Gold Prices Stagnate As Market Awaits Key US Inflation Data

Economic

Commodity

Summary:

Gold prices stalled Thursday, after touching a two-week low in the previous session. Investors eye U.S. inflation data for signs of cooling that could spur the Federal Reserve to slash interest rates.

Gold prices stalled Thursday, after touching a two-week low in the previous session. Investors eye US inflation data for signs of cooling that could spur the Federal Reserve to slash interest rates.

It last stood firm at $2,299.55 per ounce as of 0255 GMT, following a drop in the previous session to its weakest since June 10. US gold futures fell 0.1 per cent to $2,310.20.

The dollar was near an eight-week high, making gold more expensive for holders of other currencies, while benchmark 10-year yields also held firm.

"The ascent by the US dollar accompanied by rising bond yields have left the gold price swimming against the tide," said Tim Waterer, chief market analyst at KCM Trade.

Fed Governor Michelle Bowman said Wednesday she still believes inflation will continue to ease with policy rate held steady, but added that lower interest rates would be "eventually" appropriate if inflation trends toward the 2 per cent target.

Key economic data due this week includes the US first-quarter gross domestic product estimates are due at 12:30 GMT and personal consumption expenditures (PCE) inflation data on Friday.

"If the core PCE print leaves financial markets pessimistic about when that first Fed interest rate cut may occur, gold could slip back towards $2,270 level," Waterer added.

Though gold is usually considered a hedge against inflation, higher interest rates increase the opportunity cost of holding the non-yielding asset.

The tension was underlined in a note from BMI analysts recently: "Gold prices remain tangled in a tug of war between a less dovish Fed and high levels of geopolitical tension."

"The main driver of easing gold prices in the longer term will be greater risk-on sentiment as the global economy recovers in the later part of the decade."

Other precious metals moved lower, with spot silver down 0.1 per cent at $28.74. Platinum eased 0.3 per cent to $1,007.33 while palladium gained 0.2 per cent to $930.39.

With the coming critical data related to the economy, gold price will be highly sensitive to deviations in both inflation expectations and Federal Reserve policy outlooks. Investors are keenly watching for these developments to track what the future holds for gold and other metals together.

Source:wionnews

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Samantha Luan

Economic

May’s higher-than-expected inflation figures prompted a widespread gloom that the Reserve Bank of Australia would have to increase interest rates again – but there is narrow cause for hope for the country’s strained mortgage holders.

The return of a headline consumer price index with a four in front of it for the first time since November – when the RBA last raised the cash rate – certainly stirred markets, the media and those in Canberra.

There is now a better than one-in-three chance of a 14th rate rise when the bank’s board meets on 5-6 August, investors bet. Those hoping for certain relief in the form of a rate cut will have to peer well over the horizon towards November 2025.

An early federal election called on the premise of falling mortgage costs, in other words, seems ruled out for now.

In Sydney on Thursday night, the new RBA deputy governor, Andrew Hauser, will be pressed at the Citi A50 Australian Economic Forum over what he makes of the May inflation figures and whether the central bank board will lock in a rate increase when it next meets on 5-6 August. (Spoiler: he will do his best to not rule anything in or out.)

To the cause for hope. Excitable punters and headline writers aside, the reality is the RBA has said all along it would be following the data. When it comes to inflation, the governor, Michele Bullock, has said she pays attention to the quarterly numbers and those won’t land until 31 July.

What we do know is that the central bank forecasts for the June quarter already anticipate some acceleration in annual headline inflation from 3.6% in the first three months of 2024 to 3.8% in the April–June period.

Taking into account we had 3.6% in April and 4% for May, technically we are still on that 3.8% course.

The inflation bulls, for now at least, have grounds to claim validation. The trimmed mean inflation measure that the RBA generally cares most about did indeed tick up to 4.4% in May from 4.1% in April – hardly the trajectory to get back to a 2-3% target.

The NAB promptly became the most pessimistic of the big four banks, pushing back their expectations for a rate cut from November this year until May 2025 – the last possible month the next federal election could take place.

