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Ukraine seeks to rebuild economy with defiant small businesses

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  • Women-owned skincare business expands despite war
  • Signs frozen economy is stabilizing
  • Kyiv sets sights on $500 bln GDP by 2032
  • Government has relocated 700 companies

LVIV, Ukraine, Oct 8 (Reuters) – Victoriia Maslova abandoned her herbal cosmetics factory in the Ukrainian town of Bucha on the first day of Russia’s invasion of the country, fleeing to Poland with her mother and three younger brothers when rockets began hitting a nearby airport.

A month later, they were back in Ukraine, determined to keep manufacturing Maslova’s plant-based cosmetics brand, Vesna.

“We love Ukraine. We wanted to return to our country and work here,” says Maslova, 24, who founded the business seven years ago with her mother, Inna Skarzhynska, 44.

To reverse the economic shock caused by the biggest war in Europe since World War Two, Ukraine’s government is pinning its hopes on the entrepreneurial resolve of people like Maslova, along with the return of millions of refugees – and large-scale international financial aid.

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Waiting until after Russia’s chaotic withdrawal in April from Bucha, a town near Kyiv now notorious for an occupation that left civilians’ bodies strewn in the streets, Maslova’s mother returned to the factory. The shop floor had been looted and was in disarray, but she salvaged some equipment and loaded it on a truck. They set up a new operation in the relative calm of Lviv, some 450 km (280 miles) west near the Polish border.

Five months later, Vesna products are sold in more countries than ever, including Poland and Lithuania, and Maslova recently won a deal to produce goods for a private label in the United States, she said. All the while, the company has been donating skincare and haircare products, labeled “You are our hero”, to women and men serving at the front.

The war, which Moscow calls a “special military operation”, is now nearing its eighth month. Despite recent wins for Ukraine on the battlefield, experts believe it could drag on for a long time yet, leaving millions of Ukrainians displaced within the country and nearly 8 million outside its borders.

So, at the same time as Ukraine’s forces fight to regain territory seized by Russia since the Feb. 24 invasion, the government in Kyiv is racing to steady the economy, and to find employment opportunities for those who fled homes, jobs and businesses in the east and south.

The economy is expected to shrink by more than a third this year, but with businesses reopening, Economy Minister Yulia Svyrydenko sees output stabilizing and growing by as much as 15% in 2023, albeit from a low base. And in a decade, she dreams of it more than doubling from pre-war levels to reach $500 billion, helped by foreign investments and European Union accession.

“We always say that we have two fronts: one is the military one and the other one is the economic front,” Svyrydenko told Reuters in an interview in the basement of Ukraine’s imposing Soviet-era Cabinet of Ministers building, where the corridors and windows are crowded with sand bags. “The economic one is not less important than the military one.”

Small- and medium-sized businesses like Maslova’s are core to the government efforts.

Economic activity froze across the country after the war began, but restaurants, retail shops and even night clubs are now visibly open again in Kyiv, Lviv and other non-occupied cities, even in Zaporizhzhia, near a besieged nuclear power plant.

The economy ministry has helped 700 companies relocate from frontline areas, of which 480 have already resumed operations, Svyrydenko said. Those companies are benefiting from the return of an estimated 3 million refugees, helping demand, while money trickles back into the economy from renewed exports, including from three Black Sea ports.

To help displaced companies make a fresh start, the Ukraine Investment and Trade Facilitation Center in Lviv, is offering firms rent-free access to office and manufacturing space, a valuable lifeline.

The task facing the country, and entrepreneurs like Maslova, is daunting, given a recent World Bank and European Union estimate of war damages totalling nearly $100 billion and ongoing Russian strikes on civilian infrastructure.

Ukraine also faces mounting budget problems, despite a freeze in debt payments agreed by Western government creditors this month and by private creditors in August. It is seeking foreign aid, but also needs private capital to rebuild.

Any investments will require security assurances and strong accountability, given what the German Marshall Fund called Ukraine’s “history of corruption”, in a report last month.

