During the Asian session on Tuesday (February 7), spot gold fluctuated slightly and is currently trading at $1,871.75 per ounce. When concerns about the global economic slowdown linger, investors value the safe-haven appeal of gold. Low buying continued to support gold prices, but the U.S. dollar index rose to its highest level in nearly a month, making gold more expensive for buyers holding other currencies. U.S. bond yields are also rising, which may keep some investors away from gold, or limit the room for gold prices to rebound.
“Traders will look at gold as a safe-haven asset and buy it,” said Phillip Streible, chief market strategist at Blue Line Futures in New York.
Lingering fears of an economic slowdown are likely to keep gold demand solid this year, analysts said. In addition, the U.S. dollar index has a large short-term increase and is now approaching the resistance of the 55-day moving average. The short-term is also facing some callback pressure, which is expected to provide some opportunities for the short-term rebound of gold prices.
This trading day will usher in the speech of Federal Reserve Chairman Powell. Some analysts predict that after last week’s beautiful non-agricultural data, Powell may turn from a dovish attitude after the interest rate decision to a hawkish one. Investors need to focus on it.
In addition, U.S. President Joe Biden will deliver a State of the Union address, which investors will also need to pay attention to.
Fed’s Bostic: Rates may need to be raised higher than previously expected
The central bank may need to raise borrowing costs more than previously expected given the unexpectedly strong job growth in January, Atlanta Fed President Bostic said on Monday.
Unless the report turns out to be anomalous, “it could mean we have to do more,” Bostick said. “And I expect that to translate into higher interest rates than I’m currently forecasting.”
He said the Fed could also consider raising interest rates by 50 basis points, but that was not his base case forecast.
Bostic has previously said he expects the Fed will need to raise its benchmark interest rate range to 5% to 5.25% to make policy restrictive enough to push inflation back toward its 2% target. As of December, most of his colleagues agree. The current interest rate range is 4.5%-4.75%.
San Francisco Fed report: U.S. financial conditions may tighten further
U.S. stocks could fall further and Treasury yields could rise as the central bank continues its current round of rate hikes in the coming months, according to an analysis published Monday by the San Francisco Fed.
Financial conditions tightened markedly even before the central bank started raising interest rates last March to combat inflation at 40-year highs, as investors anticipated the Fed’s actions.
Assuming the Fed sticks to its December forecast of raising the policy rate to 5.1 percent by May and inflation falling to 3.1 percent by then, these policy tightening moves by the Fed would be on record, researchers at the San Francisco Fed wrote. Toughest round ever.
Analysis by Simon Kwan, a senior research adviser at the San Francisco Fed, and Louis Liu, a research associate, showed that while stock prices have historically tended to rise towards the end of Fed policy tightening cycles, this time may be different.
Based on how asset prices have performed in past tightening cycles, “equity prices are expected to decline further” while “bond markets tighten further,” they wrote. This is largely because, at the start of the cycle, despite rising inflation, policy was very accommodative and the fed funds rate was close to zero, creating historically very large negative “real interest rate differentials.”
“While a rapid tightening of financial conditions is expected to slow the economy relatively quickly, given the need to narrow large real interest rate differentials, the historical likelihood of an even tighter financial condition increases,” they wrote.
Treasury Secretary Yellen: No U.S. Recession When Unemployment Is At 53-Year Low
U.S. Treasury Secretary Janet Yellen said on Monday that she expects the U.S. economy to be on a path to avoid recession, with inflation falling sharply and the economy remaining strong, given the strength of the U.S. labor market.
Yellen said on ABC’s “Good Morning America,”“When you have 500,000 new jobs and the lowest unemployment rate in over 50 years, you don’t have a recession, and what I see is a path where inflation falls sharply and the economy remains strong.”
Inflation is still too high, Yellen said, but it has been falling for the past six months and will fall significantly in the future given the measures taken by the Biden administration, including moves to lower the cost of gasoline and prescription drugs.
Data released by the U.S. Labor Department on Friday showed that job growth accelerated sharply in January, with non-farm payrolls increasing by 517,000 and the unemployment rate falling to a 53-1/2-year low of 3.4%.
Yellen told the ABC that reducing inflation remains Biden’s top priority, but the U.S. economy is proving to be “strong and resilient.”
Three pieces of legislation, the Lower Inflation Act, the Chips and Science Act and a massive infrastructure bill, along with a price cap on Russian oil, would help push inflation down, she said.
Yellen called on Congress to raise the U.S. debt ceiling, warning that failure to do so would produce “economic and financial disaster.”
“While sometimes we don’t see until the last minute, Congress has always felt it was their responsibility to do it again.”
The U.S. government hit its $31.4 trillion debt ceiling last month, prompting the Treasury Department to warn that default may not be avoided after early June.
U.S. Republican House Speaker McCarthy and President Joe Biden held talks on raising the debt ceiling last week and agreed to meet again, but the impasse has rattled markets.
Goldman Sachs Cuts U.S. Recession Chance to 25% in Next 12 Months on Strong Labor Market
Goldman Sachs said on Monday it now sees a 25% chance of the U.S. entering a recession within the next 12 months, down from its previous forecast of 35%.
“Continued strength in the labor market and early signs of improvement in business surveys suggest that risks of a near-term downturn have significantly diminished,” the bank said in a research note.
Economists polled by Reuters in December put the chance of a recession in 2023 at 60%.
