COMEX Gold prices started the week on a positive note, amid concerns of an nearing “X date” for the US debt ceiling coupled with renewed fears on the banking sector.
The estimates for the US hitting the debt ceiling have been pushed to July, amid lower tax collections this season. US 5-year CDS rose to the highest since 2011.
The standoff between the White House and Republicans holds and the US Senate showed no signs of moving to avoid a looming debt-ceiling crisis, as Republicans rejected calls to raise the $31.4 trillion limit without conditions.
There were also reports that US bank regulators are weighing the prospect of downgrading their private assessments of First Republic Bank, a move that may curb the troubled firm’s access to Federal Reserve lending facilities.
However, gold pared early gains towards the second half of the week, amid signs of persistent inflation pressure.
Surprising housing data with a rise in home sales and house prices raised concerns about shelter inflation, which accounts for almost one-third of US CPI.
The latest economic data from the US also raised stagflation concerns with elevated inflation and a slowdown in GDP. US GDP rose at an annualized 1.1% in the first quarter of 2023, largely driven by an inventory drawdown.However, the core PCE prices, which measure consumer spending on goods and services, rose to 4.9% during the first quarter and at the quickest pace in a year.
The dollar index and US benchmark treasury yields edged higher as an unexpected uptick in consumer spending showed that more work is needed to be done and cemented expectations for a quarter-point rate hike for the May FOMC meeting.
Meanwhile, consumer spending growth also accelerated to 3.7%.
The Bank of Japan’s monetary policy provided another boost to the greenback after the Bank of Japan said it would maintain its ultra-loose monetary policy but announced a review, in its first meeting under new governor Kazuo Ueda.
Yen depreciated more than 1.5% against the dollar, as the central bank kept its 0.5% ceiling for 10-year government bond yields and maintained its short-term policy rate at minus 0.1%.
On the investment demand front, holdings at the SPDR gold trust ETF slightly rose and stood at 926.28 tonnes as of 27th April, compared with 923.68 tonnes in the previous week.
The coming week is also going to be a data-driven week, with the FOMC meeting and ECB in the spotlight. US Labour data and ISM PMI will also be in focus. US ISM Manufacturing PMI has been in contraction for the last five months.
Investors might cautiously await to see if the government data might mimic an unexpected expansion in the private data released during the previous week.
However, a major focus will be on the FOMC meeting. Markets have already priced in a 25 basis points rate hike, however, Powell’s press conference is going to be crucial to see if Fed is indicating a pivot or might deliver another quarter-point rate hike during the June meeting, amid elevated sticky inflation.
Swaps are now pricing in around 50 basis points rate cuts for the year, compared with almost 75 basis points cut seen in March.
We expect gold prices to ease a bit ahead of the FOMC, as the Fed might reiterate higher rates for longer and no rate cuts in 2023.
Having said that, any dovish tilt in comments might be an upside trigger for gold prices.
(The author is VP-Head Commodity Research, Kotak Securities Ltd)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)