Top economic experts from Ukraine, the World Bank, International Monetary Fund and other donors will work through some of these questions at a recovery conference hosted by Germany in Berlin on Oct. 25.

The International Monetary Fund on Friday approved $1.3 billion in additional emergency financing for Ukraine that could catalyze support from other donors, with an eye to a larger, full-fledged program in the future.

‘BRAVE BUSINESSES, BRAVE PEOPLE’

Iryna Tytarchuk, who heads the investment center in Lviv, helps connect displaced business owners to resources, including government micro-credits and loans of up to $68,000, and U.S. Agency for International Development funds earmarked for women-owned firms that helped Maslova get back on her feet.

“These are brave businesses and brave people who haven’t left everything and gone abroad, but decided to start again and again,” she said. Tytarchuk recalled that many firms saw a bounce in revenues in 2014 when they shifted away from Russian markets after the annexation of Crimea.

“Now, even more markets are opening for them,” she said, noting that a number of businesses in Britain had reached out to her looking specifically for products “Made in Ukraine.”

Close to the front line, Mykolaiv, 800 kilometres (500 miles) to the southeast of Lviv, comes under regular artillery barrages. Here, Julia Konovalova is biding her time, eager to restart Fresh U & detox, her once-thriving healthy food delivery business, when the fighting stops.

Konovalova stayed when more than half Mykolaiv’s population fled. She donated her supplies to the army when the war started, and has been coordinating food aid for the World Central Kitchen relief group in recent months.

“I still have all my equipment. Now I’m waiting until the war is over, and then I’ll start again,” the former hotel manager said. “We just need to survive.”

Near the Russian border, fierce fighting has drained Ukraine’s second-largest city, Kharkiv, of three-quarters of its 2 million residents, although the recent Ukrainian advances have taken back nearby territory.

Rockets damaged Evgeniy Safonov’s wine bar in Kharkiv, but he is already scouting out new locations in safer cities and wants to return to Kharkiv eventually.

“Our investors are interested, even now,” he says. “Call me brave or stupid, I know. But our planning horizon is a matter of days. You never know what tomorrow will bring.”

LOOKING FOR INVESTMENTS

Svyrydenko concedes Ukraine faces big challenges, but says she and other officials are hunting for investments wherever they can, citing estimates that every $10 billion invested will generate a 5-percentage point jump in national output.

Her ministry is studying 50 requests from the United States, Germany, Britain and Poland submitted after the launch of a new “Advantage Ukraine” investment portal at the New York Stock Exchange last month that maps out $400 billion in investment opportunities, but said it was too soon to provide details.

The World Bank’s private funding arm, the International Finance Corporation, and the European Bank of Reconstruction and Development last month also said they would put $70 million into a private equity fund investing in tech and export-oriented businesses in both Ukraine and neighboring Moldova. It aims to raise up to $250 million over the next 12 months.

Andy Hunder, who heads the American Chamber of Commerce in Ukraine, said Ukraine’s economy was demonstrating “phenomenal resilience,” with internet and banking services functioning better in wartime Kyiv than in some parts of Europe at peace.

The group’s latest survey, released this week, showed 77% of its 600 member companies believe the war will end in 2023, and all but 2% plan to keep doing business here.

Yulia Zavalniuk, whose small Villa Verde flower farm about 40 km west of Kyiv was heavily damaged by Russian forces four days into the war, initially contemplated moving to Slovakia, but decided to relocate to Lviv temporarily, while selling plants to keep paying salaries and cover basic business costs.

“Now is the time for us – small entrepreneurs,” she told Reuters. “We have to be the most creative, service- and quality- oriented to produce goods, sell them and pay taxes,” she said.

Reporting by Andrea Shalal; Editing by Frank Jack Daniel and Jane Merriman

Our Standards: The Thomson Reuters Trust Principles.

