Marc Chandler - Markets Are Now Pricing In Rate Hikes: Outlook For USD, US Markets and Precious Metals

Hey, everyone. Welcome to the K E report in a daily editorial Friday, March 20th. We are chatting

with Mark Chandler. And in this interview, I want to quickly talk currency markets, but then I also

want to look at US equity markets where a bottom could be and talk about the precious metals,

the beating that they took this week. And again, if there is a bottom coming for that area as well,

Mark is the managing partner at Bannockburn Global Forex, also editor of the Mark II market website,

which I'll post a link to in the show notes. Mark, first comment, because we always talk with you

about currencies, US dollar. It was a choppy week, mostly sideways, maybe a little downward bias,

but dollar is still right around a hundred on the dollar index. That was in the face of

pretty much everything else except for the oil market moving down pretty aggressively this week.

What was your takeaway from this week and what was moving markets this week?

Thanks, Corey. So this is the first week and three. This is the first week since the war began

that the dollar index looks like it's going to finish lower on the week. But I think that

that sort of hides the kind of volatility and chockiness we've seen. And partly,

Mark is sort of like a yo-yo from where people thought was a hawkish Federal Reserve,

especially Powell's press conference on Wednesday. And in the following day, the market heard

the Bank of England and the ECB, the market takeaway that what the market heard was very bearish.

And so we saw the big sell off in the dollar on Thursday. And here ahead of the weekend,

I think nobody really wants to go into the weekend while the war is raging, being short dollars.

So I think that there was some position adjusting here ahead of the weekend. But with the dollar

having a firmer bias. And I think there's just sort of the war effect.

Well, Mark, just to that point, we've had some people weigh in on the Fed meeting. But I'd love

to get you to break it down a little bit further. Your takeaway is from it. Some people saw it as a

nothing burger. Other people saw it as hawkish. Other people saw it as disappointing because they

were hoping there was going to be more rate cuts on the menu. It seemed kind of like a weight and

whole data dependent statement. But there was other action and other central banks. And it seems

like the tone is shifting from being dovish and cuts until the eye can see. And so some are now

looking at hikes instead. So what do you make of the lay of the land with the central banks?

Yeah, sure. Maybe the first place to begin is the Fed. And I think that when the market first saw

the statement from the Fed, very little reaction. It really wasn't until Powell the year talking

that the market took away this hawkish sense. And some of the elements that gave the hawkish sense

was one that Powell played down the dot plot, the summary of economic projections.

Usually he's been emphasizing them as a way to get into what the Federal Reserve officials

are thinking. But this week he played them down. And in particular when he was asked about

how they can reconcile the higher inflation with still the median dot looking for one rate cut,

he sort of suggested that when you look below the surface, there were more adjustments towards

a height that the median didn't change, but sort of the composition of it did. I think also made

the market also take away a little bit of a hawkish tone from it was the fact that there was only

one dissent. And many people were looking for two or three dissents. In fact, there was a piece

in the Wall Street Journal talking about what the dissents mean for the Federal Reserve's credibility.

And then another day there's only one dissent. And today Governor Waller was on CNBC and he said

he was leaning towards a cut after he saw the job's data. But with the war and the oil spike

and related upward pressure on prices, he didn't think that his dissent was appropriate.

So at the bottom line here, I think that the market did take away a hawkish view from the Fed.

And here's what it looks like to me. Before the war began, the market was pricing in about

60 basis points of Fed easing. Before the Fed met, the market was pricing in still one cut,

25 basis points of cuts this year still. Like with the Fed, like I said, that was a median dot in

December and again this week. But now the market is pricing in nine basis points of tightening

this year. This is a big swing. I mean, this week alone, it's about 32 basis points swing.

And since the war began, we're talking about almost a 70 basis points swing in expectations.

And I think that is a, well, not only affects forward prices, but I think it affects how people

are thinking about the markets what could happen. And the same thing to your point, Chad,

the same thing and even to a larger extent took place after the ECB meeting and the Bank of England

meeting. So looking at like the ECB meeting first, I sort of heard Lagarde say,

sort of you suggested sort of wait and see data dependent. And the market, though, I think

was influenced by some of the hawkish, hawkish members who spoke right after the ECB meeting.

And then today the Bundesbank president also, like through in his two cents and talked about the

possibility of a hike next month. So here's what's happened this week. I should say before this

week began, the market was pricing in about seven basis points of tightening by the ECB.

