Gold outlook: Fed decision to dictate short-term moves in yellow metal

Gold will react mainly to the shifting odds of a December rate cut, which means that the September NFP report may further weigh on the yellow metal, analyst said

Gold Outlook: Weighed down by dimming Fed rate cut odds

Gold performance:

On November 20, spot gold swung between $4038 and $4110. At the time of writing this article, the shiny metal was trading at $4048, down by around 0.70 per cent for the day, as a strong US nonfarm payroll report (September) weighed on the metal. The MCX December contract at ₹122,292 was down 0.62 per cent.

 

Earlier, in the week ending November 14, the yellow metal closed with a weekly gain of 2 per cent at $4084, its first weekly gain after 3 straight weekly losses.

US data:

The US data deluge has begun after the US government reopened. The US September nonfarm payroll report released on November 20 showed that the US added 119000 jobs in September, versus the forecast of 50,000, while the two-month net job revision stood at -33000. Private payrolls increased by 97000 jobs, beating the forecast of 65000 jobs. Meanwhile, manufacturing jobs declined by 6000, the fifth straight decline. Unemployment rate ticked higher from 4.32 per cent to 4.44 per cent as labour force participation rate increased from 62.3 per cent to 62.4 per cent versus the estimate of 62.30 per cent. 

   

Average hourly earnings increased 0.2 per cent m-o-m versus the forecast of 0.3 per cent, though prior data was revised higher from 0.3 per cent to 0.4 per cent. Earnings were up 3.8 per cent y-o-y (forecast 3.7 per cent) as prior data was revised higher from 3.7 per cent to 3.8 per cent. Initial jobless claims (November 15) came in 220000, which sent the four-week moving average down from 227.25000 to 224.25000; however, continuing claims jumped from 1950000 to 1974000 in the week ending November 8. Philadelphia Fed business outlook (November) came in at -1.7 versus the estimate of 1. Existing home sales rose from 4.05 million in September to 4.10 million in October, which beat the forecast of 4.08 million.

US Dollar and yields:

The US dollar Index, at the time of writing this report, was hovering around 100.18, down 0.05 per cent for the day as notwithstanding an encouraging US employment report. 2-Year US yields at 3.54 per cent were down nearly 1 per cent, and so were 10-year yields at 4.09 per cent.

December Fed rate odds:

December Fed rate cut odds currently stand at 34 per cent, down sharply from nearly 90 per cent before the October 29 FOMC meeting.

ETF and COMEX inventory:

Total known global gold ETF holdings stood at 97.40 MOz as of November 19. Gold holdings, on track for second straight weekly increase, are up 17.56 per cent YTD, which amounts to a net inflow of 452 tons YTD.

 

As of November 20, eligible COMEX gold inventory slid to 17.51 MOz, the lowest since September 2 and down 22 per cent from the cycle high of 22.45Moz as seen on April 14.

More stimulus on the way:

Japanese PM Sanae Takaichi will unveil $112 billion economic stimulus package that is about 27 per cent more than what was pledged by the former PM Ishiba last year and is 2.6 per cent of the country’s GDP. The stimulus will aim at combating inflation, strategic spending and shore up defence. It is to be noted that the nation’s GDP contracted by 1.8 per cent on an annualised basis in Q3.

 

China is expected to announce new measures to support its struggling property market, which may otherwise destabilise its financial system. The measures may include providing new homebuyers with mortgage subsidies for the first time nationwide, raising income tax rebates for mortgage borrowers and lowering home transaction costs. Germany’s stimulus is expected to come into effect from mid-2026.

Geopolitics watch:

Japan-China diplomatic spat continues with China warning tourists and halting Japanese seafood imports. Concerns abound that China, in its bid to inflict pain on Japan, may cut off rare earth exports to Japan, as the latter completely relies on the former for rare earth supplies.

 

The Israeli military launched airstrikes on Gaza, killing 25 Palestinians in retaliation for an attack. Tensions continue to simmer making ceasefire look increasingly fragile, while more than 300 Palestinians have been killed since the US-backed ceasefire between Israel and Hamas came into effect on October 10.

FOMC minutes:

FOMC minutes of the October 29 meeting showed that policymakers were divided over a December rate cut, yet another factor that dims December rate cut odds.

Upcoming data:

Major US data to be released next week includes S&P PMIs (November prel.), University of Michigan consumer sentiment and inflation expectations (November final), retail sales advance (September), PPI (Sept.), Conference Board Consumer confidence (November), Pending home sales (Oct.), 3Q GDP, real personal spending (October) and PCE Price Index (October).

 

UK Chancellor Rachel Reeves will present the budget on November 26, which will be closely monitored by markets as it is a tightrope walk balancing fiscal credibility with growth. In addition, investors will also focus on European PMIs and Germany's 3Q final GDP.

Other than US data, a battery of Fed speakers will also entertain investors as Fed rate cut prospects will continue to shape markets.

 

The October NFP report of the US will be released along with the November NFP report on December 16; however, the October unemployment rate will not be released due to the lack of household survey data for October. October CPI report may not be released.

Gold outlook:

In the very short term, gold will react mainly to the shifting odds of a December rate cut, which means that the September NFP report may weigh further the yellow metal.

 

It is to be noted that recently, many Fed speakers have become vocal in their opposition to the December rate cut as inflation remains elevated.

 

The US Fed will have to make its December 10 monetary policy decision without the benefit of knowing the employment and inflation status of October, which means rate cut odds may remain suppressed unless some other influential factor crops up in the picture. Nonetheless, we expect that odds may slowly rise going ahead as ADP’s October and November preliminary reports portray a weakening job market.

 

China-Japan tensions and wobbly risk assets (despite encouraging earnings and guidance by Nvidia) may limit the downside.

The yellow metal is likely to test support around $4000/$3972, a breach of which will open the way to $3929. Resistance is at $4160/$4200. 

(Disclaimer: Praveen Singh is the head - currencies and commodities at Mirae Asset Sharekhan. Views expressed are his own.)