“The mix of slow growth and gradual progress on inflation reflects the RBA’s decision to embrace a ‘lower for longer’ approach – a lower rate peak compared to other advanced economies, resulting in a longer period at that peak,” Alan Oster, NAB’s chief economist, said in a note.

“It is possible the board will change course and raise rates at its August meeting, especially if the [June quarter] print exceeds expectations, but with the labour market easing we don’t believe their hand will be forced.”

ANZ moved a fortnight ago to predict the first cut wouldn’t be until February, while the Commonwealth Bank and Westpac are sticking for now with their November 2024 rate cut calls.

Luci Ellis, formerly the RBA’s chief economist who took over as Westpac’s top economist just before the last rate rise, said that her bank “always” had its predictions under review.

Ellis sees no need to shift Westpac’s forecasts just yet – not least because her team correctly picked the 4% May inflation result, compared with the market’s consensus view of 3.8%.

What is key, though, is “whether or not the RBA [was] surprised by the number”, she said, adding that Hauser’s response to questions tonight may be revealing.

And as Westpac noted on Thursday, “the monthly indicator only includes price updates for around 60% of the inflation basket and should be interpreted with caution”.

John Hawkins, a senior lecturer at the University of Canberra and formerly of both the Treasury and the RBA, also thinks people may be reading too much into the May data.

“The CPI actually fell slightly in the month,” Hawkins said. “The annual rate only jumped as there was a big fall last May” when the rate fell to 5.6% from April’s 6.8% pace.

Unless month-on-month prices rise by more than 0.6% in the current month, the annual percentage growth should return to a decline, he said. A 0.3% rise, for instance, would translate into a 3.7% quarterly pace or less than the RBA expects.

“I don’t think [Wednesday’s 4%] number will force the [RBA] to increase rates,” Hawkins said. “But it won’t do much to ease their concerns that inflation is not coming down that rapidly.”

“The path to an interest rate cut remains narrow but it is still there.”

A path, then, and not yet a gangplank.

Source:The Guardian

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Warren Takunda

Economic

Japanese retail sales rose 3.0% on year in May, above the consensus call of a 2.0% rise, with the pace of increase accelerating from a downwardly revised 2.0% gain in April, thanks to continued solid department store sales and a smaller drop in vehicle sales, data released Thursday by the Ministry of Economy, Trade and Industry showed.

Strong inbound spending and high demand for luxury brand goods continued to propel department store sales, which also saw higher temperatures boosting sales of seasonal goods. Resumed vehicle production in March after two months of suspension over a safety scandal led to a smaller decline in auto sales.

Retail sales have been above year-earlier levels for a 27th consecutive month, but the pace of increase has slowed from the recent peak of a 7.3% rise in February 2023, which is the highest since the 8.3% increase in May 2021. High costs for daily necessities are hurting consumer sentiment and real wages have been falling for two years.

On the month, retail sales jumped a seasonally adjusted 1.7% on solid department store sales, a rebound in auto sales and higher fuel prices, after rebounding 0.8% (revised down from a 1.2% gain) in April and falling 1.2% in March. It was also stronger than the median forecast of a 0.7% increase.

The METI upgraded its assessment for the first time in 15 months, saying retail sales are “on a gradual uptrend.” In the previous five months, it said sales were “taking one step forward and one step back.” The three-month moving average in seasonally adjusted retail sales rose 0.4% on the month in May for the fourth straight monthly gain after rising 0.5% in April.

Details from the METI’s Current Survey of Commerce:

* Sales of automobiles fell 3.3% on year in May but the pace of decline eased from decreases of 10.6% in April, 15.4% in March and 4.0% in January, which was the first drop in 20 months. Sales of machinery and equipment (largely consumer electronics) rose 5.3% on higher demand for smartphones, marking the 11th straight increase after rising 8.0% in April, when hot weather led sales of air conditioners.

* Sales of food and beverages, a category which has the largest share in retail sales, posted their 20th straight rise, up 1.0%, after rising 1.5% the previous month.