Now it's pricing in 20 for this year. I'm sorry, this is for April. The odds of an April

hike are up to 80 percent from say a little bit less than a one and three chance at the end of

last week. And at the, before the war began, the market was still pricing in a small chance of a cut.

So here too, you see this, but a very powerful pendulum swing in what the ECB is expected

for as soon as next month. And if we look at what's happening for the end of the year,

the market is now pricing in a little bit more than three hikes by the ECB before the end of the year.

Like the Fed, ECB, I think both the market is exaggerating the likelihood of this,

but I think it shows, and I think we see this in the prices and we can talk about the stock market

shortly, but I think this just shows a pendulum swing from greed to fear. And you can see the same

general thing when we look at the UK. The market now is pricing in almost an 80 percent chance

that the Bank of England raises rates at the end of April when it meets again. And it's also pricing in

not only three hikes, but about a 40 percent chance of a fourth hike by the Bank of England this year.

It's quite a dramatic move. Like I say, I think it's exaggerated, especially when you look at oil

and that the fact that WTI is, for most parts flat this week, it's up about 1 percent.

Well off of the peak that we made in both Brent and WTI, which was March 9th or 10th.

So I think that this just reflects just, the market doesn't know what to do. And I think that

it's panicking and I think that officials will panic and high grades aggressively. And I think

that's a bit too much right now. But of course, it is this fog of war. We don't know how long the war

lasts. I think that when I look at the betting markets like Polly Market, the odds favor the end

of the war by June, I think that would be too long for what the market is currently pricing.

I sort of suspect that we could and we could see the war end even sooner. But the market is very

hopeful still, I think, compared to this sort of the magnitude of the disruption at that hand.

Mark, those are wild swings to switch from maybe a catter too to multiple hikes. That's

entirely different than anyone thought three months ago. And I realize there's a war going on.

Multiple war is still going on. But when we look at the market impact of all of this, yes,

US markets have been weak. Who knows where bottom is. But also international markets. I follow a lot

of the European markets, whether it's a Eurozone ETFs or even United Kingdom ETFs, those are down

around 10% just this month. So make sense of these markets. Is there a bottom coming? Is there

opportunity for investors or is this a new world this year? Is that these markets are going down?

I don't know. I sort of think that if you would have told me the war is going to end tomorrow,

I'd say the stock is going to rally. A risk comes back on. I mean, I think that much of the

discussion of the war is over the disruption to oil or gas. And I think that the disruption

is so much bigger than that. And that's why I think that this fear on one hand hangs over the market.

And I think about how energy intensive our food is. And this is fertilizer, pesticides.

And then I think about other disruption has one of the bite products that's produced in

a natural gas is helium. And helium is a key component of making semi-conductor chips.

And the helium has also been disrupted. So I think there's a problem right now for people

like myself is that we just don't know how much inventory, how much stocks that these semi-conductor

companies have with helium or farmers who are in the north there being the plant and are going

to need that fertilizer and pesticides soon. How much inventory they have before they run out

and before it becomes disruptive. And so I think that's part of the unknown. And I think that's why

it's producing a lot of volatility in the markets. You know, when I look at these S&P 500,

the last two days we fallen below the tuner day moving average in the S&Ps. I know a lot of

bottles look at that, a lot of traders look at that. My rule of thumb is, and it sounds kind of

contrarian, but I only want to buy the S&P with below its tuner day moving average. But I don't

want to catch a falling knife. And so what I was saying before, you know, before we got on here,

I was thinking that what I want to do is look for some sign of reversal. When I'll below the

tuner day moving average in the S&Ps, it looks to me like it's going to fall further.

We're trading pretty heavily today. We're still haven't been able to distance ourselves from

the lows. So I think we'll fall further. I'm not saying the catch is falling knife. I'm saying

be attuned looking for a some kind of reversal pattern. And reversal patterns could be where it

sells off and it closes higher on the day. It could be a gap higher opening. It could be a weekly

reversal. I would just stay a prize to fundamental news. That is with the war ends. Or when it looks

like it stopped escalating. And I know both the US and Israel now say they won't hit Iranian

energy infrastructure. I don't know. Maybe it's me and my cynicism. But you know, the US and Israel

attacked Iran in a middle of negotiations. I think that what politicians say when the belligerence,

like the people who are engaging the war, I wouldn't trust anything politicians say. I think

it's partly the kind of misinformation they want to leave for the opposition for the adversary.

