Silver Sees Green After Powell Speaks

Don’t look now, but the 50-day MA is coming for silver. 

While silver rallied intraday on Feb. 1 following Powell’s ambiguous remarks, it still couldn’t close above $24. Moreover, while the crowd assumes that Goldilocks will confront the financial markets in 2023 – meaning rate cuts, low inflation and high corporate earnings – we’ve warned that a realization is unrealistic. 

To that point, while we have been employment bulls for many months and still believe the consensus underestimates the peak FFR, the fundamentals have not deviated from our expectations. For example, JOLTs job openings came in at 11.012 million on Feb. 1 and materially outperformed the consensus estimate of 10.250 million.

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Furthermore, the JOLTS spread shows there are nearly 5.3 million more job openings than Americans unemployed.

Please see below:

To explain, the red line above subtracts the number of unemployed Americans from the number of JOLTS job openings. If you analyze the right side of the chart, you can see that the metric has re-accelerated recently, which is the opposite of what needs to occur to normalize wage inflation to 2%. As such, it’s another indicator of why the Goldilocks narrative lacks fundamental credibility.

To that point, S&P Global released its U.S. Manufacturing PMI on Feb. 1. The headline index improved from 46.2 in December to 46.9 in January, and an excerpt read:

“January data indicated only a fractional rise in workforce numbers at manufacturers. The rate of job creation eased for the fourth month running amid challenges hiring suitable staff and retaining skilled workers.”

Likewise, while the Institute for Supply Management’s (ISM) Manufacturing PMI declined from 48.4 in December to 47.4 in January, the report stated:

“ISMs Employment Index registered 50.6 percent in January, 0.2 percentage point lower than the seasonally adjusted December reading of 50.8 percent….

“Labor management sentiment reversed in the month, with a strong majority of panelists' companies attempting to hire compared to reducing their employment levels. Although layoffs are occurring, there is a 4-to-1 hiring to reduction ratio (2-to-1 in the previous four months) as companies make decisions to retain workforces to support projected second-half growth.”

So, while these are not blowout results like the JOLTS report, the important point is that hiring remains prevalent, and that’s bullish for the FFR. Remember, job openings must decline and the unemployment rate needs to rise to achieve 2% wage inflation, and that’s not happening. 

Speaking of which, S&P Global’s report noted:

Again, while these are not blowout figures, they highlight the nature of jumpy inflation; and the more the bulls price in a soft landing and loosen financial conditions, the more inflation will bounce around and remain elevated.

Finally, a major casualty of the Goldilocks narrative has been the USD Index. With the crowd assuming the Fed is done and a re-acceleration of global growth will help other markets outperform, investors are eager to bid up risk-on currencies like the EUR, the GBP and the AUD.

As evidence, nothing screams a weaker U.S. dollar than flows into emerging markets (EM).

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To explain, the light blue bar on the right side of the chart shows how the most-recent weekly flows into EM debt and equities have soared. As a result, the crowd assumes the USD Index’s best days are in the rearview.

In contrast, the magnitude of the USD Index’s decline makes the medium-term outlook bullish, and we expect a sharp rally before this bear market ends.  

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To explain, the blue line above tracks the USD Index’s 12-week percentage change. If you analyze the right side of the chart, you can see that the recent slide is on par with major three-month declines throughout history.

However, sharp dispersions often precede sharp reversions, and Morgan Stanley notes that “rebounds often follow.” Therefore, don’t be surprised if the U.S. dollar shocks the consensus in the months ahead.

 Overall, while Powell helped initiate another short squeeze across risk assets, silver still could not reclaim $24. Furthermore, while its long-term potential is undeniable, we still expect a sharp medium-term drawdown before its next bull market begins. Consequently, we believe that investors’ faith in Powell will erode as time passes. 

How does wage inflation return to 2% without a material decline in the JOLTS spread? Would you buy the EM trade or the USD Index? Do you think the CPI will decline linearly?

Alex Demolitor

Precious Metals Strategist