* General merchandise sales at department stores and supermarkets marked the 27th straight year-over-year gain, up 5.4%, after rising 2.1%. The pace of increase has slowed from 6.2% in March and 8.3% in February. Sales of apparel and accessories edged down 0.3% for a sixth straight drop after falling 1.0% in the previous month. Temperatures were high but there were more rainy days in the latter half of May, dampening sales of summer clothing at some stores.

* Sales of fuels rose 4.5% for the seventh straight year-on-year increase after rising 4.7%, reflecting higher gasoline prices.

* Demand for medicine and cosmetics remained solid, up 5.1%, after a 6.3% gain in the prior month.

Department Store Sales Remain Solid, Led by Inbound Demand

Industry data released this week showed department store sales marked the 27th straight year-over-year rise in May, up 14.4% at ¥469.2 billion, following increases of 8.9% in April, 9.9% in March, 14.0% in February and 7.1% in January. Sales last month were also up 8.9% from the pre-pandemic May 2019.

The Japan Department Stores Association said strong inbound spending as well as high demand for luxury brands, art and jewelry continued to lead overall sales. Higher temperatures propped up sales of summer clothing and other seasonal goods including sunglasses and folding fans, it said. Family and food events for the Golden Week holidays in early May and Mothers’ Day also helped boost sales.

Spending by foreign visitors surged 231.2% on the year to a fresh record high of ¥71.8 billion, beating the previous record of ¥59.9 billion hit in April. It was 132.4% above the level seen in May 2019, surpassing the pre-pandemic levels for the 11th straight month. There were more visitors from China due to its Labor Day holidays from May 1 to May 5.

Source: MaceNews

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Forex

Economic

Political

France in political turmoil

President Macron's decision to call a snap legislative vote hot on the heels of the European elections came as a complete shock not only in France but also across Europe, not to mention for financial markets. What is widely perceived as an attempt by Macron to reassert his authority in the French parliament after his party lost its majority at the previous election in 2022, the move appears to have backfired.

Macron was probably hoping that the mere threat of Marine Le Pen's National Rally or Rassemblement National (RN) party coming into power after it won the most French seats in the European Parliament would have been a wake-up call for other parties, as well as the French public, to unite against the far right. But that didn't happen.

With only a few days to go until the first round of voting on June 30, the Ensemble coalition that is led by Macron's Renaissance party is a distant third in the opinion polls, overtaken by the newly formed alliance of left-wing parties called the New Popular Front (Nouveau Front Populaire – NFP). Meanwhile, RN has widened its lead, with most polls putting it ahead with at least 35% of the vote.

Doubts about a far-right majority

However, that may not necessarily translate to enough seats for RN to obtain an absolute majority in the 577-member National Assembly where 289 seats are required to control the legislative agenda in France's lower house. This then raises a host of possibilities as to who could form a government.

Talks between RN and an even more hardline far-right party, Reconquete, which belongs to Le Pen's rival, Eric Zemmour, broke down soon after the announcement of the snap elections. Since then, RN's 28-year-old leader, Jordan Bardella, has signalled he is not interested in sharing power with other parties and has set the goal of winning an absolute majority.

Going mainstream

This can be seen as being both a positive and negative move. RN is clearly trying to appeal to mainstream voters to secure the majority it needs and in doing so, it has had to tone down some of its more controversial ideas. This is good news for the markets as it reduces the risk of a Liz Truss-style debt crisis and a confrontational relationship with the European Union.

RN's likely candidate for the post of finance minister has said the party would abide by the EU's fiscal rules, while Bardella appears to have rowed back on a pledge to undo Macron's pension reforms, which raised the retirement age to 64. The party's softened stance on many of its radical policies helped to calm investors' fears, with the yield spread between French and German 10-year bonds declining somewhat from the post-European election spike. Is France Headed for Political Stalemate and How Bad is this for Euro?_1

Is France Headed for Political Stalemate and How Bad is this for Euro?_1

The euro has also been steadier but remains within its short-term downward trajectory amid the uncertainty about the outcome of the elections. If an RN majority was more certain, the euro might be under less pressure right now as Le Pen and Bardella seem to be taking the party in a similar direction as Italy's Giorgia Meloni has done with her far-right Brothers of Italy party when she won the country's election.

