 "gold price, gold share")
Gold: Slightly lower ahead of the US nonfarm payroll report
Performance:
Spot gold, buoyed by rate cut expectations as the US Fed concluded its monetary policy meet on July 31, extended its rally on the first day of the month; however, it came under selling pressure as wider markets fell. The yellow metal was changing hands at $2,440, down nearly 0.30 per cent when the MCX closed. Earlier, the metal rallied 1.55 per cent on July 31 as the Fed Chair Powell said that a rate cut will on the table if the Fed gets the desired data.
The MCX October gold contract was trading at Rs 69,997, up around 0.49 per cent.
Spot gold posted a notable gain of 5.2 per cent in July, the best monthly performance since March.
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FOMC outcome:
The US Federal Reserve, as expected kept the benchmark rate unchanged in the target range of 5.25 per cent-5.50 per cent for the eighth straight meeting as the FOMC cited risks to both the sides of its dual mandate of maximizing employment rate and keeping inflation rate around 2 per cent. The statement showed a slight deviation per se as earlier the Fed was focusing largely on high inflation risk.
The Fed Chair Powell, in his presser, said that the US economy was no longer getting overheated, and the job market was not that tight, but it was easing in a normalized manner. He added that the Fed may act in case the job market weakened at a faster pace. He talked about possibilities of multiple scenarios in which rate cuts could range from zero to multiple rate cuts. The US bonds rallied further in his presser, which led the yellow metal further higher.
US yields and the Dollar Index
Ten-year US bond yields fell for the sixth consecutive day on soft US data. The yields were at 3.98 per cent, down nearly 3 per cent on the day, at the time of the MCX closing. The two-year yields were down 2 per cent to 4.19 per cent as the yields slumped for the third straight day.
Ten and two-year yields declined 37 bps and 50 bps respectively in July.
US bond traders are presently fully pricing in 75 bps cuts this year.
The US Dollar Index at 104.42 up by 0.32 per cent on the day as the UK Pound and the Euro fell despite declining US yields.
Data and event round up
The Bank of Japan, somewhat unexpectedly, hiked its benchmark rate by 15 bps to 0.25 per cent and halved the quantum of the bonds to be purchased, which boosted the Yen further. The Japanese Yen, aided by interventions and rate hikes, rallied around 7 per cent in July.
US jobless claims data, released on Thursday, rose by 14,000 jobs to 249,000 jobs in the week ended July 27, which is the highest level in almost a year. US ISM manufacturing PMI (July) came in at 46.80 Vs the forecast of 48.80, which was the fourth straight contraction, and the sharpest contraction since November. Unit labor cost (Q2) and Employment Cost Index (Q2) increased less than expected; thus, boosting the multiple rate cut probability, which benefited the bonds.
On August 1, the Bank of England voted 5-4 to cut interest rates for the first time since early 2020 and signaled further rate cuts ahead.
China’s Caixin manufacturing PMI data released on July 31 showed that the private sector manufacturing unexpectedly contracted in July for the first time October.
Upcoming data: Focus on the US nonfarm payroll report and the ISM services
The US nonfarm payroll report (July) will be released today. As the June report was weak and the Fed is paying attention to possible unusual weakness in the job market, the job report is quite crucial for the yellow metal. Similarly, the ISM services data, due on August 5, is also key data. Weakness in these reports will bolster the rate cut notion as investors are concerned that so far the job market is concerned, the Fed is behind the curve. In that case a 50-bps rate cut in September is quite probable.
Outlook: Turning constructive
As the US economy shows telltale signs of weakness, particularly in the job market, traders are looking for deep rate cuts this year and the next. As the Swiss National Bank, Bank of Canada, the European Central bank, the Bank of England, etc. have already started slashing rates, the US Federal reserve is expected to follow the suit. The metal outlook is turning constructive with rising probability of deep rate cuts in the US.
However, weakness in the Chinese economy and the US economies are hurting the commodities severely. As gold is both a commodity and a currency, it is likely to be volatile and choppy ahead of the key US macroeconomic releases. Nonetheless, investors are likely to buy the dips to position ahead of the US nonfarm payroll report.
Support is at $2420 (MCX October contract Rs 69,400)/$2400 (Rs 68,900)/$2362 (Rs 67,700), whereas resistance is at $2462 (Rs 70,600) $2485 (Rs 71,287) /$2500 (Rs 71,700).
Disclaimer: Praveen Singh is Associate VP, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas, Views expressed are personal.
