Gold prices fall as markets reprice Fed's policy outlook, US jobs data in focus

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COMEX Gold prices are poised for a third consecutive weekly decline, after notching a 33-month high of $2,085.4 per troy ounce in early May. It has been a painful week for the yellow metal, as hawkish comments from Fed officials, better than expected economic data from US, and progressive talks on the debt ceiling front boosted the dollar index and US benchmark treasury yields, weighing down on bullion commodities.

Weak economic data from the Eurozone and China further aided the greenback after China's consumer spending, retail sales and industrial activity grew at a slower pace than expected in April.

Minutes of the May FOMC meeting showed that officials are split on whether to pause, hike or skip in June. While some participants have indicated that it's time to either pause or at least skip hiking rates at the June FOMC meeting, some are arguing for another quarter point rate hike.

Federal Reserve Bank of St. Louis President James Bullard said that he backed two more increases, while Minneapolis Fed President Neel Kashkari said that if the central bank does pause, it should signal tightening isn't over.

Economic data releases from the US over the week showed that the economy is holding up and that the Fed has more room to tighten. A contraction in preliminary Manufacturing activity was more than offset by a rebound in Services activity.

Data released on Thursday showed an upward revision in US GDP, while initial jobless claims were revised substantially lower. The US economy grew by an annualized 1.3% in Q123, slightly higher than 1.1% in the advance estimate, as consumer spending growth accelerated more than expected to 3.8%.

US Retail sales released last week also suggested that consumer spending is holding up, despite high borrowing costs. Meanwhile, US weekly Jobless claims slightly rose to 229k during the previous week, however, the prior data was downwardly revised by 17k.

The latest set of data suggested that the labor market is showing no signs of weakness, which might result in an uptick in wage inflation, ultimately leading to additional rate hikes from the Fed.

Amid the backdrop of recent data and hawkish Fed statements, markets have significantly repriced the outlook for Fed policy outlook. During the first half of May, markets were pricing in that fed funds rate had already peaked and a first 25 bps rate cut was expected in September, with nearly 100 bps of cuts by the 2023-end.

However, interest rate futures are now pricing in another quarter point rate hike in July and less than 15 bps rate cuts for the year.

Repricing of terminal rates and markets pushing back against rate cuts boosted the greenback to a fresh two-month high of 104.3 levels, while the rate sensitive two year yields rose by more than 25 basis points to 4.53%, the highest since the US banking crisis.

On the investment demand front, SPDR ETF holdings stood at 941.29 tonnes as on 25th May, not far from an eight month high of 943.89 tonnes notched at the start of the week. Despite a sharp decline in gold prices, ETFs witnessed only marginal outflows during the week, as higher rates in the short-term means more economic pain in the medium term.

Resolution on raising the US debt limit might probably be dragged into the coming week. Republican and White House negotiators are moving closer to an agreement to raise the debt limit and cap federal spending for two years.

Though the odds of a debt default are very low, such an event will send shockwaves through financial markets. US Jobs data will also be in the spotlight and it needs to be seen whether data would surprise this time.

Labour market is a lagging indicator and is the last data point to turn in the cycle. Bloomberg forecasts non -farm payrolls to increase by 180k in May compared with an increase of 253k in April, and the unemployment rate is expected to rise to 3.5% from 3.4% in April. Weakness in the US Labor market might boost bullions. However, any signs of strength in the jobs data might bolster the current market pricing of fed funds, with expectations for another 25 bps hike in July, aiding dollar index and weighing down on gold prices.

(The author is CMT, CFTe, EPATian VP-Head Commodity Research Kotak Securities Ltd)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)