Is the left a bigger threat?

If RN wins the most seats but falls short of a majority, it's still possible it would try to form some sort of a coalition with other parties, potentially with the right-wing Les Republicains, despite ruling it out for now.

The bigger fear is if the left-wing NFP comes a close second and manages to strike a deal with other smaller parties. Its policies include increasing public sector pay by 10%, lowering the retirement age to 62 and boosting healthcare and education. Although it plans to finance these by hiking taxes, it's questionable if the amount raised would cover the planned 150 billion euros in spending. Is France Headed for Political Stalemate and How Bad is this for Euro?_2

Is France Headed for Political Stalemate and How Bad is this for Euro?_2

France already has a very high debt level of more than 100% of GDP and ran a budget deficit of 5.5% in 2023, in excess of the EU's 3% limit. Any new government that triggers alarm bells about higher spending would likely spark another panic in the markets, sending French yields sharply higher and stocks lower. France's leading stock index, the CAC 40, shed more than 7% as the political turmoil unfolded before rebounding somewhat. Is France Headed for Political Stalemate and How Bad is this for Euro?_3

Is France Headed for Political Stalemate and How Bad is this for Euro?_3

Can Macron's party hold onto power?

A less disastrous scenario for the markets is if Macron's Ensemble coalition were to agree to a pact with the NFP simply to keep out the far right and since this would be its only option of being in government given Macron's plummeting approval ratings. An alliance between the left and centrists parties would probably produce a more moderate government. But even if such a coalition can be agreed, it might not last long or struggle to pass legislation.

In the event of a hung parliament, the President can play a role in pushing parties to reach a deal. The President can also exercise his influence by picking the next prime minister, especially when there's no clear winner and so the post does not necessarily go to someone from the largest party. However, with so many fractures across France's political spectrum, it's hard to see parties putting their differences aside for the sake of avoiding political instability.

Political paralysis

Under the French constitution, new parliamentary elections cannot take place for another year after the last one. So, if no parties are able to form a government, there would likely be political paralysis for at least a whole year or until Macron's term expires in 2027. If push comes to shove, Macron may decide to stand down before then, even though he has said he would not do so.

For currencies and financial markets in general, there is nothing more dreaded than uncertainty, so the prospect of a prolonged period of uncertainty in the Eurozone's second largest economy does not bode well for the euro. Making matters worse are concerns about the rise of far right parties in other European countries such as Germany where the ruling coalition is hanging by a thread.

Euro bears eye dollar parity

Against the US dollar, the single currency has already taken quite a tumble, slipping from the $1.0900 level to lows of around $1.0670. With the final results of the election not due until after the second round on July 7, the euro could continue drifting downwards, possibly towards the April low of $1.0599. Is France Headed for Political Stalemate and How Bad is this for Euro?_4

Is France Headed for Political Stalemate and How Bad is this for Euro?_4

The heightened political risks that have rekindled fears of a fresh debt crisis are already weighing on business sentiment, endangering the Eurozone's feeble economic recovery. Any sustained deterioration in business confidence could add to the euro's woes, as the European Central Bank might be more inclined to cut interest rates aggressively.

Whilst steeper rate cuts would be positive for risk assets, it would be bearish for the euro. In the worst case scenario where an extreme right or extreme left party takes power with an agenda of unfunded spending, or even a messy situation where the ruling coalition is unable to ‘cohabit' with President Macron, the euro could face the prospect of parity again with the dollar.

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Warren Takunda

Central Bank

Economic

The Australian Dollar has rallied against all its G10 peers amidst a surge in Australian bond yields, which indicates markets are preparing for higher central bank policy rates.

