Gold Ignored the Best US Jobs Data in Months. Is This Why?

What are Scott Bessant and Kevin Walsh really doing to these markets? And why are they so strange in the wake of what has been a very impressive set of economic statistics over the past several days? That's what we're going to try to figure out here on Macro Money. I'm ISPAC, head of global macro here at Tasty Live. And as ever, we're going to look at the data uh first from the price action itself and see what the markets are trying to tell us here. And from there, take a look at what is coming up for the rest of this week and how that might shape the conversation as it develops. So, here's the S&P 500. It continues to be stuck here in familiar territory, and that perhaps is the story all by itself. Uh there's no conviction here despite the fact that we've seen a run of very impressive economic data out of the US toward the tail end of last week. Of course, the ISM service sector numbers impressive in their own right, suggesting the largest part of the US economy and the one where uh the uh the the consumer really focuses uh the impact of what really drives the economy 68% of US GDP is household consumption and those consumers primarily spend on services and those services are primarily furnished by domestic firms. So, uh you'd think uh there would be some variety of response here, but no, the market remains pinned in a familiar range basically since the beginning of August. And there's not much that changes about that here uh either uh last week or starting into this shortened holiday week. Uh the story is very similar for the NASDAQ. Also sideways drift here kind of hugging familiar levels here basically around the 29,000 um and uh above area u area not quite even making it uh all the way up to 30,000 uh here just even on an intraday test. And so we have a situation where the stock market really seems to be uh out of step with um the news uh flow in the sense that while the numbers may be convincing, the stock market pointedly is not convinced. uh and so there's a situation developing here then where uh the spotlight seems to shift and sentiment itself stock market being a kind of standin for risk appetite large is still looking for a clear lead and frankly has been looking for one let's say best case since mid August the situation in the bond market is perhaps uh where the more interesting part of this story starts to appear because in this sense we are still holding that very critical range where apparently the pain point for the US Treasury Department sits and we can see here the first test where we set up that range with the downside gap on these ZB futures That's the intervention from uh Scott Bessant and company uh in conjunction with Japanese authorities to help Japan to boost the yen without selling dollars and dollar uh denominated assets and essentially allows Japan to get that done in euro terms and in so doing sort of signals we're not okay with large scale scale selling of US and USD denominated securities in particular at the long end and kind of starts to set a tone that perhaps this is about as high as Treasury wants 30-year yields to go. Bonds and yields of course move inversely. So these lows for the bonds are going to transpose to highs for the yields. Now what you see then shortly thereafter 19th of August is uh where you get um the test and the response. There's another probe through that level and there's a swift reaction from Treasury. Scott Besson comes out and says, "We're going to increase the size of our bond buyback effort from 2 to 4 billion, which on the surface doesn't sound like it's particularly impactful. This is a market that is much larger than those figures. Um the the cash market for treasuries does in excess of a trillion in turnover a day. On top of that is the repo market which is in excess of four trillion a day. On top of that our treasury futures in the hundreds of millions in turnover a day. So 4 billion in an operation is not exactly the biggest deal. But the signal seems clear and indeed Bessant clarified as much in a CNBC interview after this announcement and said, "What we're trying to do is we're trying to speak to the markets, signal to them that we think yields shouldn't really be going higher than about here." And then what you get last week is another test of that level. there's a spike in the yen right around where that third test comes. And so it becomes tempting to think that there is maybe a um second round of intervention here. But whereas the first one was loudly owned by both US and Japanese authorities, this other one was pointedly not. And in fact, the BOJ published some flow of funds data suggesting they didn't do this. So there is emerging perhaps a kind of organic reaction function in the markets where they're saying ah well if this is the pain point for treasury this is also the pain point across a whole range of assets and we're going to take as an assumption that this is what uh is going to be defended for now. This makes it all the more interesting where we get that hot economic data. We get the ISM numbers. We get the NFP numbers that were much better than expected immediately in their wake. 160 odd thousand jobs added against expectations of less than half that. In fact, uh looking at various forecast, it was between 56 and 58K that was expected. Uh certainly not the result we actually got. The revisions for the prior two months added 55k to the mix. Uh there was nothing to hate about what happened with the labor force participation rate this goound. The unemployment rate looked uh steady for the right reasons. And so the whole nature of the news flow toward the end of last week seemed to say rate hikes. it seemed to say, "Ah, well, if the Fed wanted justification and if the markets were convinced that this is what we need to do, well, here's here's your ammunition. You get this very hot service sector ISM number, then you get a really hot jobs report. If you get uh anything like supportive economic data this week, well, then the case is made." And we'll get into what that data is here momentarily. But gold doesn't play ball. And that is a story that seems to really show up across the key markets and seems to perhaps once again look like a tell. Gold already gave us a tell in July when it would not sell off as real yields continued to push higher. Now, it will not sell off as the economic data screams, the Fed is justified in being hawkish. Neither one of those things seem to line up with how gold ought to work traditionally. It's