The Precious Metals Week in Review – August 18th, 2023

1. A storm of public and private debt is brewing in the U.S., and the troubles are already beginning to show on the surface as loans pile up and borrower confidence falters. At a broad level, Fitch Ratings‘ downgrade of the U.S. credit rating and Moody’s downgrade of 10 U.S. banks this summer points to issues for both sovereign credit and debt originated out of the banking sector (structural pressures stemming from tighter credit conditions and Fed policy). But there are more problems mounting across debt markets as well, as both private and public sectors face a drastically different environment than they did in the previous decade when interest rates were at historic lows coming out of the 2008 crisis. If low rates spurred the sugar rush of heavy borrowing, rising interest rates may be setting the stage for the sugar crash. Private debt levels are building fast and hitting new records this year. Credit card debt just passed $1 trillion for the first time ever, according to Federal Reserve data. Personal unsecured loans also hit a new record, notching an unprecedented $225 billion in 2023, which saw volumes grow 6.2% over the last year to hit $7.8 trillion. The public debt picture looks even worse. The national debt balance blew past $32 trillion for the first time this year, with the potential for $5 billion to be added each day for the next 10 years, according to Bank of America. Meanwhile, the delinquency rate for all personal loans rose to 2.23% in the first quarter of this year, up from just 1.7% in the first quarter of 2021, Fed data shows. Earlier this year, Morgan Stanley noted that the credit crunch had arrived as banks recorded the sharpest decline in lending on record.

2. Last Friday, the average 30-year fixed mortgage rate jumped to 7.19%. Economists have predicted mortgage rates could go above 8 percent if the economy continues to show signs of strength. Over the past few months, mortgage rates have climbed back up. Financial markets, which have reacted to stronger-than-expected labor market data, are now factoring in higher probabilities of the Fed maintaining higher interest rates for a prolonged period. This 7.19% mortgage rate is the second highest recorded by Mortgage News Daily since early November. It was surpassed only by the 7.22% rate reached in July. Mortgage rate forecasts from eight leading research firms are listed below. The Mortgage Bankers Association: The trade group projects that the 30-year fixed mortgage rate will average 5.9% in Q4 2023. Beyond this year, the group expects mortgage rates to slide to 4.9% by Q4 2024. Morningstar: Economists project that the average 30-year fixed mortgage rate will average 6.25% in 2023, 5.0% in 2024, and 4.0% in 2025. Goldman Sachs: The investment bank projects that the 30-year fixed mortgage rate will end in 2023 at 6.4%. In 2024, Goldman Sachs expects the 30-year fixed mortgage rate will average 5.9%. The National Association of Realtors: Economists forecast that the 30-year fixed mortgage rate will slide to 6.4% before the end of 2023, and then to 6.0% in 2024. Morgan Stanley: The Agency project that the 30-year fixed mortgage rate will start in 2024 at 6.0%. Moody’s Analytics: Moody’s still projects that the 30-year fixed mortgage rate will average 6.5% through most of 2023. Realtor.com: Economists believe the 30-year fixed mortgage rate will start 2024 at 6.1%. Fannie Mae: Economists forecast that the 30-year fixed mortgage rate will average 6.6% in Q4 2023.

3. U.S. stock fell at the open on Tuesday as a retail-heavy week began by showing continued consumer resilience in the U.S., while China painted a grim picture for the world’s second-largest economy. The moves added pressure to a glum August for stocks after the indexes had a rebound day on Monday, with the Nasdaq rising over 1%. Retail sales numbers out Tuesday morning, however, suggested continued health for the U.S. consumer. Retail sales rose 0.7% in July from the previous month, more than Wall Street’s estimates for 0.4% growth. Meanwhile, China reported a further decline in health for its economy. China’s central bank unexpectedly cut a range of key interest rates in a bid to spur growth in its sputtering economy. Notably, it also suspended the publication of its youth jobless data after months of spirals. UPDATE: U.S. stocks sunk at the open Friday in what is shaping up to be the worst week of an August swoon for the major indexes. The Dow Jones Industrial Average fell around 0.4%, while those tied to the S&P 500 dropped around 0.6%. The tech-heavy Nasdaq Composite was 0.9% lower after three consecutive days of sharp losses.