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Gold Outlook 2023: The global economy at a crossroads – World Gold Council

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The global economy is at an inflection point after being hit by various shocks over the past year. The biggest was induced by central banks as they stepped up their aggressive fight against inflation. 

Going forward, this interplay between inflation and central-bank intervention will be key in determining the outlook for 2023 and gold’s performance.

Economic consensus calls for weaker global growth akin to a short, possibly localised recession; falling – yet elevated – inflation; and the end of rate hikes in most developed markets. 1 In this environment which carries both headwinds and tailwinds for gold, our key take-aways are: 

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  • A mild recession and weaker earnings have historically been gold-positive
  • Further weakening of the dollar as inflation recedes could provide support for gold
  • Geopolitical flare-ups should continue to make gold a valuable tail risk hedge
  • Chinese economic growth should improve next year, boosting consumer demand
  • Geopolitical flare-ups should continue to make gold a valuable tail risk hedge 
  • Chinese economic growth should improve next year, boosting consumer gold demand
  • Long-term bond yields are likely to remain high but a levels that have not hampered gold historically
  • Pressure on commodities due to a slowing economy is likely to provide headwinds to gold in H1

On balance, this mixed set of influences implies a stable but positive performance for gold (Figure 1). 2

That said, there is an unusually high level of uncertainty surrounding consensus expectations for 2023. For example, central banks tightening more than is necessary could result in a more severe and widespread downturn. Equally, central banks abruptly reversing course – halting or reversing hikes before inflation is controlled –could leave the global economy teetering close to stagflation. Gold has historically responded positively to these environments. 

On the flipside, a less likely ‘soft landing’ that avoids recession could be detrimental to gold and benefit risk assets.

Figure 1: Consensus scenario of a mild recession, with greater upside potential for gold than downside risk

Bumpy road ahead

Economic growth: short sharp pain

There are now many signs of weakening output due to the speed and aggressiveness of hiking moves by central banks. Global purchasing manager indices (PMI), now in contraction territory,3  indicate a deepening downturn across geographies, and economists are warning of a material recession risk (Chart 1).

Consensus forecasts now expect global GDP to rise by just 2.1% next year. 4 Excluding the global financial crisis and COVID, this would mark the slowest pace of global growth in four decades and meet the IMF’s previous definition of a global recession – i.e. growth below 2.5%.
 

 

Chart 1: Global contraction appears all but guaranteed

Global contraction appears all but guaranteed

Global manufacturing and services PMIs and year-ahead probability of recession*

Global contraction appears all but guaranteed

Global manufacturing and services PMIs and year-ahead probability of recession*

*Global PMIs below 50 are associated with an economic contraction. 4Q average recession probability. Data as of December 2022.
Source: Bloomberg, Survey of Professional Forecasters, World Gold Council

Sources:
Bloomberg,
Survey of Professional Forecasters,
World Gold Council; Disclaimer

*Global PMIs below 50 are associated with an economic contraction. 4Q average recession probability. Data as of December 2022.

Policy and inflation: higher for longer

It is almost inevitable that inflation will drop next year as further declines in commodity prices and base effects drag down energy and food inflation. Furthermore, leading indicators of inflation tell a consistent story of a moderation (Chart 2).

This brings us to the implications for monetary policy. The policy trade-off for nearly every central bank is now particularly challenging as the prospect of slower growth collides with elevated, albeit declining inflation. 

No central bank will want to lose its grip on inflationary expectations resulting in a strong bias towards inflation fighting over growth preservation. As a result, we expect monetary policy to remain tight until at least mid-year. 

In the US, markets expect the Fed to start cutting rates in the second half of 2023 (Chart 3). Elsewhere, markets expect policy rates to come down more slowly than in the US, but by 2024 most major central banks are expected to be in easing mode. 5

 

Chart 2: Inflation has peaked

Inflation has peaked

PCE inflation and Bloomberg median forecast, US producer and house prices*

Inflation has peaked

PCE inflation and Bloomberg median forecast, US producer and house prices*

*Consensus PCE inflation forecast provided by Bloomberg median economists’ forecasts. As of December 2022.
Source: Bloomberg, World Gold Council

Sources:
Bloomberg,
World Gold Council; Disclaimer

*Consensus PCE inflation forecast provided by Bloomberg median economists’ forecasts. As of December 2022.

