Spot gold continues to fall, weak data is hard to shake the Fed’s hawks, unless this scenario is witnessed
Spot gold prices continued to decline on Tuesday (Oct. 25). Although weak US economic data sparked broader recession fears, still-high inflation convinced investors that the Federal Reserve would not suspended interest rate hikes in the near future. The Fed doesn’t necessarily need to see more layoffs, but it needs to see a decline in wage growth.
At 8:14 pm Beijing time, spot gold fell 0.33% to $ 1,644.06 an ounce; leading COMEX gold futures contract fell 0.36% to $ 1,648.2 an ounce; the US dollar index rose 0.05% to 112.039.
US trading activity contracted for a fourth consecutive month in October, according to an S&P global survey, the latest evidence that the US economy is weakening due to high inflation and rising interest rates. US Treasury Secretary Yellen said that “risks cannot be ruled out” when it comes to recession. However, as inflation in the US is still at a high level, the Fed is not expected to suspend interest rate hikes in the foreseeable future and will raise interest rates by 75 basis points for the fourth consecutive time on November 2. Some economists say the Fed shouldn’t stop until inflation drops to around half its current level.
Unpredictable time for the supply shock to ease
In the US, overall CPI increased 8.2% yoy in September and core CPI increased 6.6% yoy. Inflation looks slightly better when you take into account the Fed’s preferred measure, basic personal consumption spending (PCE), which rose 4.9% in August, down from its high of 5.4% in February. However, the market still expects an annualized core PCE recovery in the US to 5.2% in September.
“The economy has taken a huge supply shock and I’m sure the supply problem will be solved, but it’s hard to predict when it will be,” said Preston Caldwell, Morningstar’s US chief economist.
The US Energy Information Administration (EIA) Winter Fuel Outlook shows that the average US household is likely to spend more on heating this winter. Households using natural gas will spend $ 931 between October and March, 28 percent more than last winter, while households using gas oil for heating will spend 27 percent more, bringing bills to over $. 2,300.
Most economists expect the Fed to cut interest rates by 50 basis points in December. By the end of 2022, the range of federal funds rates will rise to 4.25% -4.50%, in line with the Fed’s median “dot plot” forecast. But even as Fed officials have begun to Consider when the pace of rate hikes should slow down, it will take months for any change in interest rate policy to take effect.
The strong dollar index has pushed gold lower, but as the next Fed meeting in November approaches and the opportunity to adjust the pace of interest rate hikes in December, the dollar should stabilize and gold could remain in a relatively narrow range.
GDP is expected to rise in the third quarter, but next year is not optimistic
Looking ahead, the U.S. Gross Domestic Product (GDP) data coming in this Thursday (Oct 27) will be closely followed. The annualized quarterly rate of US GDP in the third quarter is expected to increase significantly to 2.4%, which should temporarily reverse the contraction in the first two quarters.
The Fed raised interest rates from nearly zero in March to between 3% and 3.25% today. If the central bank does what most market watchers expect, the federal funds rate cap is on the verge of hitting 4%, the highest level in 15 years.
Brett Ryan, senior US economist at Deutsche Bank, said: “Fed officials have indicated that unless there is ‘clear and convincing’ evidence that inflation is slowing, there is no chance of a pause. in rate hikes. As the Fed continues to tighten aggressively to control the persistent rise in inflation, we expect the economy to begin a mild recession in the third quarter of next year as real growth slides into negative territory and the unemployment increases dramatically “.
The U.S. Federal Reserve is willing to raise interest rates early to keep inflation low, with the goal of achieving a correction in real federal funds rates in early 2023.But doing so is not without cost, with the market expecting the US economy to be headed into recession next year. While the Fed has not yet predicted a near-term policy shift, the gold bears will hold back the urge to build positions aggressively.
It must see a sharp decline in wage growth
At the same time, the labor market continues to show strong strength. Unemployment is at 3.5%, roughly where it was before the coronavirus outbreak more than two years ago. Initial jobless claims in the United States remain low despite reports of layoffs from large tech companies.
The Atlanta Fed Wage Growth Monitor shows income growth increasing from 3% in May 2021 to 6.7% in July 2022. However, wage growth has stabilized since the summer before dropping to 6.3% in September. The number of job vacancies dropped to 10 million in August from nearly 12 million in March, while the 25- to 54-year-old labor force participation rate increased this year.
“The job market is the tightest in decades and the Fed doesn’t necessarily need to see more layoffs, but it needs to see a decline in wage growth,” said Kara Murphy, chief investment officer at Kestra Investment Management.
The best-case scenario for the Fed is that more workers start looking for work, which, combined with fewer job openings, should lead to a return to normal wage growth. This would help keep inflation expectations around the Fed’s 2% target rather than losing control.
There are signs that many of the things driving the overall price increase will cool down in the coming months, including semiconductor supply, road freight costs, and house prices. Once these problems are resolved, price increases should slow down and the Fed may not need to be as aggressive to dampen demand.
Clifford Bennett, chief economist at ACY Securities, said:Gold is “relatively stable” above $ 1,600. If the selling pressure of sovereign wealth funds eases in the coming months, gold could see a sharp rise to $ 1,850- $ 2,200 in 2023.
Spot gold could drop to $ 1,627
On the hourly chart, the price of gold touched $ 1,637 and is likely to further test $ 1,627, which are the 61.8% and 80.9% Fibonacci retracement levels of the $ bullish range, respectively. 1,617- $ 1,670. For gold to resume its uptrend, it will need to revisit $ 1,650 as soon as possible, which is the 38.2% Fibonacci retracement level of the aforementioned range.