a non-yielding asset. Those things that uh boost yields, especially real yields, ought to be terrible for gold. And clearly, that's not what's going on here. It's a similar story for the dollar, which will not rally. And so the logic is is a similar one. Again, through the course of July, you'd think the dollar would be rallying against the euro. It is not. Since then, the euro starts uh to to push higher, looking very much like a sort of mildly truncated uh chart of gold here. And again, this hot economic data doesn't seem to do anything to really inspire further momentum. So, the market seems to be attempting to say something here in the price action itself. Note, we're still very much geared up for at least one rate hike by the end of the year. The probabilities have only mildly cooled since that hawkish speech from Chair WH gave us those big jumps that you see. The orange line on top, that's the probability of at least one hike by December. Then the one below that, the green one is two hikes. The one below that in purple is three. You can see that once war spoke, the likelihood that we're going to get tightening of some stripe increased across the board. And he didn't so much say anything terribly different as he really leaned in on the idea that the labor market is not a cause for concern. Inflation is. And since then there's been a little bit of moderation, but only a little. We're still looking at between 80 and 90% chance that we are going to get one hike by year end. And that's of course overwhelming. from there the there's a 40 to 50% uh chance that we're going to get two of them. So that we are at least one hike on the board by year end is almost a certainty here it would seem as far as the markets are concerned and yet data reinforcing that view is having no impact. Now perhaps that much is already priced in but the markets are readily speculating that there's a chance that there is a a third hike and a second beyond the first. So one would think that there is room to uh extrapolate here especially with the benefit of both a Fed saying the right things and the data saying the right things in parallel but the markets are not moved. Uh the situation in crude oil one would think ought to be aggravating this issue in the opposite direction. Crude oil has been going up since bottoming in early July. The most recent moves here of course in the latter part of August have taken it higher um basically to a one month high right uh there uh around the 93 uh dollar level on WTI and north of what has emerged as a kind of midline for the wartime range right around 87. Moreover, it's not like the markets don't care about oil. Uh the appearance here it would seem is that inflation expectations are once again going higher and crude oil is once again their bogey. There was a kind of disconnect from July through much of August between rebounding crude oil and break even inflation rates. These are the inflation rates uh that are that are priced by markets into US Treasury bonds. It seems like we've recalled here and so it's not as if the market doesn't seem to think this is a meaningful input into inflation considerations at least at the near term and yet again no gold selloff in parallel no silver selloff either um no dollar rally and the stock market seems to be idling now either the stock market is concerned about rate hikes as an exive and maybe um less so because of the positive economy and there's maybe some balance there but the response from gold and the dollar seems altogether counterintuitive and this might be why what we're looking at here is admittedly a somewhat messy chart but if we work our way from the top down. We can kind of see what's going on. The orange line at the top is the spread between the threemonth and 2year rates. So that's the slope of the front end of the yield curve. And we can see that's become more steep because we get the hawkish comments from Sher WH and we get all these rate hikes uh in the forecast. And there we have it. The yellow is the slope of the long end of the yield curve. And we can see since Bessant came out and said we really don't like the 30-year to be any higher that is we don't like the bonds to be any lower than this. We can see the slope of the 10 to 30ear spread at the long end of the yield curve has narrowed in. We see likewise that pick up in break even inflation expectations. Those are uh at the top panels those two lines there. uh the magenta and the teal if you will. Uh and you can see that interestingly they seem to have woken up not so much because crude oil is up in tandem but because the slope of the long end of the yield curve has started to flatten significantly. And then if you look at the bottom part of the panel, you can see there the isshares tips ETF. That's those real rates. And this is of course uh a tracking of the bonds, not the rates. So uh the pink line going down is rates going higher. And you can see the euro and the dollar won't comply. The the gold price won't comply. And it's almost as if what we're really looking at here is longterm inflation through suppression of the long end of the curve as the real concern and not so much whatever's happening at the front end. The economic data at the start of the week not terribly eventful. All of what we're really looking at coming on Thursday and Friday by way of PPI uh and uh an ECB rate decision on Thursday, CPI for the US and consumer confidence on Friday. That's where we're going to see if the market still cares about these expectations for uh Fed policy expectations or if there's something else that's going on here. As far as positioning is concerned, I haven't changed very much here. Still long gold, short the dollar against the basket of currencies, Aussie, pound, euro, and the Canadian dollar. Long Bitcoin, another reflection of this idea through a call vertical uh short uh calls in the NASDAQ through the Q's and the S&P through SPY. Looking for these things to remain soggy while all of these shenanigans happen in the bond market. And likewise looking at a call vertical for silver. Same idea as gold. And a call vertical in uh TLT. Looking for the long end of the bonds to hold that bottom that Bessant seems to be defending. And that is macro money for today. As ever we are here Monday through Thursday. Shortened week this week, but we'll be back tomorrow. Uh, in the meantime, I'm writing for the news and insights portion of tasty.com and commenting at Ilaspac on former Twitter and on Blue Sky. Happy trading. Macro money will return.