So I would take anything like this for granted. I don't know how much the war the US controls

right now. In the sense that the Iranians, I mean, I think President Trump declared victory

within the first couple of days. He says that they wiped out 100% of the Iranians and

that 0%. Iran seems to be doing a lot of damage, including today. And so I'm just not sure

of how to play this except to think that I want to be prepared to buy on what seems to be

a large war related sell off. Yeah, Mark. As you say, it's the fall of war. I don't think anybody

actually knows what's going to happen. And it's I think it's a lot more important to watch what

countries actually do on the ground in the air on the strikes versus what they say they're going

to do. Because it's usually two different things with what politicians say and what the actual

military does. But we'll just keep following along with it. I want to dig into the point you made

though about the cost being pushed into other areas than just oil while oil has still in the headlines

and rightly so. We've had guests on the show this week talking fertilizers. We haven't talked

fertilizers in like a year or two. I was on two shows yesterday. All the questions from the

audience were about fertilizer and food and inflation cost. And the other thing was sulfuric acid

moves through the straight of hard moves. And that's needed in a lot of like you say,

different chemical processes chemical companies are trending right now. So it's a weird

market where a lot of these contagion effects are passing on airlines are raising their rates because

of the cost of jet fuel and refinement. And a lot of people worry about how that could affect

tourism. Same thing with cruise ships are actually raising their rates for the first time.

So what do you think about the knock on effects of inflation into the system? Not just from oil,

but from all the other things that oil goes into whether it's freight or travel. Those kind of

elements. And you know, I think shared that central bankers have all identified this. They are

recognized that inflation is likely to rise and that the headlight inflation which like includes

food and energy of course is going to rise more than the core. But this is input to production

processes. And so we're going to see some follow through in core. The question I think becomes

is it sustained? Is it went off? And what happened in the war ends? And so I think that

it's like I think this is like the sort of that weight and sea attitude. But I think you're right.

I think that businesses it's sort of like those a guy I think from Cato. They sort of libertarian

think tank in the US. And he did a he did some research about the price of wine. And it turns out

that American consumers saw an increase in wine that exceeded the price of tariffs.

You know, my local gas station began raising prices long before they got the oil that's coming

from the Middle East. What I mean by that is that in the back of our minds, I think a lot of people

have this like pipeline inflation at first raw material prices rise. And then later the final

good prices rise. I think that's like I think that's a bit naive, especially for some products

where they rise simultaneously. You see you see the price of wholesale oil, wholesale gasoline rising.

And what will the retail businessmen do? He'll raise his prices anticipating those. Knowing that

the consumer sees the higher oil prices and says yeah, I got to pay more for gasoline because oil

prices are going to be so I think that it helped protect profit margins. And I think we should be

prepared for that. But I think this is very similar to what we saw when the Russians invaded Ukraine.

Disruption of fertilizer, disruption of oil, disruption of gas. And you know, I say even now

several years later, the Europeans haven't quite come to full grips with that. And so I think

it's going to take us a while. I sort of think of it as like, you know, the giraffes swallowing

something. It's got a long way to go down the giraffes neck. And I think that's what happens with

these price increases, these shocks. They take a while to filter through the economy. But if you're

a central bank as a central banker to pose to an investor, I think that you want to want to look

at what's the signal and what's the noise? What's the sustainable signal? Is it because I think

that again, there's a one to punch here. The first punch that we all feel higher prices. But what

happens with higher prices, especially for things like food and gas to lead, is the more we spend for

those things, the less we have for discretionary spending, the less likely you'll take your family out

for dinner or go into vacation. And so I think that central bankers are well aware that on one hand,

it raises prices. And on the other hand, the shock is going to compress demand. And they're trying

to wrestle with those impulses. Okay. So Mark, let's take a step into the precious metal sector then

because taking this all into account, it does seem still like, look, there's a risk off environment.

There are wars being fought. Inflation could be taking up. You would think the precious metals would

be doing pretty well. But we've also had people say, maybe the precious metals got ahead of this. Look

at how well they did do. But look, overall, this week, very bad week for gold, silver, and the

underlying equities. What do we take away from this market here where gold was on a run. It was the

best performing asset last year. This year's a very different story already.

Finally, I think that the takeaway is that don't count on the precious metals as a hedge for inflation.

I think that they trade much more like risk assets. And what's intriguing now, of course,

as we see a gold in the spot market approaching, I think we approached $4,500 this week. We

agree about $4,570 now. It still looks heavy. And what's the driver? I leave aside inflation.

What's happening is we've seen, like I mentioned, we've seen this huge jump in interest rates.

So that means the opportunity costs for gold has risen dramatically.

