1. Inflation shows signs of cooling again
The annual rate of U.S. CPI without seasonal adjustment in April recorded 4.9%, the 10th consecutive decline, the lowest since April 2021, lower than market expectations of 5.0%. However, the seasonally adjusted CPI monthly rate in April recorded 0.4%, an increase from the previous month.
After the CPI report, traders increased bets that the Federal Reserve will pause interest rate hikes in June. The White House said the results of the CPI report were progressive, with debt default the biggest threat.
2. Schumer, the majority leader of the US Senate, said that working-level negotiations on the debt ceiling will begin. S&P Global Market Intelligence data showed U.S. government one-year credit default swaps (CDS) rose to 172 basis points from 163 basis points on Tuesday.
3. The four foreign ministers of Russia, Turkey, Syria and Iran held talks on the comprehensive restoration of relations between Turkey and Syria.
4. The Palestinian-Israeli conflict escalated. The Israeli army claimed that 469 rockets and mortar shells had been fired from the Gaza Strip to Israel, and the Gaza port was closed.
The monthly rate of overall inflation and core inflation in April recorded 0.4% as expected, and the annual rate all slowed down, confirming that inflation is cooling. However, the current monthly inflation rate of 0.4% is far higher than the 0.17% monthly inflation rate required to reduce the annual rate to 2%, so the Fed does not have enough evidence to make them turn dovish.
However, looking at the breakdown, service inflation other than energy and housing appears to be softening, with used cars the largest contributor to the monthly inflation increase (up 4.4% month-on-month). The Fed is focusing on inflation in core services, excluding energy and housing, because a tight labor market could put upward pressure on wages in those sectors, which could affect inflation. The 0.2% month-on-month increase in this part in April may allow the Fed to further ease concerns about inflation.
Looking ahead, while we don’t think the Fed needs to hit the 2% annual inflation target before considering a rate cut, monthly inflation does need to fall to 0.1%-0.2% on a sustained basis for the Fed to decide to cut rates. Since housing rents have clearly peaked and will be increasingly reflected in the housing inflation sub-items of the CPI from the third quarter, and the pricing power of enterprises is also weakening, we believe that from the end of the third quarter to the fourth quarter The monthly inflation rate can meet our expectations. The National Federation of Independent Business survey on Tuesday showed that the index matching the core CPI fell to about 2.5% year-on-year by the end of the year. There are plenty of reasons to cut rates.
If the lagged effect of a 500 basis point Fed rate hike and a sharp reduction in credit supply slows the economy sharply and unemployment starts to rise, then a rate cut is increasingly likely. Markets currently expect the Fed to start cutting interest rates by 25 basis points as early as September, but this may be too early, and we believe that the Fed may begin to shift to a neutral monetary policy stance in November and December.
GAIN Capital analyst Fawad Razaqzada
The dollar sold off after the release of the U.S. CPI data, pushing gold and major currency pairs higher. However, gold prices weakened rapidly afterwards, and the gains after the data were released were quickly erased. The lower-than-expected CPI value supports the expectation of interest rate cuts this year, and the inability of gold to maintain a continuous upward momentum may be due to investors’ profit-taking. Therefore, I expect gold prices to reach higher levels in the coming months and I remain positive on the outlook for gold.
While markets believe the Fed’s interest rates have peaked, Powell left the door open for further rate hikes as the job market is strong and inflation remains stubbornly high. However, the Fed may soon have to cut rates.
On the one hand, US inflation has fallen further, from 5.0% to the current 4.9%, more than expected. On the other hand, concerns about the debt ceiling are rising and credit is tightening. Biden’s latest talks with Congress on the debt ceiling have yielded no progress. If no resolution is found in the next 3 weeks or so, it is inconceivable that the US could default. Then again, Asia’s economic recovery appears to be fading.
For these reasons, the Fed may have to start cutting rates soon, possibly before September, which would further weigh on the dollar and help boost the outlook for gold.
Given the way gold has struggled in recent days, a fresh bullish signal is needed to confirm my suspicion that the weakness in gold prices is only temporary and driven by profit-taking. In fact, gold prices are holding above $2,000 and the bulls are still in control of the price action. I would only consider being bearish on gold if we see a clear reversal signal. Should gold break below its recent low of $1,969, that would weigh on gold’s outlook, at least in the short term. But as long as that level doesn’t get breached, I think any short-term weakness is just noise and an entry point for potential buyers.
After the U.S. CPI data was lower than expected and U.S. debt fell sharply, gold prices soared on Wednesday, but quickly erased the gains. Gold’s reaction to the unusual move in bonds suggests that the slowdown in inflation has been priced in ahead of time. Gold prices have risen more than 11% since the start of March, so the rally is clearly struggling, suggesting that nominal bond yields would have to fall further for gold to hit higher highs and set new all-time highs.
Still, the bar for gold to rise again isn’t too high as headwinds mount for the U.S. economy amid tightening credit conditions for businesses and households following the banking turmoil in March, which could tip the U.S. into recession later this year . As the economic outlook worsens, forward-looking traders will try to anticipate a big rate cut ahead of the Fed, putting downward pressure on U.S. Treasuries. Against this backdrop, it is only a matter of time before the 10-year Treasury yield hits an April 2023 low of 3.25%. The specter of a recession, coupled with an unresolved U.S. debt ceiling issue, could lead to increased safe-haven demand, so my bullish bias on gold remains unchanged for now.
Technically, while gold may head higher, after a strong rally over the past two months, the possibility of a near-term consolidation in gold cannot be ruled out, which means that gold may trade within a narrow range in the short term Shock. At present, the first support level of gold is at the psychological level of $2,000. If it falls below this bottom line, then gold may pull back to $1,975. On the upside, the first resistance is seen at $2,050. If gold breaks this resistance, it may test the year’s high again in the near future.
Gold prices retreated sharply on Friday after reaching new highs last week. We still prefer that gold prices will eventually rise to new record highs above $2070-75. With the bearish divergence still intensifying, the highs of $2,070-$2,075 are expected to remain a strong hurdle for further sideways consolidation for now.
First support is seen at $1969, then $1950/48, which includes the 55-day moving average, which we expect to cap the decline if reached. After the current range-bound phase, we believe gold will eventually rise to new all-time highs, underpinned by falling US real yields. A weekly closing price above $2,075 will mark a sharp breakthrough in gold prices and start a new round of upward movement, with the first core upward target at $2,330-2,360.