Gold rallies on rate cut expectations amid US economy slowdown

Spot gold rallied sharply on Friday as traders looked past hotter than expected US inflation data to focus on possible rate cuts as the US economy, going by recent key macroeconomic data, is weakening. Spot gold closed with a gain of 1.55% at $2414 Friday. The yellow metal was up around 2.30% on the week.

Although the ten-year US yields closed with a gain of 1.25% at 4.42% Friday, the yields were down around 1.80% on the week. The two-year yields fell roughly 2% on the week to close at 4.82%. The US Dollar Index has come under pressure on a series of disappointing data as rate cut probability has risen. The Index was down nearly 0.80% on the week to close at 104.50.

Data and event round up: Deterioration in the US economy amid sticky inflation

Almost all the inflation metrics reflect that the US inflation continues to remain elevated; nonetheless, markets are presently cheering a slight miss on one particular count – US CPI m-o-m. The US CPI (April) m-o-m was noted at 0.30% Vs the forecast of 0.40%, though y-o-y inflation data at 3.4% matched the estimate. CPI ex food and energy y-o-y and m-o-m at 3.60% and 0.30% respectively were also in line with their respective forecasts. Import price Index (April) m-o-m and y-o-y readings came in at 0.90% and 1.10% respectively Vs the respective forecasts of 0.30% and 0.40%. Similarly, the US PPI Final demand (April) m-o-m was up 0.50% Vs the forecast of 0.30%, PPI ex food and energy m-o-m was also up 0.5% as against the expectation of 0.20%. PPI ex food and energy y-o-y stood at 2.40% Vs the forecast of 2.30%, whereas PPI final demand y-o-y at 2.20% was in line with the forecast. The export price index m-o-m and y-o-y were noted at 0.50% and -1% respectively as against the respective forecasts of 0.20% and -1.10%.

At the same time, the US economy seems to be losing its momentum as recent macroeconomic indicators like GDP (Q1), nonfarm payroll (April) and services and manufacturing PMIs had been disappointing. This week was no exception. Retail Sales advance (April) m-o-m stagnated as against the forecast of +0.40%. Retail sales control group came in at -0.30% Vs the forecast of +0.10%. The US Philadelphia Fed business outlook, housing starts, NAHB housing Index, and industrial production data fell short of their respective forecasts.

Markets have not been deterred by disconcerting inflation data because of two factors: Firstly, the notion that some of the elements in the PPI report, which will go into the PCE deflator report, have not been hot enough. Moreover, downward revisions to the prior data also mitigated the impact. Secondly, The US Fed Chair Powell is confident that inflation will move towards the Fed’s target goal of 2% this year. He called the CPI data mixed as prior data were revised lower.Dovish Fedspeak
Fed officials have adopted a hawkish stance in the wake of lack of progress on inflation. The Federal Reserve Vice Chair Philip Jefferson said that it is appropriate to keep rates steady until there is additional evidence that inflation will return to the 2% target. The Fed’s Williams said that he does not see the need for rate cuts. Kashkari, Mester, and Goolsbee see a case of higher for longer rates. Richmond Federal Reserve Bank President Thomas Barkin said that the latest Consumer Price Index (CPI) showed that inflation is not where the Fed is trying to get. However, the Fed Chair Powell is somewhat dovish as he dismissed the US CPI data as mixed and expressed confidence in the possibility of the US inflation falling towards the Fed’s 2% goal this year. Although he continues to drive home the point that progress on inflation has stalled, markets do not find him sufficiently hawkish.
ETF holdings
Total known global gold ETF holdings rose for the third consecutive day on May 16 to take the level to 80.715 MOz, which was higher than the level of 80.542 MOz seen at the end of the prior week.

The US household’s debt
As per the New York Federal Reserve, American households set a new record as total household debt rose 1.10% from Q4 2023 to $17.69 trillion of debt in Q1 2024. At the same time, the number of delinquencies is rising amid elevated inflation.

Credit card balances, which at $1.12 trillion outstanding, decreased by $14 billion during the first quarter but remain 13.1% above the level a year ago.

Data next week
The major US data next week include FOMC meeting minutes (May 1), existing home sales (April), S&P Global US manufacturing and services PMI (May preliminary), new home sales (April), durable goods orders (April preliminary), and University of Michigan sentiment and both short- and long-term inflation expectations. Out of Europe, focus will be on the UK’s CPI (April), manufacturing and services PMI (May preliminary) and retail sales (April), and Germany’s GDP (1Q Final) and manufacturing and services PMIs (May preliminary).

Weekly outlook
Gold is expected to trade with a positive bias next week. Fedspeak will continue to be a crucial factor for the metal. The US Federal Reserve facing constraints in hiking rates amid elevated inflation and a weakening economy is positive for gold. The metal is expected to test resistance at $2500 sooner than expected. Interim resistance is at $2432/$2450. Support is at $2400/$2360. Buying the dips remains a preferred strategy.

(The author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas)

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