 "Hawkish Fed pause weighing on Gold prices, may test Rs 70,300, Rs 68,700")
Gold – Tumbles on uncertainty over the Fed rate cuts
Performance
Gold tumbled on Thursday after three straight days of gain.
Investors cheered the possibility of swift rate cuts by the US Federal Reserve on softer than expected US CPI prints (May). Commodities including gold spiked sharply higher on the US inflation data. However, contrary to the expectations of investors, the US Federal Reserve, although, as expected, it kept the benchmark rate unchanged in 5.25-5.50 per cent range, struck a hawkish tone in its monetary policy decision delivered on June 12.
The Fed Chair Powell said that the Fed wants more good data to gain more confidence to enable it to start slashing interest rates. Its dot plot projected just one rate cut this year as compared to three cuts projected in March.
The hawkish pause of the US Fed is weighing on commodities markets.
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Spot gold was trading at $2302 at the time of the MCX closing, down nearly 1 per cent on the day. The MCX August contract was at Rs 71,135, down 1.16 per cent.
Data and event roundup
The much awaited US CPI data (May) fell short of expectations on every count as the headline inflation was steady M-o-M vs the forecast of a rise of 0.10 per cent, slowest gain in seven months; the core CPI inflation rose 0.20 per cent M-o-M vs the forecast of 0.30 per cent; the headline CPI inflation rose 3.3 per cent Y-o-Y as against the expectation of 3.40 per cent increase; while core CPI inflation rose 3.40 per cent, which fell short of the forecast of 3.50 per cent rise, and was the slowest gain in three years.
The Fed at its FOMC meeting, concluded on June 12, came out with its dot plot, which forecasts the unemployment rate remaining unchanged from March's 4 per cent, but it revised inflation projections higher as it raised median 2024 PCE inflation to 2.6 per cent from 2.4 per cent, and median core PCE to 2.80 per cent from 2.60 per cent in March.
Similarly, the next year's inflation projections have been revised higher to 2.3 per cent from 2.2 per cent. It sees an additional rate cut, four in total, in 2025, which will bring down the Fed fund rate to 4 per cent. Thus, the markets' hopes of multiple rate cuts this year have been belied, at least for now.
The US data released on Thursday also showed softer than expected PPI (May). PPI final demand (May) came in at -0.20 per cent M-o-M vs the forecast of 0.10 per cent; PPI ex food and energy was steady M-o-M vs the expectation of 0.30 per cent; PPI final demand Y-o-Y at 2.20 per cent fell short of expectation of 2.50 per cent; whereas PPI ex food and energy rose 2.20 per cent vs the prediction of 2.50 per cent. Initial jobless claims surged to 242K, sharply above the forecast of 225K. Even continuing claims topped the forecast.
Yields and the US Dollar Index
Notwithstanding the Fed's assessments and projections, the bond market is yet to react to the hawkish posturing of the Fed. The bond market is giving more credence to the US data than the Fed's projections and assessments. The reaction may be delayed.
The US bonds defied the hawkish Fed on Thursday as the yields slipped further to 4.245 per cent, the cycle low, at the time of MCX closing. The US Dollar Index at 105.20 was up 0.53 per cent.
The US bonds got a boost from an encouraging auction result of 30-year bonds, too.
ETF holdings
Total known global ETF holdings slipped on June 12 after eight consecutive days of net inflows.
Upcoming data
Today's US data releases include import price Index (May), University of Michigan sentiment (May) and University of Michigan inflation expectations.
Outlook
Although the US inflation data bolster the case for a rate cut, the Fed has chosen to be cautious. The US Central Bank wants to gain more confidence on inflation before it can begin rate cuts.
China pausing gold buying in May is another bearish factor for the metal. Spot gold may test the key support at $2,277 (Rs 70,300), a breach of which may precipitate losses. In that case, a decline to $2,225 (Rs 68,700) is not out of the question, though medium to long term outlook is constructive on heightened geopolitical concerns, rate cuts, central banks piling into gold and concerns about Chinese economy.
China is expected to start buying gold once again as the metal becomes cheaper.
Resistance is in $2,345-$2,350 zone (Rs 72,400-Rs 72,600).
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Disclaimer: Praveen Singh is associate vice president of fundamental currencies and commodities at Sharekhan by BNP Paribas. Views expressed are his own.
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Disclaimer: Praveen Singh is associate vice president of fundamental currencies and commodities at Sharekhan by BNP Paribas. Views expressed are his own.