COMEX Gold prices started the week on a positive note, as weak US PMIs raised the odds of a Fed pause in the June FOMC meeting. The US ISM Services PMI showed that the service sector nearly stalled in May as business activity and orders eased, while ISM prices paid slid to near a three-year low.
Barring a contraction in December 2022, these are the lowest figures since June 2020. ISM Manufacturing PMI, on the other hand, has been in contraction for the last seven months. Hawkish comments from the ECB president further weighed on the greenback, aiding bullion.
ECB President Christine Lagarde acknowledged “signs of moderation” in core inflation in the eurozone but reaffirmed it was too early to call a peak in that key gauge of price growth, increasing expectations for more interest rate increases from the ECB this month and the next.
The yellow metal pared earlier gains and plunged on Wednesday after the Bank of Canada surprised markets with another rate hike, following a similar move from the Reserve Bank of Australia on Tuesday.
Bank of Canada resumed rate hikes after five months and hiked by 25 basis points in June to 4.75%, the highest since 2001. Having paused in April, the Reserve Bank of Australia hiked another 25 basis points in June, citing increased upside inflation risks and that core inflation was not falling more quickly.
Both the central banks hiked rates after pausing previously and warned that further tightening may be required to ensure that inflation returns to target.
Unexpected rate hikes from the Bank of Canada and Bank of Australia increased the conviction that Fed might also be forced to hike rates in the future if the core inflation does not ease significantly. The US swaps curve was briefly fully priced in a 25 bps rate hike by the Fed’s July policy meeting and fewer cuts for 2023, weighing down on gold prices.However, gold prices reversed earlier losses and edged higher on Thursday, after the US weekly jobless claims jumped to 261K during the week ended 2nd June, to the highest since October 2021, and above market forecasts of 235K. This marks a third consecutive week of increases in initial jobless claims, a
sign that the labour market might be cooling.
Markets are now pricing in a 76% probability that the Fed will leave interest rates unchanged at the June FOMC meeting, according to the CME FedWatch tool. However, the chance of an additional 25-basis-point rate increase in July has risen to nearly 52%, up from just 10% a month ago.
Despite a decline in the greenback, US treasury yields were mostly higher for the week, limiting the gains in non-yielding bullions.
Meanwhile, China increased its gold reserves for a seventh straight month, signaling ongoing strong demand for the precious metal from the world’s central banks.
China raised its gold holdings by about 16 tonnes to 2,092 tonnes in May, according to data from the PBoC. Central bank buying has contributed to more than a quarter of the global gold demand in 2022, even though the momentum has slowed in Q1 2023.
A slew of major economic events are scheduled for the coming week, including monetary policy meetings from the Fed, ECB, and Bank of Japan. US CPI data and Retail sales are also going to be crucial.
While the ECB is expected to hike rates by another quarter point, the Bank of Japan might maintain the status quo. The Federal Reserve might go for a pause, but a June pause is no guarantee that the Fed will stop hiking rates.
The US Fed chair Jerome Powell might sound hawkish and reiterate the data-dependent approach, raising the prospects of further hikes in the future if inflation fails to ease. US headline CPI is expected to ease sharply in May, while core CPI might stay elevated. Markets are going to be extremely data-sensitive.
(The author is VP-Head Commodity Research, Kotak Securities Ltd)
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