Gold traded with a firm undertone for most of the past week
Gold traded with a firm undertone for most of the past week, at one point climbing a few dollars above $1,780 and reaching its highest level since mid-August. The continued strength owed largely to another round of softer-than-expected US price data, which markets again interpreted as suggesting a long-awaited pullback in inflation. In turn, several Federal Reserve officials indicated potential for smaller rate hikes. In the week to Thursday’s close, gold firmed 0.3%, leaving it -3.8% this year (spot ref.: $1,760).
Last week it was US October CPI coming in at 7.7% y/y versus expectations for 8.0% y/y and down from 8.2% y/y in September that sent gold off to the races. This week it was US October PPI that kept the environment for gold positive: the 8.0% y/y headline number was softer than the 8.3% y/y consensus expectation and the 8.4% y/y recorded in September. The core PPI numbers told a similar story: flat m/m and down to 6.7% y/y vs. 7.2% y/y in September. Although CPI and PPI measure different things, consumer and producer prices, respectively, their similar messages on prices buoyed risk assets.
While several Fed officials sounded inclined to dial back the pace of rate hikes from the 75bp moves delivered in June, July, September and November, pretty much all of them were clear that it was too soon to conclude hikes altogether. There was also a bonus of sorts from St. Louis Fed President Bullard. While economists and Fed officials alike have been speaking about the US policy rate moving up to a ‘restrictive’ level, none have really put hard numbers on where that might be. Bullard, however, did just that in presentation Thursday by outlining the area of roughly 5.0-7.0% (presentation, see page 6). This is just Bullard’s opinion, of course, but it provides useful context just the same.
Getting back to gold’s two usual main drivers, the soft US price data together with the toned-down hawkishness on the part of Fed officials weighed on the US dollar and so kept it from hindering gold. US Treasury yields were mixed and so less influential.
Over the week to Thursday’s close, the US Dollar Index (DXY) lost 3.5%, bringing its fall since peaking over 114 in late-September to 6.5%. Among DXY components, the Swiss franc gained ground versus the greenback (USDCHF -3.2%), as Swiss National Bank Chairman Thomas Jordan said further rate hikes “cannot be excluded”. Sterling outpaced that move (GBPUSD +4.5%) even with the Autumn Statement on Thursday raising taxes and forecasting a recession through next year. A day earlier, UK October CPI was reported at 11.1% y/y, the highest in 41 years and so raising the possibility of another rate hike from the Bank of England when it next meets Dec. 15. EURUSD rose 3.5% despite some ECB members verbally hedging against continued, aggressive rate hikes. For example, while the normally hawkish Robert Holzmann (Austria) did say that more hikes were in store, he added that the risk of too-aggressive tightening leading to stagflation/recession needed to be considered as well. The Canadian dollar advanced 1.5% versus its US counterpart. On Wednesday Canada reported October CPI at 6.9% y/y, the same rate as in September. The Bank of Canada’s next meeting is Dec. 7.
The yen, already up 4.2% versus the US dollar in the week through Thursday, firmed a bit more on Friday after Japan reported National CPI in October at 3.7% y/y, the fastest pace of increase in 31 years. USDJPY might have gone down even more had Bank of Japan Governor Kuroda not thrown cold water on the prospect of rate hikes following the data. The BoJ chief wants to see nominal wages rise sustainably before tightening.
Over the week to Thursday’s close, the nominal 2y US Treasury yield was up 9bp to 4.43%, but the 5y down 2bp to 3.93% and the 10y down 5bp to 3.77%. Steep inversions in several spreads along the curve are being viewed as harbingers of recession. For example, the 2y10y closed Thursday at -66bp, just 2bp from a multi-decade low (-68bp) reached on Wednesday. The 5y real Treasury yield (TIPS) was up 13bp to 1.61% but the 10y up a lesser 6bp to 1.49%. The CME Fed Watch Tool as at Thursday’s close showed the probability of a 50bp hike at the Dec. 13-14 FOMC meeting at 80.6%.
China assets had another topsy-turvy week as reports of more COVID outbreaks stoked fears of more draconian lockdowns. Otherwise of note was the People’s Bank of China on Wednesday warning of an acceleration in inflation were demand to pick up. Earlier in the week, the PBoC kept its medium-term policy loan rate unchanged. The offshore yuan gained some ground against the greenback in the week through Thursday’s close (USDCNY -1.1%). Mainland equity indexes made small headway as well, gaining 1-2%.
Potential for the aforementioned COVID issues in China to hit demand in the world’s largest importer of crude oil kept Brent and WTI on the defensive, with the former down 3.0% and latter down 4.0% in the week through Thursday’s close. In its November Monthly Oil Market Report released on Monday, OPEC revised down its projections for global oil demand in 2022 and 2023 by 100k bpd each, to 2.55mn bpd and 2.24mn bpd, respectively. Two important dates for oil in early December bear watching. The first is Dec. 4, when OPEC+ will next decide on members’ production quotas. A day later, the G7-backed sanctions and a price cap on Russian oil are scheduled to go into effect.
Middle East stock markets were mostly lower in the week through Thursday, e.g., Saudi Arabia’s Tadawul All Share -2.3%, the UAE’s FTSE ADX General -1.8%, and Dubai’s DFM General -1.5%. GCC currencies were stable again, however. The Gulf Business website reported a rise in assets at Oman’s sovereign wealth fund. Qatar’s economy may get a boost from visitors attending World Cup matches, which begin this weekend.
India on Monday reported somewhat comforting inflation data, ‘somewhat’ because while October CPI of 6.77% y/y was down from 7.41% in September, the number was still above the upper parameter of the Reserve Bank of India’s 4.0% +/- 2.0% target range. Local equities had a good week nonetheless, with the BSE Sensex and Nifty 50 gaining just shy of 2.0%. The rupee edged 0.2% firmer against the US dollar and India’s 10y yield eased 4bp to around 7.31%. The RBI will meet again in early December.