Inflation will follow initial deflation
More monetary stimulus will come to prevent an imminent recession.
“I think that people have got this wrong, everybody is looking at this event as deflationary, but it is actually the opposite. You’re going to have a reduction of production, so less supply of goods, and the world is going to be flooded with money,” Schiff told Kitco News
and a larger money supply would be bullish for gold, this according to Peter Schiff, CEO of Euro Pacific Capital.
The main event next week is the Federal Reserve meeting on Wednesday with the central bank looking increasingly ready to cut rates to zero and introduce quantitative easing.
“TD is calling for a 100 basis point cut at the next meeting, if not sooner. On top that, there is a push for more stimulus, both monetary and fiscal, on a global scale, which underpins the strength for gold,”said McKay. “That will push gold higher and eventually materially higher.”
The CME FedWatch tool is currently showing that markets are pricing in an 80% chance of a 100 basis point cut.
“That is quite a positive backdrop for gold,” added Bain. “Further out, we are a bit more positive on the outlook of the gold price given that in a few months we will have ultra-low interest rates across the board.”
In terms of what to watch from the Fed Chair Jerome Powell on Wednesday, Capital Markets Economics U.S. economist Andrew Hunter said to look at confirmation of full-scale QE.
“The announcement yesterday that they would significantly expand repo operations and re-configure their monthly asset purchases is essentially going back to full-scale QE. They will probably confirm that next week and they may also increase the pace of those asset purchases from the current $60 billion,” Hunter pointed out.
This scale of involvement raises a chance that the Fed could cut rates down to zero all in one go on Wednesday, the economist added. “They already seem to be going to QE, which would normally already be an emergency measure,” he said.
But even this move is unlikely to lead to a sudden rebound in stocks as the critical driver remains the severity of the coronavirus outbreak, Hunter highlighted.
“Their repo operations should help calm some of the recent signs of stress in money markets. I don’t think any of this will lead to a sudden rebound in stocks. Clearly, the key driver of that now is how coronavirus develops,” he said.
All eyes are on the coronavirus outbreak next week — how it spreads in the U.S. and Europe and how bad the economic activity will be hit.
“The next two regions that will be hit quite hard will be Europe and U.S. Once we start to see numbers in those regions falling off, then that’s when markets could start to re-position themselves for a different story,” explained Bain.
The daily increase in new cases is a crucial factor that markets have been watching.
The increase in the number of new cases in the U.S. specifically will be very important to watch next week as testing is just beginning and it could reveal a headline shock, said McKay.
“We could see plus more than 1,000 cases on a daily basis,” he noted.
Numbers out of Italy are also vital. “They seem to be worse than China, so there is some sense that China was suppressing those numbers,” McKay added.
Markets are also eyeing business closures. Capital Economics has revised its U.S. GDP growth forecast for Q2 with expectations of a tentative recovery only in Q4.
“We expect GDP to fall by about 4% annualized in the second quarter on the assumption that we will get this widespread disruption in the U.S,” Hunter said.
However, that doesn’t mean that the U.S. is heading into a prolonged recession. “We see GDP falling sharply in Q2, then flatten out in Q3, and we are penciling in tentative recovery in Q4. It depends on just how bad the outbreak in the U.S. gets. At the moment, we are assuming a relatively benign scenario.”