 193,000.

9. Oil prices were stable on Friday after better-than-expected U.S. employment data through both benchmarks remained on course to fall more than 4% on the week amid U.S. interest rate hike jitters. Brent rose 21 cents, or 0.3%, to $81.80 a barrel by 1440 GMT. U.S. West Texas Intermediate crude (WTI) was up 10 cents, or 0.1%, at $75.82. Expectations of further rate hikes in the world’s largest economy and Europe have clouded the global growth outlook and driven both crude benchmarks down almost 5% so far this week, their worst drop since early February.

10. The Euro initially tried to rally during trading on Thursday but gave back early gains to show signs of hesitation. Ultimately, this is a market that looks as if it is paying close attention to the 200-Day EMA, as it has offered support for a couple of days in a row. Whether or not that holds longer-term remains to be seen, because quite frankly with Jerome Powell suggesting in front of Congress that interest rates in America will continue to climb and perhaps even at a faster pace than originally thought, it does make a certain amount of sense that the US dollar might pick up a bit of momentum. Because of this, one should pay attention to whether we can break down below the 1.05 level underneath, because it is what looks to be the bottom of a larger support level including the 200-Day EMA.

11. The dollar index was steady on Friday, a rare spot of calm in volatile global markets ahead of key U.S. payrolls data later in the day, while the yen weakened after the Bank of Japan kept stimulus settings steady. The dollar jumped as much as 0.64% against the yen, a knee-jerk move after the BOJ (Bank of Japan) kept policy unchanged in Governor Haruhiko Kuroda’s last policy meeting before he steps down in April. It was last up 0.5% at 136.79.

Mortgage rates climbed again last week, while a key measure of housing sentiment dropped back close to the record lows recorded last year, as higher interest rates roiled the housing market. For the week that ended March 3, the average contract rate on a 30-year fixed mortgage increased to 6.79%, from 6.71% the prior week, the Mortgage Bankers Association (MBA) said on Wednesday. It marked the fourth weekly increase in mortgage rates after a period of declines, as rates climbed back toward the 20-year high above 7% reached last fall. Despite the rising rates, mortgage applications increased 7.4 percent from one week earlier, though the increase may in part be due to the recent President’s Day holiday, said Joel Kan, MBA’s Vice President, and Deputy Chief Economist. “Even with higher rates, there was an uptick in applications last week, but this was in comparison to two weeks of declines to very low levels, including a holiday week,” said Kan. “Comparing the application indices from a year ago, purchase applications were still down 42 percent, and refinance activity was down 76 percent. Many borrowers are waiting on the sidelines for rates to come back down,” he added. Meanwhile, Fannie Mae’s monthly gauge of housing sentiment dropped 3.8 points in February to 58.0, falling close to its record low seen in October. As mortgage rates rise, both buyers and sellers were pessimistic about the market, according to Doug Duncan, chief economist and senior vice president at Fannie Mae. “With home-selling sentiment now lower than it was pre-pandemic – and homebuying sentiment remaining near its all-time low – consumers on both sides of the transaction appear to be feeling cautious about the housing market,” said Duncan in a statement.

Americans racked up a record $180.3 billion in additional credit card debt last year, as rampant inflation and dwindling savings rates forced many families to tap lines of credit, a new study finds. US credit card users ended 2022 with $1.18 trillion in outstanding credit card debt, a 15% increase from the year before. In the fourth quarter alone, credit card debt increased by $85.8 billion, the highest quarterly increase ever recorded, and the average household ended the year with $9,990 in credit card debt. As the Federal Reserve raises its benchmark interest rate to fight inflation, credit card variable rates have risen in tandem, making the debt more costly to pay off. If the Fed issues a larger 0.5-percentage point rate hike later this month as expected, it will cost credit card users $3.4 billion in addition to interest payments over the next 12 months. But for those carrying big credit card balances, higher rates will mean a steeper climb out of debt.

Russia is likely to downgrade its ambitions in Ukraine for the time even as it enjoys deepening economic and defense support from China, US intelligence chiefs told a Senate committee. President Vladimir Putin would need to find outside suppliers of ammunition and impose a mandatory national mobilization if Russia is to advance in its year-old invasion. We do not foresee the Russian military recovering enough this year to make major territorial gains. Putin is likely better off understanding the limits of what his military can achieve and seems to be focused on more limited military aims for now. That assessment was part of a broader outline of the threats the US faces as spelled out in a report released as the hearing began. Although Russia got attention, China was the main focus, called out for its control of global supply chains, its dominance of critical minerals, and its control over the video-sharing app TikTok, which Republican Senator Marco Rubio of Florida described as “one of the most valuable surveillance tools on the planet.” The report predicted China will keep up its defense and economic cooperation with Russia despite international condemnation of the Ukraine invasion and pressure from the US and its Western allies. At the same time, it found China is advancing its nuclear weapons capability and building out its ability to destroy enemy satellites as part of a broader push to strengthen its military. “Despite global backlash over Russia’s invasion of Ukraine, China will maintain its diplomatic, defense, economic, and technology cooperation with Russia to continue trying to challenge the United States, even as it will limit public support,” the Office of the Director of National Intelligence said in the report.

Volatility should be expected to remain high as investors will be closely watching for hints on upcoming monetary policy direction. Many investors have redoubled their efforts to ensure that their portfolios are sufficiently diversified in the hopes that they will be able to withstand corrections in multiple market sectors. Many of these investors have included physical precious metals as part of their diversification plans, given their long history as a hedge against both inflation and during times of economic turmoil. Remember, the key to profitability through the ownership of physical precious metals is to own the physical product and hold it for the long term. Always remember that you should never overextend your ability to maintain ownership of your precious metals over the long run.

Trading Department – Precious Metals International, Ltd.

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