This is after Australia's monthly inflation indicator rose for a third consecutive month at 4.0% year-on-year in May, confirming price pressures are heating up once more. Cash futures suggest that the probability of a hike by the RBA's September meeting has risen to nearly 60% from less than 15% in the day preceding the inflation report.

The 'trimmed mean' measure of core inflation hit 4.4%, jumping from 4.1%, and underlining the relatively broad-based nature of the surprise increase. This is a particularly important reading as RBA keeps a close eye on this figure which gives a better understanding of genuine domestic inflationary developments.

"Australian price growth accelerated to its fastest in six months in May, knocking markets off balance and raising the likelihood of another rate hike this year," says Karl Schamotta, Chief Market Strategist at Corpay.

A concern for the RBA is that Australians earning less than A$150K are set to benefit from changes to the stage-three tax cuts package from July, which can further stoke demand in the economy. Australian Dollar: Bracing for a Hike_1

Above: The yield on Australia's ten-year bond saw its biggest daily rise since May 2023.

With the RBA potentially raising interest rates again, analysts say the Aussie Dollar can remain supported.

"With the RBA expected to be the last to ease financial conditions among its peers, AUD’s resilience continues to show with a solid floor above the 0.65 level versus USD, targeting the 0.68-0.69 area in the pair," says a note from Citi. Strategists at the bank are positioned for an ongoing rebound in the AUD.

However, if the RBA opts to push back on interest rate hike expectations and plays down the recent trends in inflation, the Aussie could give back some of its recent gains.

"In our view, the RBA is unlikely to actually follow through on another rate hike. For one thing, the economy is just barely muddling along, meaning demand should soon start to fall short of supply. For another, inflationary pressures coming out of the labour market are set to cool further," says Marcel Thieliant, Head of Asia-Pacific at Capital Economics.

Capital Economics nevertheless pushes back its forecast for the first RBA rate hike from Q1 to Q2 next year.

This would be in keeping with a consensus view that the RBA will be amongst the last central banks to cut interest rates. This can provide AUD with ongoing support via the interest rate expectations channel.

Source: Poundsterlinglive

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Cohen

Economic

Central Bank

In most previous ECB cutting cycles, the signals to cut from the real economy and inflation rate were clear. That was not the case at the June meeting.

Recent inflation data has continued to come in hotter than the ECB expected. It could be even argued that — in the absence of the forward guidance ahead of the June meeting — the ECB may not have cut interest rates.

It is of course impossible to know if inflation will now slowly converge to a 2 per cent target or if it will remain persistently above target for a prolonged period of time. As ever, things will only become clear in hindsight.

The ECB is relying on its projection to cut rates. This was one of the major justifications at the press conference by Christine Lagarde. Underlying this forecast are two main assumptions: a strong rebound in labour productivity, and a rapid decline in pay per employee. Reality continues to challenge the former assumption. Labour productivity is still shrinking, albeit at a smaller pace. And surveys don’t suggest the rise in labour productivity embedded in the ECB forecasts is coming. The forecast of much lower pay per employee is based on the ECB wage tracker and Indeed wage trackers. But the former can be revised.

Importantly, German metalworkers’ union IG Metall recently announced a 7 per cent wage demand, versus 7–8 per cent in the previous year. Other German unions tend to follow IG Metall in their wage demands. Given the significant labour shortages in Germany at the moment and still historically low unemployment, there is a significant risk of another strong pay settlement. This means that Unions have more bargaining power than in the past. There’s a fight ahead, and it isn’t at all clear that future pay settlements will be in line with the ECB’s forecast assumptions — they could be a lot higher.

There is a historical precedent to the ECB both hiking and easing too early. Most market participants will be familiar with the premature 2011 hike, following the global financial crisis. But fewer will recall April 1999 — when the ECB cut the deposit rate by 25 bps, only to raise it again in November as an acceleration in the economy led to stronger inflation than expected.

