Mixed Messages – May 7, 2021

Mixed Messages – May 7, 2021
Morgan Lewis Posted on May 7, 2021

Weekly Hard Asset Insights
By David McAlvany

Mixed Messages

The first week of May was action-packed for global markets in what might be fairly characterized as a week of notable contradictions. Mixed economic signals and mixed messages out of the US Fed and US Treasury added some jitters and uncertainty to a seemingly sensitive market. What remained fairly unambiguous, however, was the inflation message as economy-wide prices continue to surge and the breakeven inflation rate moved higher.

Supportive of the booming global recovery theme were strong economic reports out of previously lagging Europe and parts of Asia. Eurozone March retail sales were up 2.7% month/month against expectations of 1.6%. German March factory orders increased the most in five months, 3.0% m/m, against expectations of 1.5% m/m. In Asia, Japanese April vehicle sales rose 22.2% year/year, which was the biggest increase in six months.

Strong global demand for steel, copper, iron ore, and a broad array of commodities continues as hungry economies emerge from Covid lockdowns. At the same time, this demand comes just as some of the world’s biggest miners have been hampered by operational issues and production bottlenecks that have been curbing supply in key areas. This backdrop, along with ultra-low interest rates and unprecedented global government stimulus, has contributed to surging commodity price inflation that has been continuing to gain momentum. Just this week, copper, iron ore, and steel joined the record prices party. The surge in copper prices to new all-time highs has been so strong and relentless that it has unleashed havoc on parts of China’s copper-reliant economy. According to a survey by the Shanghai Metals Market, “some Chinese manufacturers of electric wire have idled units and delayed deliveries or even defaulted on bank loans.”

The hot economy and inflation theme has been gaining enough steam in recent weeks that on Tuesday US Treasury Secretary and former Fed Chair Janet Yellen said, “It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat….” This seemingly innocuous statement appeared to hit a nerve with the market. Yellen’s comments exacerbated selling pressure in equities on Tuesday before Yellen walked back her comments on Wednesday.

Even though Yellen’s comments were rather tame and understated, they were viewed as contradictory to Powell’s belief that the need for continued stimulus and economic support outweighs any concerns of economic overheating and inflation. The incident may provide some insight toward a complicated market sentiment, and indicate the degree to which the market’s bull thesis is predicated on the assumption that the Fed punch bowl isn’t going anywhere. Market participants are clearly uneasy about the emerging dynamic between increasing inflationary signals and Fed Chair Powell’s dovish policy insistence. For now, however, it appears the market is giving the benefit of the doubt to Powell’s credibility, albeit cautiously.

This interpretation of the primary importance of continued fiscal and monetary stimulus assumptions underpinning the bull thesis seemed largely verified by the events unfolding on Friday. Going into the Friday April U.S. employment report, in the context of a booming recovery narrative and expectations for even faster economic growth in Q2, analysts were expecting a blowout number of new jobs. Estimates were for as much as 1–1.3 million new jobs. In a truly shocking departure from expectations, U.S. employers, in fact, added only 266,000 new jobs. This negative economic surprise was very much in conflict with the vast majority of positive economic reports of recent weeks. The new jobs number was so disappointing that it triggered a press conference from President Biden, where he defended his handling of the economic recovery and argued in favor of more fiscal support for the recovery. In a perversion of historical norms that has become routine in our modern markets, bad economic news triggered a widespread market rally and new all-time highs in stocks. According to Greg Bassuk, chief executive at AXS Investments, “the anticipation and confirmation of [Federal Reserve] policy staying the same and continued economic recovery…have fueled these all-time highs.”

As for weekly performance: It was a big week in the precious metals space. The yellow metal was up 3.60% and closed the week above $1,800. Silver surged 6.22%. Platinum rallied 4.09%, while palladium was the laggard, down 0.99%. The HUI gold miners index had a great week, up 9.72%. IFRA, the I Shares US Infrastructure ETF, was up 3.13%. Energy commodities were higher on the week. Oil rallied 2.08%, while natural gas prices were up 0.96%. The CRB Commodity Index was higher again, up 3.60%. Copper continued to surge, up 6.26%. The Dow Jones US Real Estate Index ended the week down 0.69%, while the Dow Jones Utilities Index was down 1.02%. The dollar reached new lows for its multi-week decline, dropping 1.15%. The yield on the 10-year Treasury lost 5 bps.

Have a great weekend!

Best Regards,

David McAlvany
Chief Executive Officer

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