4. IBM CEO Arvind Krishna announced a hiring pause in May, but that’s not all. Later that month, he also stated the company plans to replace nearly 8,000 jobs with AI. Krishna noted that back-office functions, specifically in the human resources sector, will be the first to face these changes. In recent weeks, the company has opened up dozens of positions for AI-based roles to help develop and maintain these systems. The transition will happen gradually over the next few years, with machines potentially taking over up to 30% of noncustomer-facing roles in the five years. This means that workers in finance, accounting, HR, and other areas will likely find themselves facing stiff competition from robots and algorithms. The decision highlights the increasing reliance on automation and artificial intelligence across various sectors and the potential impact on the workforce. While IBM isn’t the only tech giant to downsize recently, with layoffs also hitting Meta Platforms, Amazon, Twitter, and Microsoft, it’s clear that AI is rapidly transforming the workforce. The prospect of mass automation looms large, as a new report by Goldman Sachs economists reveals that up to 300 million full-time jobs worldwide could be affected by the latest wave of AI technology. The report suggests that 18% of all work around the globe could potentially be replaced by machines, with the most advanced economies being hit the hardest.

5. A bipartisan group of former senior U.S. national security officials urged Congress on Wednesday to dedicate resources to President Joe Biden’s recent order restricting some outbound U.S. investment to China, calling it a top priority. Twenty-one veteran officials sent a letter to congressional leaders, calling the order “a positive step in the overdue process of limiting adversaries’ access to American capital. The United States must ensure that China and other foreign adversaries aren’t able to use our financial dynamism and openness against us in ways that continue to threaten our national security and prosperity,” they wrote in the letter. Biden’s order, issued last week but expected to be implemented next year, is aimed at preventing American capital and expertise from helping China develop technologies that could support its military modernization and undermine U.S. national security. It authorizes the U.S. Treasury Secretary to prohibit or restrict U.S. investments in Chinese entities in three sectors: semiconductors and microelectronics, quantum information technologies, and certain artificial intelligence systems. China has said it is “gravely concerned” by the order, though some U.S. lawmakers have criticized it as having too many loopholes.

6. In the week ending August 12, the advance figure for seasonally adjusted initial claims was 239,000, a decrease of 11,000 from the previous week’s revised level. The previous week’s level was revised up by 2,000 from 248,000 to 250,000. The 4-week moving average was 234,250, an increase of 2,750 from the previous week’s revised average. The previous week’s average was revised up by 500 from 231,000 to 231,500.

7. While backwardation in oil markets has reached the widest level since April and inventories are declining globally, the upside for crude oil prices is no longer as clear as it was a couple of weeks ago. Oil is heading for its first weekly loss since June. The Federal Reserve minutes, showing Fed members divided over the need for further rate hikes, cooled down expectations of a soft landing, and China’s ongoing macroeconomic woes resurfaced again, seeing Brent edge lower week-on-week to $84 per barrel. WTI (West Texas Intermediate) is trading at $80.35 per barrel.

8. EUR/USD started to edge higher after dropping below 1.0850 in the European session. Although Wall Street’s main indexes continue to stretch lower, the U.S. Dollar struggles to build on its weekly gains amid retreating U.S. yields and allows the pair to stabilize. EUR/USD maintains the multi-session bearish move well in place at the end of the week. A deeper pullback now targets the July low of 1.0833 (July 6). The loss of this region leaves the pair vulnerable to a probable test of the critical 200-day SMA (Simple Moving Average) at 1.0790 in the short-term horizon. In the meantime, the pair’s positive outlook stays unchanged while above the 200-day SMA.

