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Seasonal weather and price variability in the first quarter will dissipate, which will reduce the agita caused by the recent inflation scare. This will increase the Fed’s comfort level in initiating a rate-cutting cycle in June with a 25 bp cut. With inflation well-behaved, real interest rates will move lower and gold prices will move higher. The rate-cutting cycle also will allow the USD to weaken as assets ex-US become more attractive; this will be bullish for gold. Physical demand for gold is expected to remain robust, along with safe-haven and central-bank diversification demand, due to heightened geopolitical uncertainty. We continue to expect gold to trade above $2,200/oz this year.
We rank the US spread sectors in terms of risk versus reward.
Could a second wave of global inflation be underway? The latest inflation prints in the US and UK showed upside surprises, while there is evidence of increased price pressures in global manufacturing. Combined with the improvements seen in economic sentiment measures and leading economic indicators in the US and Europe, and potential upside risks to oil prices, we see a strong case for owning more inflation protection in global bond portfolios. Inflation-linked bonds look attractive in this environment, especially in the US.
Energy markets are balanced in the short run, which keeps our Brent price forecasts at $95/bbl and $105/bbl in 2024 and 2025. Structurally, we see an upward bias to inflation, as geoeconomic fragmentation fundamentally alters supply chains; higher costs follow. Military access to oil will be prioritized. Renewables are the future, but war will be fought with hydrocarbons. We remain long the COMT, XOP and PPA ETFs.
This week’s report explores factors behind the recent rise in the dollar, and whether this could continue in the next month.
Supply and demand shocks in markets critical to the renewable-energy and defense industries will continue to play havoc with prices, which will negatively impact capex. In the short run, this benefits China given its already-dominant position in these markets. Longer term, investors already are providing capital for long-term projects needed for the energy transition. We remain long the XME ETF, given its low exposure to lithium and nickel holdings.
Our thoughts on bond positioning following this morning’s employment data.