 

Chart 3: Market pricing in cuts during H2 2023

Market pricing in cuts during H2 2023

Fed Funds futures curve and Fed median projection 2023*

Market pricing in cuts during H2 2023

Fed Funds futures curve and Fed median projection 2023*

*Fed dot plot provided by the Federal Reserve. Fed data as of September 2022. Fed Funds Futures (data as of 2 December) reflect one market view of the future Fed Funds rate.
Source: Bloomberg, World Gold Council

Sources:
Bloomberg,
World Gold Council; Disclaimer

*Fed dot plot provided by the Federal Reserve. Fed data as of September 2022. Fed Funds Futures (data as of 2 December) reflect one market view of the future Fed Funds rate.

Macroeconomic implications for gold

Gold is both a consumer good and an investible asset. As such, our analysis shows that its performance is driven by four key factors and their interactions:

  • Economic expansion – positive for consumption
  • Risk and uncertainty — positive for investment
  • Opportunity cost – negative for investment
  • Momentum – contingent on price and positioning.

These factors, in turn, are influenced by key economic variables such as GDP, inflation, interest rates, the US dollar, and the behaviour of competing financial assets. 

Recession: portfolio ballast

A challenging combination of reduced but still elevated inflation and softening growth demands vigilance from investors. The likelihood of recession in major markets threatens to extend the poor performance of equities and corporate bonds seen in 2022.
 

 

Chart 4: Gold does well in recessions

Gold does well in recessions

Performance of gold before, during and after NBER-designated recessions*

Gold does well in recessions

Performance of gold before, during and after NBER-designated recessions*

*Based on the LBMA Gold Price PM. The vertical line at time T is the start of an NBER-designated recession. The thick portion of each respective line denotes the recession period.
Source: ICE Benchmark Administration, The National Bureau of Economic Research (NBER), Bloomberg, World Gold Council

Sources:
Bloomberg,
ICE Benchmark Administration,
NBER,
World Gold Council; Disclaimer

*Based on the LBMA Gold Price PM. The vertical line at time T is the start of an NBER-designated recession. The thick portion of each respective line denotes the recession period.

Gold, on the other hand, could provide protection as it typically fares well during recessions, delivering positive returns in five out of the last seven recessions (Chart 4). Furthermore But a recession is not a prerequisite for gold to perform. A sharp retrenchment in growth is sufficient for gold to do well, particularly if inflation is also high or rising.

Inflation: disinflation ahead

While inflation may indeed come down next year, there are several important considerations that impact the gold market. 

First, central bankers have inflation targets and while a lower inflation rate is necessary, it is insufficient for central bankers to withdraw their hawkish policies. Inflation needs to get to target or below for that to happen. This raises the risk of an overshoot, in our opinion. 

Second, our analysis suggests that the retail investor segment appears to care more about inflation than institutional investors, given a lower level of access to inflation hedges (Figure 2). They also care about the level of prices. Even with zero inflation in 2023, prices will remain high and are likely to impact decision-making at the household level. 

lastly institutional investors often assess their level of inflation protection. through the lens of real yields. These rose over the course of 2022 creating headwinds for gold.  

In 2023 we could see some reversal of the dynamics at play in 2022, which were high retail investment demand but weak institutional demand. 

indeed, any sign of yields moving down could  encourage more institutional interest in gold. On balance however lower inflation should mean potentially diminished interest in gold from an inflation hedging perspective.

Figure 2: Retail investors care about inflation, institutions care about rates*

 

*Four of the regression equations that comprise our Qaurum model on GoldHub. Inflation variables are significant for Bar & coin (retail) investors in green, but not for institutional investors, in red. 
Source: World Gold Council

US dollar: trending down

After strengthening for nearly two years straight, the US dollar index (DXY) has recently seen a steep drop, despite continued widening of – both actual and expected – rate differentials. It seems that reduced demand for dollar cash was the likely culprit. 

