On Tuesday (October 25), spot gold prices continued to fall. Although weak U.S. economic data sparked broader recession fears, inflation that was still running at a high level convinced investors that the Federal Reserve would not suspend interest rate hikes in the near future. The Fed doesn’t necessarily have to see more layoffs, but it does need to see wage growth drop.
At 20:14 Beijing time, spot gold fell 0.33% to US$1,644.06 per ounce; the main COMEX gold futures contract fell 0.36% to US$1,648.2 per ounce; the US dollar index rose 0.05% to 112.039.
U.S. business activity contracted for a fourth straight month in October, a S&P Global survey showed, the latest evidence the U.S. economy is weakening amid high inflation and rising interest rates. U.S. Treasury Secretary Yellen said “risks cannot be ruled out” when it comes to recession. However, as U.S. inflation is still running at a high level, the Fed is not expected to suspend interest rate hikes in the near future, and will raise interest rates by 75 basis points for the fourth consecutive time on November 2. Some economists say the Fed should not stop until inflation falls to about half its current level.
Unpredictable time for supply shock mitigation
In the United States, the overall CPI rose 8.2% year-on-year in September, and the core CPI rose 6.6% year-on-year. Inflation looks slightly better if you factor in the Fed’s preferred measure, core personal consumption expenditures (PCE), which rose 4.9% in August, down from a high of 5.4% in February. However, the market still expects the annualized core PCE in the United States to recover to 5.2% in September.
“The economy has had a huge supply shock and I’m sure the supply issue will be resolved, but it’s hard to predict when it will be,” Morningstar chief U.S. economist Preston Caldwell said.
The U.S. Energy Information Administration’s (EIA) Winter Fuel Outlook shows that the average U.S. household is likely to spend more on heating this winter. Households using natural gas will spend $931 between October and March, up 28 percent from last winter, while households using oil for heating will spend 27 percent more, bringing their bills to more than $2,300.
Most economists predict the Fed will cut interest rates by 50 basis points in December. By the end of 2022, the federal funds rate range will rise to 4.25%-4.50%, which is in line with the median forecast of the Fed’s “dot plot”. But even if Fed officials have begun to consider when they should slow the pace of rate hikes, it will take months for any changes in interest rate policy to take effect.
The strong dollar index pushed gold lower, but with the next Fed meeting in November approaching and the possibility of adjusting the pace of interest rate hikes in December, the dollar is expected to stabilize and gold may remain in a relatively narrow range.
GDP is expected to pick up in the third quarter, but the coming year is not optimistic
Looking ahead, U.S. gross domestic product (GDP) data due this Thursday (October 27) will be closely watched. It is expected that the annualized quarterly rate of US GDP in the third quarter will significantly increase to 2.4%, which is expected to temporarily reverse the contraction in the first two quarters.
The Fed has raised interest rates from near zero in March to between 3% and 3.25% today. If the central bank does what most market watchers expect, the ceiling on the federal funds rate is on the verge of hitting 4%, the highest level in 15 years.
Brett Ryan, senior U.S. economist at Deutsche Bank, said: “Fed officials have indicated that unless there is ‘clear and convincing’ evidence that inflation is slowing, there is no possibility of a pause in rate hikes. As the Fed continues to aggressively tighten to control persistent Soaring inflation, we expect the economy may start a mild recession in the third quarter of next year as real growth slips into negative territory and unemployment rises sharply.”
The U.S. Federal Reserve is willing to raise interest rates ahead of time to keep inflation down, with the goal of achieving real federal funds rate correction in early 2023.But doing so is not without cost, with the market expecting the U.S. economy to be headed for recession next year. Even if the Fed has yet to foresee a policy turning point in the short term, gold bears will curb the urge to aggressively build positions.
Must see sharp drop in wage growth
At the same time, the labor market continues to show strong strength. Unemployment is at 3.5%, about where it was before the coronavirus outbreak more than two years ago. U.S. initial jobless claims remain low despite reports of layoffs at big tech companies.
The Atlanta Fed’s Wage Growth Tracker shows income growth soaring from 3% in May 2021 to 6.7% in July 2022. However, wage growth has plateaued since the summer before falling to 6.3% in September. The number of job openings fell to 10 million in August from nearly 12 million in March, while the labor force participation rate for 25- to 54-year-olds rose this year.
“The labor market is the tightest in decades, and the Fed doesn’t necessarily have to see more layoffs, but it does need to see wage growth drop,” said Kara Murphy, chief investment officer at Kestra Investment Management.
The best-case scenario for the Fed is that more workers start looking for work, which, combined with fewer job openings, should lead to a return to normal wage growth. That would help keep inflation expectations around the Fed’s 2% target rather than run out of control.
There are signs that many of the things driving overall price increases will cool in the coming months, including semiconductor supply, trucking costs and home prices. Once those issues are resolved, price increases should slow and the Fed may not need to be as aggressive to dampen demand.
ACY Securities chief economist Clifford Bennett said,Gold is “relatively stable” above $1,600. If the selling pressure from sovereign funds subsides in the coming months, gold could see a sharp rise to $1,850-$2,200 in 2023.
Spot gold may drop to $1,627
On the hourly chart, the price of gold touched $1,637 and is likely to further test $1,627, which are the 61.8% and 80.9% Fibonacci retracement levels of the upward range of $1,617-$1,670, respectively. For gold to resume its uptrend, it will have to revisit $1,650 as soon as possible, which is the 38.2% Fibonacci retracement level of the aforementioned range.