U.S. inflation expectations fell to the lowest in more than two years in September as consumers became more optimistic about the economic outlook. Preliminary data from the University of Michigan showed that consumers expect inflation over the next year to be 3.1%, down from the 3.5% expected in August. %, which is the lowest value since early 2021. Respondents believed that the inflation rate in the next five to ten years would be 2.7%, the lowest since the end of 2020. Even so, the consumer confidence index fell to 67.7, lower than market expectations.
Strikes at three major U.S. automakers enter their third day. United Auto Workers President Sean Fein said he was unmoved by Stratis’ proposal for a 21% wage increase.
The U.S. government shutdown is approaching, and nearly ten important economic reports in October may have to be postponed, including non-agricultural data.
MARKET VIEWPOINTS
TD Securities previews Fed rate decision
The market generally expects the FOMC to suspend interest rate hikes for the second time in the remaining three meetings this year, keeping interest rates unchanged at 5.25%-5.50%. While the Fed may be done raising interest rates, Fed officials aren’t ready to close the door on further hikes just yet. Forward guidance is expected to maintain the possibility of further rate hikes before the end of the year, and Powell is expected to remain tight-lipped on the prospect of higher rates at a news conference. Powell may simply acknowledge the fact that despite recent progress against inflation, the fight is not over yet and the Fed is not even considering a rate cut. We also expect the FOMC to continue signaling via the dot plot that further rate hikes are more likely than no rate hikes before the end of the year. However, forecasts for another rate hike this year are likely to be very spread out due to personnel changes at the Fed.
1. OWe believe the median interest rate in 2023 will maintain guidance for further rate hikes before the end of the year. Forecasts for 2023 are likely to cluster between 5.375% and 5.625%, and will be split almost evenly between these two camps. If the median continues to point to one more rate hike, the market may push expectations for a November rate hike slightly higher from the current 8 basis points. Markets have now begun pricing in the possibility of a December rate hike, suggesting overall expectations for a rate hike in 2023 may be rising, not just for November.
2. The dot plot is expected to show that the most likely outcome in 2024 is three rate cuts (the June dot plot suggested four). Lowering expectations for an interest rate cut in 2024 will reinforce the message of “maintaining higher interest rates for longer.” Although the Fed will try to remain silent, if it lowers its expectations for an interest rate cut in 2024, it may trigger a hawkish reaction from the market.
3. Taking into account the above, it is very likely that the median interest rate will also be pushed higher in 2025, rising from 3.375% in June to 3.625%. Notably, the Fed will also debut its forecasts for 2026, which at the midpoint are expected to show further rate cuts as the economy likely reaches a plateau by then, approaching the midpoint of the committee’s longer-term forecast.
4. Discussion of future interest rate hikes: The Fed’s recent comments (such as Waller’s statement) indicate that although it cannot rule out the possibility of another interest rate hike, the Fed seems satisfied with the current progress. If Powell hints that further rate hikes may not be necessary, markets may react dovishly. However, any such hints would likely be accompanied by talk of “keeping rates higher for longer,” which would have a hawkish offsetting effect.
Bloomberg economist Anna Wong looks ahead to the Fed’s interest rate decision
0 Dot Chart: The median dot chart would show that the Fed has one more rate hike before the end of the year, but the likelihood of a rate hike is slim. The possibility of a UAW strike and a government shutdown will keep the Fed “cautious” and “patient” (terms used by several policymakers, including Fed Chairman Jerome Powell, when describing their approach to raising interest rates) vocabulary). Our base case is that the Fed will keep rates on hold for the remainder of the year. Economic uncertainty, the possible disruption from the UAW strike and the government shutdown could force the Fed to delay the rate hike predicted by the dot plot until 2024 or cancel it entirely.
2 Economic expectations: Although most economic data unexpectedly rose after the July meeting, the most important labor market indicator cooled more than expected. And even though gasoline prices pushed up headline inflation in August, the stickiest inflation, such as rents, slowed. In the latest economic forecast, officials are expected to lower U.S. core inflation in 2023 to 3.7% from 3.9%, but raise headline inflation to 3.4% from 3.2%. Forecasts for 2024 and 2025 should remain unchanged. Consumption was unexpectedly strong in the third quarter, which should push up officials’ median forecast for third-quarter GDP growth, with the upward revision partially offset in the fourth quarter. The latest economic forecasts are likely to show GDP growth of 1.5% in 2023 (1.0% in June), with little change to GDP expectations for 2024 and 2025. In addition, the unemployment rate may be revised down to 4.0% in 2023 (4.1% in June).
Preview after the September meeting: A lot can happen after the September meeting and before the November meeting. During this time, the Fed will also receive an inflation data and a jobs report, as well as third-quarter GDP data. GDP numbers are expected to remain strong, while September’s core CPI is expected to be dismal. Still, the UAW strike could push nonfarm payrolls into negative territory. The government may shut down in October, and the unemployment rate may rise to 4.0% by then.
Commerzbank
Gold tested the $1,900 mark again this week. This is because U.S. CPI slowed less than expected and the European Central Bank’s interest rate hikes also briefly weighed on gold. According to the market, the Federal Reserve does not rule out the possibility of raising interest rates again this year. We don’t think the Fed will make any statements this week, but Fed Chairman Powell will leave the door open for further rate hikes, which will continue to influence gold prices in the short term. However, as the monetary tightening that has been implemented is likely to lead to a slowdown in economic activity in the coming weeks, interest rate hike expectations should gradually weaken. Against this backdrop, gold prices are likely to recover sharply before the end of the year.
Analyst, ANZ Research
Gold remains resilient amid a strong U.S. dollar and U.S. Treasury yields, continuing to be bullish on the precious metal’s price action as demand conditions improve. We believe the strength of the U.S. dollar is likely to weaken in 2024, and while we think U.S. dollar appreciation is likely to continue through the end of the year, interest rate cuts and slower economic growth momentum strengthen our expectation that the U.S. dollar will resume its downward trajectory next year, which will be a positive factor for gold.
The recent trend of central bank gold purchases is expected to continue. Geopolitical tensions are driving a structural shift in central bank gold buying, and we expect demand to reach 750 tonnes in 2023, but not reach 2022’s record 1,080 tonnes. So far in 2023, investors have liquidated 130 tons of strategic investments (ETF gold holdings), and retail investments are also picking up. According to the World Gold Council (WGC) report, U.S. gold coin sales increased to 85,500 ounces in August, and China’s retail sales increased to 85,500 ounces in August. Investment is also gaining momentum.
When it comes to futures and options, net long positions are at six-month lows, but that could actually be a boon for prices going forward, with the reduction in speculative positioning limiting the scope for material selling.
In addition, we also expect investment liquidity to improve. As macroeconomic uncertainty increases and expectations for monetary easing in 2024 increase, gold’s investment appeal will increase. Sustained higher interest rates may increase corporate debt. pressure, which will have a negative impact on economic growth.
