Gold started July on a subdued note, trading near $1900 per ounce levels with the backdrop of the Fed’s hawkish hold in June. Prices gradually moved up during the month as investors stuck to bets of one final interest rate hike in July. The probability that the Fed will raise its benchmark rate by 25 basis points to a range of 5.25%-5.50% in July was above 90% for most of the month, according to Interest Rate Futures. International gold prices ended the month around 2.7% higher. Domestic prices moved up by around 2.9%. However, there was some volatility along the way.
The minutes from the Fed’s June 13-14 meeting revealed that a majority of Federal Reserve officials saw the need for further interest rate hikes in 2023, given the above-target inflation and labour market resilience. Next, the US Bureau of Labor Statistics published the private sector jobs data, which showed 209,000 jobs were added in June, below the market expectation of 225,000. May’s increase of 339,000 also got revised lower to 306,000. The weaker-than-expected rise in private sector jobs was positive, but the unemployment rate edged lower to 3.6% from 3.7% and the annual wage inflation stood unchanged at 4.4%, compared to analysts’ estimates of 4.2%, pointing to still tight labor market conditions. These events sharply pushed 10-year Treasury yields above the 4% threshold and weighed on gold prices, which traded in the early-$1900s.
After these short-lived setbacks, the precious metal moved up above the $1950 mark after the Consumer Price Index (CPI) for June was published. Inflation in the US declined to 3% on a yearly basis in June from 4% in May, slightly below the market expectation of 3.1%. Further, core CPI inflation, which excludes volatile food and energy prices, dropped to 4.8% from 5.3%. On a monthly basis, the CPI, and the Core CPI both rose 0.2%, and these figures fell short of analysts’ estimates. The data eased pressure on the US central bank for additional rate hikes. In response, Treasury yields retreated to 3.85% levels, and the Dollar Index fell below the key 100 mark.
Later in the month, S&P Global said its flash US Composite PMI index, which tracks manufacturing and service sectors, fell to 52.0 from 53.2 in June. The softening economic conditions further supported market’s view that July should be the last hike of this cycle.
At its July meeting, the American central bank raised interest rates to a 22-year high. But despite this seemingly hawkish move, gold markets firmed up to $1975 per ounce levels given that a) the 25-basis point move was largely priced in and b) the meeting was perceived as less hawkish than the one in June where Chairman Powell alluded to 2 more rate hikes in 2023. This is evident from interest rate futures which post the FOMC meeting continue to see rates peaking at this level.While the disinflation momentum is positive, a large part of it is driven by base effects which could ease going forward, making it trickier to materially bring inflation down from these levels. If the Fed decides to tighten further, we could see gold prices move lower from here, the authors said.