Because gold doesn't have a yield. And I think also what's happening in this kind of market

is that people sell what they have to cover losses elsewhere. This isn't just people like us

in the market that are daily basis or weekly basis. But I hear more talk and I haven't

been able to confirm it. But I'm hearing more talk that Middle Eastern countries have been selling

gold. They've got some, they've been hit pretty hard. We've seen this one, one of the largest

gas facilities in Qatar. They might be clamped, disrupted for several years to come

with billions of dollars of losses. And so I think you sell what you can, liquid assets,

like gold, to cover maybe less liquid assets. So I don't know what to say really about gold.

I just think that this is the kind of setback in gold that I'd imagine we'll see central banks

who've been accumulating gold by more of. I think a lot of retail people, of course, have been

spooked by this sharp sell-off. But you know, we're still above low we made in early February.

I think that the gold in the spot market got down to about $4,400 an ounce.

And so the war sort of disrupted this major, maybe once in a generation, a bull market.

But the question I think is, is it over? And I just don't know if I have enough information

to make that claim one way or the other. Mark, I want to run another idea value. And you weighed

in this last week, but I thought you had some interesting cogent points on this. As far as the US

dollar, how that relates to gold, I listened to a lot of other podcasts just to see what other people

are saying out there. And after going through a half dozen of them, most people are blaming it on

interest rates in the dollar. That's why there's the weakness in the gold. And they were saying that

oil has right now about a 90% correlation with the dollar where gold was like a negative 70%

correlation. So it's mostly inversely related. You were making the point that some of the dollar

strength isn't safe haven inflows though. It's actually international investors changing their

allocation to dollar-denominated assets. And so some of that money is flowing back into the dollar.

Could you unpack that again for people that missed it? Sure. I think what we're talking about is

this concept of market like safe haven. So when things look bad, you buy the dollar. Why do people

buy the dollar? Especially when the US is a protagonist here. I mean, this is a weird form of

American exceptionalism. I think the US has bombed seven countries in the past 12 months.

We've kidnapped one, had a state. We've killed another head of state. And I can't imagine

another country doing that. And without, without like, I mean, if Russia or China did that,

to imagine what people would be saying. So this American exceptionalism, when I really try to

unpack what does safe haven mean. I think there's, I think that part of what happened is that people

like myself, short the US dollar, long say Latin American bonds. The use of the dollar at a

funding currency to buy a higher yielding asset. And when those assets go south and they

invariably do, people like myself have to get rid of it asset and buy back the dollar.

So the unwinding of dollar carry trades or funding trades, as they sometimes might be called

in the hedge fund community, I think it helps explain why the dollar often has as a parent

of safe haven. That is when those emerging markets, your high yielding assets go south,

dollar bounces. And I think the same thing is true. You know, when I look at how the US is funding,

it's large current account deficit. A lot of equity flows into the US, rather than fixed income.

But what have we learned from like the Bank for National Settlements reports is partly that

foreigners might be long US stocks, but they don't like the dollar. So they have a short dollar hedge.

So here's what's happened. Stock markets crashed. I mean, we're down about 5% in the S&P's in the

past month. Foreigners partly selling US equities and then they got to buy back their dollar hedge,

their short dollar hedge. So specifically, I'm thinking that part of this hate haven is really

short covering of previously sold dollars. Either for people like myself buying a higher yielding asset

or for those people who bought US stocks and hedge the dollar out. So I'm not sure how much

actual outright dollar longs were seeing though. In the futures market, speculative markets,

it might be a little bit different. But in the larger capital markets, I think there's been a lot

more short covering. And one of the things that I'm watching is that I find a correlation typically

in the short one, the dollar tends to move alongside US interest rates. So US interest rates have

jumped and the dollar has come up. But in the medium term, I put more emphasis on the interest rate

differential. US German differential, for example, is it near a three year low today? I think that's

going to come back at hot D dollar. Okay, Mark, we'll wrap it up here. That's a lot to take in here.

And I guess the one thing I'm taking away is that let's not all, I guess start over reacting at

some of this weakness. We do need to realize there's a lot of geopolitics at play right now.

And a lot of, I think, confusion from investors. So let's see how this all plays out. But look,

it's hard to ignore the red that's been on the screen for I think a lot of investors really

outside of energy stocks over the last couple of weeks. So boy, boy, we'll chat again in the next

couple of weeks here, Mark. But again, thank you very much for breaking all this down. And for

everyone listening, you want to follow along with Mark Readover as daily notes on the markets and

economic data. Search mark two market or click that link in the show notes. Mark, thanks for your

time. Have a great weekend. It's cool. Good luck, everybody.