The US 10-year yields have edged near 4.25%, approaching levels not witnessed since October 2022 and close to 15-year peak attained during the same period. This surge in yields increases the opportunity cost associated with holding the non-yielding gold, leading to reduced investment activity. Notably, the steeper increase in the long-term rates of the yield curve compared to shorter-term rates primarily stems from a stronger economy rather than the anticipation of further rate hikes.
US Retail sales outperformed expectations, rising by 0.7% month-on-month in July, highlighting resilient consumer spending despite higher prices and borrowing costs. Moreover, data on US manufacturing production, industrial output, and capacity utilization exceeded forecasts for the same month, propelling the dollar index toward the 103.5 mark. Concurrently, the release of US weekly jobless claims indicated a decline to 239K in the previous week, a historically robust figure that doesn’t significantly alter the narrative of potential further tightening by the Federal Reserve.
The FOMC meeting minutes contributed to the strengthening dollar trend. The meeting discussions revealed that most Federal Reserve officials held concerns about inflation’s failure to recede, implying a potential need for additional interest rate hikes. While a consensus around “upside risks” to inflation persisted, fissures in this consensus became more visible. Specifically, two Fed officials favored keeping rates unchanged or supported such a proposal instead of pursuing a rate hike. Notably, the minutes pointed to an anticipated economic slowdown and a likely increase in unemployment. However, it was noteworthy that staff economists retracted a prior projection that issues in the banking sector could result in a mild recession in the current year.
The weakening sentiment in China and diverging monetary policies also contributed to the strengthening dollar. Below-expectation economic indicators at the week’s start (industrial output, retail sales, and fixed asset investment for July) coupled with an ongoing property sector crisis in China amplified concerns about the nation’s economic trajectory. Even a surprise rate cut by the central bank failed to assuage market apprehensions.
Looking ahead to the upcoming week, the spotlight will be on flash manufacturing PMI figures from Western economies and the Jackson Hole Economic Symposium. The Jackson Hole Symposium, a significant annual event organized by the Federal Reserve Bank of Kansas City, brings together central bank leaders from around the world to discuss global economic matters. Comments made by these central bank leaders can wield a notable impact on global markets. Federal Reserve Chair Jerome Powell is scheduled to address the economic outlook on August 25th. Market participants will keenly observe this speech to discern the monetary policy outlook, particularly in light of the US economic resilience and the prevailing disinflationary trend.
Our anticipation is that gold prices might remain subdued in the upcoming week, tracking elevated yields and a stronger dollar, especially in anticipation of Powell’s speech.(The author is VP-Head Commodity Research, Kotak Securities Ltd)
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