Financial conditions remain ultra-accommodative with Goldman Sachs’s gauge touching fresh lows. The U.S. economy is gaining momentum, with a weekly tracker of activity pointing to double-digit growth (confirming the NY Fed gauge), with the U.S. outpacing its developed peers. Achieving broader labour market outcomes remains a hurdle – yet with the Fed to flag a scaling back of purchases “well before” conditions are met to raise rates, an announcement later this year to start scaling back early 2022 is likely.
Chart 10: US financial conditions remain loose amid ongoing accommodation
The 20% or so drop in the price of gold from its recent peak in August last year has had a reprieve thanks to the resumption of the decline in real bond yields in the US.
Since real yields in the US began declining again at the end of last month, gold has been given a boost, up 4% month-to-date. Since the metal yields nothing and lasts forever, it behaves like a zero-coupon long-duration asset. Longer-dated bond yields have been falling in April, so it’s no surprise that gold is up.
If the inflation scare that drove bond yields higher in the first three months of the year resumes, gold could once again be out in the cold.
Chart 11: US 10-year real yield (%) and gold (USD/oz)
Expect the FX market to remain volatile, particularly with respect to the US dollar. While April has historically been the weakest month for the greenback, May has historically been the strongest. If past relationships hold, this would bode ill for US equities, commodities and emerging markets.
Chart 12: Average monthly gains (%) in the USD over the past 10 years