Are we in for a repeat of 1999? I conducted an event study to look at the data around the first previous ECB cuts, relative to today. Real activity data looks like April 1999, but services price surveys from the purchasing managers’ index (a proxy for inflation data) continue to decline, unlike in April 1999. But the Employment PMI looks similar to April 1999. Clearly, the latest PMIs have declined as a result of a hit to confidence from French political risks. But such effects tend to be shortlived. Real wage growth and falling energy retail prices will support the continued economic rebound. Things look more like April 1999 than is comfortable.

Any inflation pressures, especially in the services sector, will be exacerbated by the 2024 Olympics in France, the Euro 2024 in Germany and a healthy dose of Taylor Swift concerts. Clearly, services price rises in response to these events should be treated as temporary. But it is impossible to separate temporary from structural inflation effects in real time. The ECB will feel it needs to react.

On the supply chain side, container prices from Shanghai to Rotterdam have risen significantly. Yes, they are still far away from the levels seen in 2021, but the risk that goods prices start rising again is clearly present.

If the ECB has eased policy too early, when will we know? Should momentum in services inflation remain as strong as it has been in the last three months, it should take just three to four months to see if things are on a different path from the ECB’s projection.

What could the ECB do if services inflation ends up significantly more persistent than expected? The most likely outcome is a delay in the cutting cycle. Rather than cutting every quarter, the ECB may have to keep rates higher for longer. The ECB has pivoted from pure data dependence to greater reliance on the forecast. But persistently stronger than expected services inflation could challenge this approach and push the GC to put more emphasis on backward looking data again. This means that the bar for further cuts could rise significantly.

Overall, the risk that the ECB has cut prematurely isn’t small, taking into account the very strong wage and services inflation pressure seen in the Euro Area. It could be a hot, sticky summer in Frankfurt.

Source:Financial Times

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Alex

Economic

Commodity

Oil prices dipped on Thursday as a surprise build in US stockpiles fuelled fears about slow demand from the world's top oil consumer, though declines were capped by worry a potential expansion of the Gaza war may disrupt Middle East supply.

Brent crude oil futures fell 28c, or 0.3%, to $84.97 a barrel by 3.10am GMT. US West Texas Intermediate crude futures dropped 31c, or 0.4%, to $80.59 a barrel.

Both benchmarks had settled slightly higher on Wednesday.

“An expected increase in US inventories of crude oil and [petrol] are weighing on the market due to fears of weakening demand,” said Tsuyoshi Ueno, senior economist at NLI Research Institute.

“But the market is in a tug-of-war situation, underpinned by the prospect that an escalation in the battle between Israel and Hezbollah may hinder supply,” he said.

The US Energy Information Administration (EIA) reported a 3.6-million barrel jump in the country's crude oil stocks last week, surprising analysts polled by Reuters who had expected a 2.9-million barrel drawdown.

US petrol stocks also rose by 2.7-million barrels, compared with analysts’ expectations for a 1-million barrel draw.

Product supplied for motor petrol, a proxy for demand, fell by about 417,000 barrels a day last week, to 8.97-million barrels a day. The four-week average for demand is about 2% under last year’s levels.

“We believe the market’s upside is limited by weak US [petrol] demand despite the peak summer driving season kicking in,” said Emril Jamil, a senior analyst at LSEG Oil Research.

Petrol margins, reflected by the crack spread between petrol to Brent and WTI, have trended lower after peaking in March at the $30s a barrel range, Jamil said.

“This weakness is further compounded by sluggish diesel demand both in Europe and the US, with margins falling since last August,” he said.

Meanwhile, worries of the Gaza war spreading to Lebanon limited price declines.

In the Middle East, cross-border strains between Israel and Lebanon’s Hezbollah have been escalating in recent weeks, stoking fears of an all-out Israel-Hezbollah war that could draw in other regional powers, including major oil producer Iran.

Turkish President Tayyip Erdogan said his country stood in solidarity with Lebanon and called on regional countries’ support.

Israeli forces pounded several areas across Gaza on Wednesday, and residents reported fierce fighting overnight in Rafah in the south of the Palestinian enclave.