Dollar extends rally on strong data on Monday
On Monday, the U.S. dollar index continued last week’s gains, reaching as high as 103.76, a new high in nearly four weeks, and closing at 103.64, an increase of about 0.62%. Possibility of rate hikes to combat inflation.
John Doyle, vice president of operations and trading at Monex USA, said, “Friday’s NFP (non-farm payrolls) data consolidated the possibility of another 25 basis point rate hike and reduced the probability of an eventual rate cut at the end of the year, causing stocks to fall, the dollar surge,”
“Overall, the dollar’s decline since the end of November has been impressive. However, it now appears that this has been overdone,” Doyle said.
The strong rise of the US dollar has caused the price of gold to drop by nearly US$100 in the past few trading days. However, the US dollar index is currently suppressed by resistance near the 55-day moving average of 103.82, and it faces some short-term callback risks, which may provide some short-term rebound opportunities for gold prices. Of course, the medium- and long-term downward pressure on the U.S. dollar index has been significantly eased, and the medium-term downward pressure on gold prices is still relatively large.
U.S. Treasury yields hit a four-week high on Monday, with the Fed expected to raise interest rates above 5%
The yield on the 10-year U.S. Treasury note hit a four-week high on Monday after a blowout jobs number boosted expectations that the Federal Reserve’s rate hikes won’t end with a hard landing for the economy and that there could be more than one more rate hike from the Fed. Last Friday’s ISM non-manufacturing PMI data was also very strong.
“It’s been a big rally in the (ISM) that takes away some of the concerns about December weakness,” said Jim Vogel, senior rates strategist at FHN Financial in New York. Meanwhile, investors are eyeing the jobs report, expecting a “big improvement in January,” has “translated into the inflation data that we will see very soon”.
The yield on the 10-year Treasury note rose as high as 3.655% on Monday, the highest since Jan. 6 and up from a low of 3.333% on Thursday before the data. The two-year yield hit 4.468%, also the highest since Jan. 6.
The yield on the 10-year Treasury note has retreated from a 15-year high of 4.338% since Oct. 21 on expectations that Fed tightening will lead to a recession this year.
Traders ramped up bets on rate cuts in the second half of the year after Fed Chairman Jerome Powell appeared dismissive of easing financial conditions and cited progress in reducing inflation at the central bank’s meeting on Wednesday. At that time, the Fed raised interest rates by another 25 basis points.
But Friday’s data led to a repricing of those expectations. Traders of fed funds futures now see the rate above 5% in May before falling to 4.79% by December. On Thursday, traders had expected rates to peak at 4.88% in June before falling to 4.40% in December.
Powell is due to speak on Tuesday, and investors will be watching for any signs that he is taking a more hawkish outlook after Friday’s data.
Some banks are also recalibrating their Fed policy forecasts based on last week’s events.
“Chairman Powell did not hit back at the market’s pricing in near-term monetary policy, nor the recent easing of financial conditions. Despite Powell’s dovish tone, short-dated yields were on the upside following Friday’s unexpectedly strong labor market report. The week closed higher,” JPMorgan analysts said in a note: “As such, we have added an additional 25 basis points to our forecast and now see the fed funds target range peaking at 5-5.25% in May.”
The next major U.S. economic data that could influence Fed policy will be January consumer price data on Feb. 14.
Chief Economist Peel: BoE willing to do more on inflation if necessary
The Bank of England’s chief economist Peel said on Monday that the Bank of England is willing to do more to bring inflation back to target.The bank had said last week that interest rates were near their peak.
“I do have a high level of confidence (in getting inflation on target) because we know what we’re going to do. We’ve done a lot to get there and we’re prepared to do more if necessary to make sure we can Continuing to make that happen,” Peele said in an online question-and-answer session, “and I don’t think anyone has changed their minds, or lost confidence, or anything like that.”
UK headline inflation fell to 10.5% in December after hitting a 41-year high of 11.1% in October.
The Bank of England raised interest rates for the 10th time in a row last week, but dropped language that it was prepared to raise borrowing costs “robustly” if necessary.
Given the typical 18-month lag in the impact of rate hikes on the economy and the risk that rate hikes could push inflation too low, the BoE must “prevent itself from doing too much,” Peel said.
“We’re going to get to a point where these types of concerns are at the top of our minds,” he said, “but if you ask me where we are right now, I think we’re still more worried about the potential persistence of inflation.”
Asked when the BoE might cut rates, he said concerns about inflationary pressures in the labor market “may tilt us toward saying we haven’t reached a point where we can feel confident engaging in discussions about a turning point in interest rates.”
Earlier on Monday, the BoE’s other rate-setter, Catherine Mann, said she supported further increases in borrowing costs,And warned that pausing now could create a chaotic “policy disaster” if rates proved to need to rise again.
On the whole, there is callback pressure on the U.S. dollar in the short term, which is expected to provide some opportunities for gold prices to rebound and adjust. However, current market expectations have changed. The market has higher expectations for the Fed’s terminal interest rate and may maintain high interest rates for a longer period of time. The market’s expectations of a U.S. economic recession have also cooled, which will limit the room for a correction in the U.S. dollar and put further downward pressure on the gold price in the market outlook. Central banks in developed countries such as the European Central Bank and the Bank of England are also facing further pressure to raise interest rates, which will increase holdings. There is an opportunity cost of gold, which is not good for gold prices.
At 10:11 Beijing time, spot gold was at $1,871.75 an ounce.