Markets are retracing to test new support levels after a strong surge during the week on weaker than expected inflation data. Silver and Gold are the exception, making new highs, with demand fueled by lower long-term Treasury yields, a weaker Dollar, and strong buying from China.
Stocks
The S&P 500 is retracing to test support at 5200/5250. Higher Trend Index troughs indicate buying pressure. Respect of support is likely and would confirm our target of 5500.
In Australia, the ASX 200 retreated from resistance at 7900. Follow-through below 7700 would warn of another test of support at 7500/7550. Rising Trend Index troughs, however, warn that respect is more likely — that would mean another test of the all-time high.
Financial Markets
Ten-year Treasury yields retraced to test new resistance between 4.4% and 4.5%. Respect is likely and would signal a decline to test support between 4.1% and 4.2%.
Financial market liquidity is improving, with commercial bank reserves at the Fed recovering after a sharp fall during April tax payment season.
The Chicago Fed Financial Conditions Index is again falling, signaling easier monetary conditions.
Bitcoin (BTC) recovered above the former $64K support level, confirming easier financial conditions. Retracement that respects the new support level would strengthen the signal.
Economic Activity
Real retail sales are edging lower but remain in line with their pre-pandemic trend (dotted line) — supported by full employment, lower inflation and government spending to secure critical supply chains.
Light vehicle sales remain below 2019 levels but sales above 15 million continue to reflect robust consumer sentiment.
Heavy truck sales rebounded to 40.2K units, indicating reasonable business activity. Continuation of the recent down-trend, however, with a fall below 37.5K, would signal that the economy is slowing. Breach of 35K would warn that a recession is imminent.
Precious Metals & the Dollar
The Dollar index is retracing to test new resistance at 105. Lower Trend Index peaks warn of selling pressure and respect of resistance is likely, offering a short-term target of 103.
Silver is the star performer of the week, climbing steeply to close at $31.43 per ounce, following a brief pause on Thursday. Rising Trend Index troughs indicate strong buying pressure and our target of $32 is likely to be broken.
Gold also displays buying pressure, although the Trend Index rise is not as steep as Silver. Expect retracement to test the new support level at $2400 per ounce, but respect is likely and would confirm our target of $2500.
The chart below from Jan Nieuwenhuijs shows Gold as a percentage of global central bank reserves, from 1880 to today. There is plenty of potential for holdings to increase as central banks attempt to diversify away from a Dollar-based global reserve currency.
China: Gold Demand
China sold a record amount of Treasury and US agency bonds in the first quarter as it diversifies away from US financial assets. Bloomberg:
Beijing offloaded a total of $53.3 billion of Treasuries and agency bonds combined in the first quarter, according to calculations based on the latest data from the US Department of the Treasury. Belgium, often seen as a custodian of China’s holdings, disposed of $22 billion of Treasuries during the period.
At the same time, China is rapidly increasing its official Gold holdings.
China’s domestic Gold price consistently shows a strong premium over the international price, currently RMB 567 per gram (Au99.99) versus 558.8 for the iAu99.99 international contract on the Shanghai Gold Exchange. The cause of strong domestic Gold demand is not hard to find.
Chinese investors have in the past favored residential real estate as a store of wealth but growth in real estate prices ended in 2021. Investors are now switching their focus to Gold.
Crude Oil
Nymex light crude respected support at $79 per barrel. Penetration of the secondary (orange) trendline would suggest that a base is forming. Lower crude oil and gasoline prices are likely to ease inflationary pressure.
Conclusion
Silver is the star performer of the week, rising steeply to close at $31.43 per ounce. Gold also broke resistance — breakout above $2400 per ounce offering a target of $2500.
Stocks are bullish after weaker than expected CPI growth for April. The S&P 500 is likely to respect support at 5200/5250, confirming our target of 5500.
Ten-year Treasury yields are also softening on weaker inflation data. Respect of resistance at 4.4% to 4.5% would offer a target between 4.1% and 4.2%. Lower yields are likely to weaken the Dollar, further boosting Gold and Silver prices.
China continues to switch its official reserves from US Treasuries to Gold. Coupled with strong domestic demand from Chinese investors — disillusioned with real estate and the weakening Yuan — combined official and private investor demand from China is expected to maintain upward pressure on bullion prices.
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