Since the last Federal Open Market Committee (FOMC) decision, equity indices have remained close to their peaks, credit spreads are at their narrowest, and gold prices hover near all-time highs. However, long-end yields have risen in tandem with commodities markets, according to Daniel Ghali, a macro analyst at TD Securities (TDS).
Market Discrepancies Point to Fed Challenges
The current price movements appear inconsistent with a Federal Reserve that is perceived to be “behind the curve.” Ghali notes that last Friday’s Non-Farm Payroll (NFP) report presents a tangible challenge to the market’s anticipated rate cut trajectory. Although rate markets have begun to adjust their expectations for the Fed‘s monetary policy, gold prices have not yet been adversely affected by significant sell-offs.
There are limits to how much the market can reprice its expectations for the easing cycle, given the Fed’s current stance. The yellow metal maintains a solid margin of safety before the initiation of the first Commodity Trading Advisor (CTA) selling program, and macro fund inflows are continuing to support higher gold prices, albeit at a slow rate. Interestingly, TDS has observed no significant inflows into gold recently, contrary to what the price movements may suggest. According to their positioning analytics, the past weeks have not witnessed a surge in gold investment.
Elevated Positioning and Ongoing Investor Confidence
TDS’s assessment of macro fund positioning indicates that it has reached record high levels, slightly exceeding the positioning seen in the aftermath of the Brexit referendum. While the risk of price gaps is elevated, the recent repricing in the rates markets has not yet prompted significant sell-offs, suggesting that macro funds remain confident in betting on an “overly easy” policy stance from the Fed.
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