Positive momentum in gold carried the yellow metal to its highest level in two weeks
Positive momentum in gold, which on Monday had carried the yellow metal to its highest level in two weeks, turned abruptly negative on Tuesday after US CPI data for August didn’t show the anticipated degree of moderation that might have allowed the Federal Reserve to dial down its aggressive monetary tightening. Making matters worse was the likelihood of technical selling when $1,680-85 support gave way two days later. In the week to Thursday’s close, gold lost 2.5%, leaving it -9.0% this year (spot ref.: $1,665).
The stark selloffs in financial assets – and not only in the US – that followed the US CPI data was essentially the consequence of dashed expectations. The headline number was forecast to moderate to 8.1% y/y from 8.5% y/y in July, but only managed to ease to 8.3% y/y. And while markets appeared resigned to accept a slight firming in the core measure to 6.1% y/y from 5.9% y/y in July, it jumped to 6.3% y/y instead. The outsized rise in the core number was particularly concerning because it indicated price pressures in certain variables, e.g., rents, that may prove harder to wring out, and so could keep the Fed on an aggressive tightening path until this so-called “sticky inflation” relents.
Coming as it did just a week before the Sept. 20-21 FOMC meeting, the disappointing CPI naturally stoked anxiety in markets that the Fed’s next move could be a supersized 100bp hike, akin to the one the Bank of Canada delivered in July. However, a move of that magnitude was only accorded a 20.0% probability as at Thursday’s close according to the CME Fed Watch Tool; another 75bp hike was accorded a greater 80.0% probability.
Aside from by how much the Fed lifts its target range (currently 2.25-2.50%) next week, markets will be keenly attuned to officials’ new economic projections, in particular for the path of the Fed funds rate. In the June projections, the median for end-2022 was 3.4% and 3.8% for end-2023. Those would seem strong candidates for upgrades considering that recent commentary from several Fed officials has not only indicated a desire to hike to 4.0%+, but has also suggested keeping rates high for some time to tame inflation.
The nominal US 2y Treasury yield surged 39bp to 3.87% over the week to Thursday’s close, putting it at its highest level in ~15 years. The 5y yield was up 27bp to 3.66% and also near 15-year highs. The 10y yield gained 16bp to 3.45%%, leaving it just shy of this year’s highs around 3.50%. Real Treasury yields (TIPS) jumped as well, the 5y by 16bp to 1.09% and 10y by 14bp to 1.02%. All these higher yields naturally did gold no favors.
Neither did the US Dollar Index. Although it finished little changed (+0.1%) over the week to Thursday’s close, its rebound from the pre-CPI lows measured nearly 2.0%. The yen firmed for a change (USDJPY -0.2%) amid market reports that the Bank of Japan had been “checking rates”, which was interpreted as indicating that intervention could be nigh. Also keeping the market on guard for possible intervention were several Japanese officials reiterating unease with yen weakness. The Swiss franc advanced 1.5% vs. the dollar ahead of the Swiss National Bank’s meeting next week (Sept. 22).
The euro (EURUSD unchanged) was buoyed by expectations for ongoing hawkishness – and more rate hikes – from the European Central Bank. Reuters on Monday reported that ECB officials saw a risk that the key deposit rate (currently 0.75%) might have to rise to 2.0% or higher in order to combat inflation, which in August reached 9.1% y/y.
Sterling lost more ground against the greenback (GBPUSD -0.5%). UK August CPI slowed to 9.9% y/y (10.1% y/y in July; cons.: 10.2% y/y) but was seen as unlikely to deter the Bank of England from hiking its Bank Rate (currently 1.75%) by 50bp or 75bp next Thursday. Canada’s dollar hit a 22-month low vs. the US dollar (USDCAD +0.8%).
Although the best of oil prices’ gains faded as the week progressed, both Brent and WTI crude still managed advances of 3.0-4.0% over the week to Thursday’s close. The oil market still seems concerned with so-called demand destruction as a consequence of higher interest rates across most of the globe weighing on growth and, therefore, hitting demand for oil. Official reports didn’t betray similar concerns, however. Even taking into account weaker demand from China given its struggling economy, the International Energy Agency on Wednesday projected oil demand growth this year at 2.0mbpd, down just 100k from August, while leaving its 2023 forecast at 2.1mbpd. A day earlier, OPEC retained its forecasts for oil demand growth at 3.1mbpd in 2022 and 2.7mbpd in 2023.
Bloomberg on Tuesday reported (subscription may be required) that the US was mulling oil purchases to replenish the Strategic Petroleum Reserve when the WTI crude price fell below $80/bbl. Inventory in the SPR has been drained by roughly 25% since March, with remaining barrels at the lowest level in nearly 40 years. However, a Department of Energy spokesperson subsequently said that a replenishing plan being worked on had no such price trigger and, in any case, oil purchases were unlikely for some time yet.
India reported August CPI at 7.0% y/y, up from 6.71% y/y in July and so still above the upper parameter of the RBI’s 4.0% +/- 2.0% target range. The RBI, which has been trying to avoid stunting growth while tightening to counter inflationary pressures (140bp in hikes so far this cycle), is expected to raise its repo rate by 25bp or 50bp when it next meets Sept. 28-30. USDINR was up about 0.3% on the week, still near all-time highs.
China’s mainland stocks indexes lost 2.0%+ over the week amid by-now-familiar growth concerns. The country’s central bank (PBoC) on Thursday left its medium-term loan rate at 2.75%. Market focus has shifted to the Communist Party’s congress next month as a potential venue for more stimulus measures to be announced. USDCNY rose 0.4% over the week; the offshore USDCNH rate on Thursday was indicated above 7.0 for the first time since early 2020. Weakness in the yuan could impair Chinese demand for gold.
Inflation in Saudi Arabia rose to 3.0% in August (2.7% in July), but was seen as unlikely in itself to catalyze a change in monetary policy. Given the riyal’s peg the dollar, the Fed’s move is more likely to factor in whether SAMA changes rates, and by how much.