Next year, we see a more complex dynamic driving the US dollar. First the shoring up of energy needs in Europe will, in the immediate future, continue to reduce pressure on the euro. Second, as central banks in Europe, the UK and Japan continue to take a more hands-on approach to their respective currency and bond markets some of the pressure on domestic exchange rates could ease. All things considered, the dollar is likely to be pressured particularly as falling inflation and slower growth take hold. And a dollar peak has historically been good for gold, yielding positive gold returns 80% of the time (+14% on average, +16% median) 12 months after the peak. Although currently very high in REER terms and likely one of the catalysts for the recent turn, the starting valuation for the DXY has been less important in determining the magnitude of gold returns. (Chart 5

 

Chart 5: If the DXY has peaked, that should bode well for gold

If the DXY has peaked, that should bode well for gold

Gold return 12m after DXY has peaked, US dollar REER at time of peak*

If the DXY has peaked, that should bode well for gold

Gold return 12m after DXY has peaked, US dollar REER at time of peak*

*Gold returns using the LBMA Gold Price PM 12 months following a peak in the DXY index compared to the BIS narrow Real Effective Exchange Rate (REER) value for the DXY at the peak. Peaks calculated since 1969 on monthly data of the DXY index. Latest data as of 2 December 2022.
Source: ICE Benchmark Administration, Bloomberg, World Gold Council

Sources:
Bloomberg,
ICE Benchmark Administration,
World Gold Council; Disclaimer

*Gold returns using the LBMA Gold Price PM 12 months following a peak in the DXY index compared to the BIS narrow Real Effective Exchange Rate (REER) value for the DXY at the peak. Peaks calculated since 1969 on monthly data of the DXY index. Latest data as of 2 December 2022.

Geopolitics: tightrope 

If the past five years has taught us anything it is that shocks – trade war, COVID, war in Ukraine, and so on – can appear from left field to upturn even the most considered economic forecasts. The latest conflict further undermines the existing model of global trade and capital integration emphasising that geo-politics has returned as a source of economic and financial risk.  (Chart 6)

And while macro factors form the basis for much of the impact on gold, geo-political flare-ups could lend support to gold investment, as we saw in Q1’22, as investors look to shield themselves from any further turbulence. Moreover, as we have discussed previously, we attribute a large proportion of gold’s resilience in 2022 to a geopolitical risk premium, with gold’s return not fully explained by its historically important drivers.    
 

 

Chart 6: Geopolitical threat level remains high*

Geopolitical threat level remains high*

Geopolitical threat level remains high*

*Data as of October 2022. Geopolitical threats reflect automated text-search results of electronic newspaper archives. See here for methodology.
Source: Matteo Iacoviello, World Gold Council

Sources:
Matteo Iacoviello,
World Gold Council; Disclaimer

*Data as of October 2022. Geopolitical threats reflect automated text-search results of electronic newspaper archives. See here for methodology.

China: a cautious rebound

Following a challenging 2022, we expect consumer gold demand in China to return to 2021 levels thanks to fewer COVID disruptions, a cautious economic rebound and a gradual pick-up in consumer confidence. 

China’s economic growth is likely to improve next year. Signs that COVID-related restrictions are easing after the local authority optimised its zero-COVID policy in November, should improve consumer confidence and boost economic activity. 

Meanwhile, Chinese regulators announced measures to support the local property market, including credit extension to developers and loosening of home-buyer restrictions. These stimuli may help stabilise real estate investment and housing demand, and encourage an upturn in consumer demand.

Europe: a tale of two winters

European gold bar and coin investment is likely to remain robust in 2023 as retail investors – especially in Germanic markets – look to protect their wealth. Even a decline in inflation is unlikely to encourage lower demand, given underlying risks.

