Gold started July on a
subdued note, trading near $1900 per ounce levels with the backdrop of the
Fed’s hawkish hold in June. Prices gradually moved up during the month as investors
stuck to bets of one final interest rate hike in July. The probability that the
Fed will raise its benchmark rate by 25 basis points to a range of 5.25%-5.50%
in July was above 90% for most of the month, according to Interest Rate
Futures. International gold prices ended the month ~2.7% higher. Domestic
prices moved up by ~2.9%. However, there was some volatility along the way.
The minutes from the Fed’s June 13-14
meeting revealed that a majority of Federal Reserve officials saw the need for
further interest rate hikes in 2023, given the above-target inflation and
labour market resilience. Next, the US Bureau of Labor Statistics published the
private sector jobs data, which showed 209,000 jobs were added in June, below
the market expectation of 225,000. May's increase of 339,000 also got revised
lower to 306,000. The weaker-than-expected rise in private sector jobs was a
positive, but the Unemployment Rate edged lower to 3.6% from 3.7% and the
annual wage inflation stood unchanged at 4.4%, compared to analysts' estimates
of 4.2%, pointing to still tight labor market conditions. These events sharply
pushed 10-year Treasury yields above the 4% threshold and weighed on gold
prices, which traded in the early-$1900s.
After these short-lived
setbacks, the precious metal moved up above the $1950 mark after the Consumer
Price Index (CPI) for June was published. Inflation in the US declined to 3% on
a yearly basis in June from 4% in May, slightly below the market expectation of
3.1%. Further, core CPI inflation, which excludes volatile food and energy
prices, dropped to 4.8% from 5.3%. On a monthly basis, the CPI, and the Core
CPI both rose 0.2%, and these figures fell short of analysts' estimates. The
data eased pressure on the US central bank for additional rate hikes. In
response, Treasury yields retreated to 3.85% levels, and the Dollar Index fell
below the key 100 mark.
Later in the month,
S&P Global said its flash US Composite PMI index, which tracks
manufacturing and service sectors, fell to 52.0 from 53.2 in June. The
softening economic conditions further supported market’s view that July should
be the last hike of this cycle.
At its July meeting, the
American central bank raised interest rates to a 22-year high. But despite this
seemingly hawkish move, gold markets firmed up to $1975 per ounce levels given
that a) the 25-basis point move was largely priced in and b) the meeting was
perceived as less hawkish than the one in June where Chairman Powell alluded to
2 more rate hikes in 2023. This is evident from interest rate
futures which post the FOMC meeting continue to see rates peaking at this
level.
Unlike last time, the
Fed did not give much forward guidance on the monetary policy path. It seems
the softer US inflation readings for June positively weighed on their decision.
Powell used the words "data dependent" when asked about the September
policy. Further easing in the monthly core inflation numbers for July and
August could very well make this the last rate hike in this tightening cycle.
On the other hand, any negative surprises on the inflation front could mean
more rate hikes. Powell again ruled out any rate cuts in 2023 which capped the
upside in gold.
Following this, the US
Department of Commerce released preliminary estimates of Gross Domestic Product
(GDP) data. The US economy grew at an annualized rate of 2.4% in the second
quarter, beating estimates of 1.8%. The data eased recession fears and drove up
US Treasury yields and the US Dollar above the 4% and 101 marks respectively.
With a strong economy reducing the need for relatively safer asset classes like
gold and strengthening the Fed’s ability to tighten, gold retreated to
mid-$1900 levels. Limiting the downside for gold was the improving inflation
environment which suggested the Fed could choose to pause for good. The
Personal Consumption Expenditures (PCE) index, which is the Fed’s preferred
inflation gauge, was up 3% y-o-y, down from 3.8% in May. The Core PCE index
climbed 4.1% y-o-y, down from 4.6% in May. On a monthly basis, the PCE, and the
Core PCE both rose 0.2%. Till clarity emerges on the direction of Fed policy,
we can expect gold prices to largely remain range bound as mixed economic
signals push and pull the metal.
While the disinflation
momentum is a positive, a large part of it is driven by base effects which
could ease going forward, making it trickier to materially bring inflation down
from these levels. If the Fed decides to tighten further, we could see gold prices
move lower from here.
Over the medium term, despite the "higher for longer" rhetoric, lower inflation along with a slowdown in US growth should lead the Fed to cut rates sooner than it currently states. A rate cut combined with higher-than-average inflation will result in a structural up move in gold prices.
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