9. The Ministry of Finance (MOF) intervened at levels above 145.90 in USD/JPY last September. Concerns are increasing that the weak Yen might mobilize the MOF. While the U.S. economy is still robust, which has already dampened Fed rate-cut expectations and is supporting the Dollar. Most see little chance of the Yen appreciating again. On the contrary, it is feared that it might ease further under these conditions unless the MOF tries to end the decline. Perhaps the BoJ (Bank of Japan) and MOF are hoping that things will change once interest rates in the U.S. begin to fall again. If so, expect the dollar to weaken at that point. But it will be some time before that happens.

The U.S. economic story of the year was hammered home again on Tuesday with the July retail sales report showing consumer spending remains surprisingly resilient. But it’s important to remember that retail sales reports aren’t the perfect consumer barometer, as they generally underweight the biggest share of where consumer spending goes towards services rather than goods. Many readers will have seen this trend discussed as a consumer preference for ‘experiences’ rather than ‘things.’ During the pandemic, the predominance of services spending was challenged, with travel and dining curtailed to prevent the spread of COVID while the housing market went gangbusters. As of June, services spending was just under 67% of the overall Personal Consumption Expenditures index, which feeds into GDP. In January 2020, 69% of PCE spending went toward services. This 2-percentage point shifts in PCE towards goods and away from services put annualized goods spending $1.6 trillion higher in June 2023 than in June 2019. But the return of a consumer habit, eating away from home, may not quite indicate that already-reshaped household budgets are going to again be reoriented in our post-pandemic world.

Most Federal Reserve officials last month still regarded high inflation as an ongoing threat that could require further interest rate increases, according to the minutes of their July 25-26 meeting released Wednesday. According to the minutes, the Fed’s policymakers also said that despite signs of progress on inflation, it remained well above their 2% target. At the meeting, the Fed decided to raise its benchmark rate for the 11th time in 17 months in its ongoing drive to curb inflation. But in a statement after the meeting, it provided little guidance about when, or whether, it might raise rates again. Inflation has cooled further, according to the latest readings of “core” prices, a category that excludes volatile food and energy costs. Still, the Fed now faces upticks in gas and some food prices, which could keep overall inflation from falling much further in the coming months. And rising costs for services, from auto insurance to restaurant meals to dental services, could keep core inflation persistently high. Data this week suggests that the economy, if anything, is picking up, which could keep inflation sticky at its current elevated level. Consumers are still spending at a healthy pace. A report Tuesday showed that retail sales rose faster than expected last month, fueled by rising online shopping and healthy sales at restaurants and bars, among other categories. The strong sales figures “suggest a much more robust underpinning to the economy, certainly not what the Fed wants to see” as it seeks to slow inflation, said Quincy Krosby, chief global strategist for LPL Financial.

Goldman Sachs housing analysts no longer think home prices will fall this year. Instead, they are forecasting a slight increase. “We are revising our home price forecasts higher, to 1.8% for full-year 2023 vs. -2.2% prior, and 3.5% in 2024 vs. 2.8% prior,” Vinay Viswanathan, a fixed income strategist at Goldman Sachs, wrote in a note. “These forecasts imply home prices will remain roughly unchanged through the year-end and then return to trend growth levels in 2024.” This comes as home prices have resumed an upward trend and mortgage rates remain elevated, creating a bleak homeownership situation for many Americans. Goldman Sachs analysts previously thought that higher mortgage rates would put more downward pressure on home prices. After declining month over month for seven straight months late last year and into 2023, home prices reversed course in February and have stayed that way through May, the latest month for which there is data from Case-Shiller’s national price index.

Geopolitical, economic, and environmental uncertainty can be expected to continue in the near term. Astute investors continue to seek out alternative investments for their portfolios to aid in diversifying them away from overexposure to any single asset class. Some are seeking out buying opportunities from temporary price dips to add more physical precious metals into their portfolios. Remember that one of the keys to profitability through the ownership of physical precious metals is to acquire the physical product and hold on to it for the long term without overextending your ability to maintain its ownership.

Trading Department – Precious Metals International Ltd.

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