Europe (and the UK) is facing a severe energy crisis, driven by a reduction in natural gas from Russia. While gas storage levels have been raised to almost 90% capacity, some question whether this will be sufficient for winter 2022. There are also concerns about energy supplies to the region ahead of next winter, if the supply of Russian natural gas remains limited and recovery in China intensifies the global demand for energy.
 

Cross-asset implications for gold

Bonds: holding on 

Consensus forecasts suggest a bull-steepening of the US yield curve.  With the yield curve (10-year less 2-year US Treasury yield) already more inverted than at any time since 1981, the long end already appears to have factored in a recession and further inversion seems unlikely.

We therefore see a stickier long end of the curve, even if the short-end drops significantly. Adding to this, both risk and term premia are likely to be higher, putting pressure on long term yields to stay put. The former from an elevated bond-equity correlation and the latter from higher supply – through both issuance and quantitative tightening. 

As gold has a stronger correlation to 10-year than shorter-term yields, we see less of a rates-driven benefit to gold in 2023.
Although higher bonds yields are associated with lower gold returns and might now be deemed attractive by some investors, current yield levels are historically not a hindrance to gold doing well, particularly when accounting for a weaker US dollar. (Chart 7)
 

 

Chart 7: Current rate levels not a threat to gold

Current rate levels not a threat to gold

Average gold returns in different rate level regimes*

Current rate levels not a threat to gold

Average gold returns in different rate level regimes*

*Average monthly return is calculated as the average of gold returns (LBMA Gold Price PM) during a range of historical real yield levels for the US 10-year TIP yield, US 12m Treasury yield less 1-year expected inflation (Michigan) and US 5-year Treasury yield less 5-year expected inflation (Michigan).
Source: ICE Benchmark Administration, Bloomberg, World Gold Council

Sources:
Bloomberg,
ICE Benchmark Administration,
World Gold Council; Disclaimer

*Average monthly return is calculated as the average of gold returns (LBMA Gold Price PM) during a range of historical real yield levels for the US 10-year TIP yield, US 12m Treasury yield less 1-year expected inflation (Michigan) and US 5-year Treasury yield less 5-year expected inflation (Michigan).

Equities: Ever the optimists

If 2023 is to bring us a mild recession, equities are headed for continued volatility. Moreover, current consensus EPS estimates seem conspicuously robust against the deteriorating macroeconomic backdrop and what earnings typically do during periods of recessions (Chart 8).

 

Chart 8: Recessions hammer earnings

Recessions hammer earnings

Recessions hammer earnings

Source: Bloomberg IBES, World Gold Council

Sources:
Bloomberg IBES,
World Gold Council; Disclaimer

The S&P 500 price-to-earnings ratio is currently 18.8. Since 1969, the average during recessions has been 13.6, with the level of inflation playing its part. The expected inflation rate for H1 is 5.5%, associated with a P/E of c.16. While falling earnings could lead stocks lower, gold has typically done well in this environment.  

Part of this performance boils down to gold’s equity hedging credentials, correlating negatively as equities fall meaningfully.

Commodities: Caught in the crossfire

Despite a severely constrained supply outlook for many commodities (Chart 9), an economic slowdown is likely to dominate price action, at least in H1 as they get caught in the crossfire of housing and manufacturing weakness. As a result, gold – which is a sizeable component of the two main indices BCOM and S&P GSCI – could suffer due to its meaningful average correlation of 0.44 over the last 20 years. 

 

Chart 9: Commodities supply constraints likely to resurface after recession*

Commodities supply constraints likely to resurface after recession*

Commodities supply constraints likely to resurface after recession*

12m trailing Capital Expenditure (CAPEX) and the number of commodities (in BCOM Index) in backwardation (4th future less 1st future) as a share of total.
Source: Bloomberg, World Gold Council

Sources:
Bloomberg,
World Gold Council; Disclaimer

12m trailing Capital Expenditure (CAPEX) and the number of commodities (in BCOM Index) in backwardation (4th future less 1st future) as a share of total.

Risks to economic consensus

On balance, gold’s return in the environment consensus expects in 2023 is likely to be stable but positive, as it faces competing crosswinds from its drivers. But there are plenty of signals that the economy may not follow a well-telegraphed path.

With the impact of the monetary shock still rippling through the global economy, any forecasts for 2023 are subject to more uncertainty than usual. 

Severe recession/stagflation

In this scenario, inflationary pressures remain as geopolitical tensions spike. Hypervigilant central banks risk overtightening, given the lag of policy transmission in the economy. This results in a more severe economic fallout and stagflationary conditions, a theme we covered last year (Chart 10). The hit to both business confidence and profitability would lead to layoffs, driving unemployment materially higher. This would be a considerably tough scenario for equities with earnings hit hard and greater safe-haven demand for gold and the dollar.

 

Chart 10: Stagflation favours gold

Stagflation favours gold

Gold returns in four combinations of growth and inflation

Stagflation favours gold

Gold returns in four combinations of growth and inflation

* As of Q2 2021. AAAR % – annualised average (stagflation) adjusted returns. Please see Appendix A.2 for AAAR definition.
Source: Bloomberg, World Gold Council

Sources:
Bloomberg,
World Gold Council; Disclaimer

* As of Q2 2021. AAAR % – annualised average (stagflation) adjusted returns. Please see Appendix A.2 for AAAR definition in the report.

Soft landing

Downside risks also exist for gold via a soft-landing scenario, where business confidence is restored and spending rebounds. Risk assets would likely benefit and bond yields remain high – a challenging environment for gold. 

 

Chart 11: Employment and housing showing strains

Employment and housing showing strains

Job cut announcements, US Fixed and ARM mortgages

Employment and housing showing strains

Job cut announcements, US Fixed and ARM mortgages

Challenger job cut announcements, y-o-y %, US 30-year fixed mortgage rate and US 5-year adjustable rate mortgage (ARM).
Source: Bloomberg, World Gold Council

Sources:
Bloomberg,
World Gold Council; Disclaimer

Challenger job cut announcements, y-o-y %, US 30-year fixed mortgage rate and US 5-year adjustable rate mortgage (ARM).

Strength in income-driven consumer demand would be offset by weaker institutional investment. Some retail investment could abate on higher confidence, but lingering inflation would unlikely result in a material drop. The case for a soft-landing hinges largely on hard economic data not yet confirming the case presented by soft economic data. In the US, non-farm payrolls growth has remained firm and there was a GDP uptick in Q3.  The Atlanta Fed GDPnow indicator points to an even stronger Q4 2022 (Chart 12). While a soft-landing won’t be great for gold, it is unlikely to be synonymous with a ‘Goldilocks’ environment until at least H2 (Chart 10), which we see as a remote risk.

 

Chart 12: GDP not confirming soft data malaise

GDP not confirming soft data malaise

US GPD QoQ SAAR and Atlanta Fed GDPnow forecast

GDP not confirming soft data malaise

US GPD QoQ SAAR and Atlanta Fed GDP Now forecast

Source: Bloomberg, World Gold Council

Sources:
Bloomberg,
World Gold Council; Disclaimer

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Mint issues black-ringed toonie in memory of Queen Elizabeth II

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The Royal Canadian Mint is issuing a new black-ringed toonie to honour Queen Elizabeth II.

The mint says the coin’s black outer ring is intended to evoke a “mourning armband” to honour the queen, who died in September after 70 years on the throne.

The mint says it will start to circulate nearly five million of the coins this month, and they will gradually appear as banks restock inventories.

Aside from the black ring, the mint says the coin retains the same design elements of the standard toonie.

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Four different images of the queen have graced Canadian coins since 1953, when she was crowned.

The core of the commemorative toonie will feature the same portrait of the queen that has been in circulation since 2003, with a polar bear design on the other side.

Queen Elizabeth II served as Canada’s head of state for seven decades and for millions of Canadians, she was the only monarch they had ever known,” Marie Lemay, president and CEO of the Royal Canadian Mint, wrote in a statement.

“Our special $2 circulation coin offers Canadians a way to remember her.”

The mint says it may produce more of the coins, depending on what it calls “marketplace needs”.

This report by The Canadian Press was first published Dec. 7, 2022.

 

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Japan’s Economy Shrank Less Over Summer Than First Thought

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(Bloomberg) — Japan’s economy took a smaller hit than first thought during a summer marked by a renewed Covid surge and a plunge in the yen, with a return to growth expected this quarter.

Gross domestic product shrank an annualized 0.8% in the three months to the end of September from the previous period, revised figures from the Cabinet Office showed Thursday. That was smaller than the 1.2% contraction first estimated and a 1% drop forecast by economists.

The revised figures showed that stronger exports reduced the heavy negative impact on trade from the yen drop, and that capital spending by firms held up.

A buildup of inventories also helped narrow the contraction of the economy, though that also suggests there wasn’t enough demand for the output of factories. The data also showed consumption was weaker than first thought during the summer Covid surge and inflation acceleration.

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Overall, the figures didn’t improve enough to eliminate concerns among policymakers over the resilience of the economy. Japan heads toward the end of the year and into 2023 with clouds darkening over the global outlook, and the possibility of recessions in key overseas markets.

“The weaker consumption worries me,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence. “Spending hasn’t picked up much in the current quarter, either, probably because of inflation and another rise in Covid infections.”

What Bloomberg Economics Says…

“Details under the hood of Japan’s narrower third-quarter GDP contraction aren’t encouraging. A buildup in inventory that contributed to the upward revision will limit catch-up production in 4Q.”

— Yuki Masujima, economist

For the full report, click here

Prime Minister Fumio Kishida has already put together an economic stimulus package to cushion the impact of strengthening inflation that should offer more support for growth early next year. Analysts also expect the economy to have returned to expansion this quarter.

The Bank of Japan, meanwhile, is expected to keep interest rates unchanged at ultra-low levels during the last months of Governor Haruhiko Kuroda’s tenure.

Still, analysts are concerned about how the economy will weather a global slowdown prompted by tighter central bank police elsewhere in the world. Cautious moves by China to relax its virus restrictions offer one of the few points of optimism over the coming months.

“External demand is also be on the wane, as we saw in industrial production,” Taguchi said. “The situation may change if China lifts its zero Covid policy, but for now Europe and the US are bracing for the impact of an economic slowdown in the wake of interest rate hikes.”

Economists expect private sector spending and services consumption to support the economy this quarter. Pent-up demand held over from the summer Covid wave has already fueled consumer outlays, though the recent resurgence of infections will likely start to limit those gains. The government is widely expected to keep the country free of virus-related restrictions to maintain economic activities.

Inflation is growing as another concern for consumption and the recovery path. Japan’s price increases hit their fastest clip in 40 years in October, and the pace likely sped up further in November based on last month’s Tokyo data, a leading indicator for nationwide trends.

Kishida’s support package offers further relief from soaring energy costs with electricity bills set to get hefty subsidies from early next year.

Business spending didn’t get revised up as expected but still showed resilience in corporate sentiment despite a yen slide that prompted government intervention in currency markets. The plunge in the yen over the summer may give companies second thoughts about their business plans.

Still, the yen’s recent pullback may reassure businesses going ahead and should also have a favorable impact on net trade this quarter.

“Personally, I don’t think the capital investment will decrease that much,” said Toru Suehiro, chief economist at Daiwa Securities. “I think that capital investment will continue throughout next year due to pent-up demands.”

Another positive development is that Japan fully reopened its borders to tourists in October. That offers the prospect of renewed inbound spending by visitors attracted by cheaper travel expenses thanks to their relatively stronger currencies.

(Adds economist comment, more details)

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