On Thursday, gold prices fell a smidgeon after the currency strengthened and comments from a top US official. A senior Federal Reserve official hinted at the possibility of accelerating policy tightening. The previous session saw gold prices rise more than 1% after the ADP National Employment Report revealed that private payrolls in the United States increased significantly less than predicted in July.
The requirements for raising interest rates might be fulfilled by the end of 2022, according to Fed Vice Chair Clarida, who also suggested the central bank could begin reducing its asset buy program this year. Clarida’s words did not sway the DXY, leaving gold more pricey for holders of other currencies. Clarida also hinted that the central bank may begin to reduce its asset buying program later this year.
Given the development in the economy and strengthening labor market, Fed Governor Christopher Waller sees the prospect of removing accommodating policy sooner than some thought.
Meanwhile, Minneapolis Fed President Neel Kashkari warned the Delta variation of COVID-19 might “wrinkle” the labor market recovery and the Fed’s asset-purchase program reduction time frame.
In the United States, daily new COVID-19 cases have reached a six-month peak, with more than 100,000 illnesses recorded across the country as the Delta variant decimated states with low vaccination rates.
According to independent analyst Ross Norman, the atmosphere toward gold is gloomy, with the market struggling to build much momentum following Clarida’s remarks.
On Friday, gold fell to its lowest level in almost a month after a solid U.S. jobs data raised anticipation that the Federal Reserve will start withdrawing its economic stimulus sooner than expected. With a 943,000 increase in jobs last month, the nonfarm payrolls (NFP) report in the United States exceeded forecasts.
In recent days, there has been speculation that the central bank will reduce its stimulus program.
A majority of the job growth in the report, according to Edward Moya, senior market analyst at OANDA, were from lower-wage leisure and hospitality sectors, which are not inflationary, reducing gold’s allure as a hedge against rising prices.
The dollar and benchmark 10-year Treasury yields jumped after the data, denting non-yielding gold’s appeal.
“We’ve already seen peak GDP, peak corporate earnings and economic data is going to be mixed at best going forward, so gold is still pretty good value,” potentially limiting its downside, Blue Line’s Streible added.
The shift in expenditure to services propelled a measure of US services industry activity to a new high in July.
According to figures released by the Federal Reserve on Friday, consumer credit in the United States climbed at its quickest rate ever in June, as Americans upped their credit card usage to drive consumer spending in the second quarter.
Total consumer credit expanded at a pace of $37.69 billion, which was the quickest rate ever and followed a $36.69 billion increase in May, the U.S. central bank said. Economists polled by Reuters had expected consumer credit to increase at a rate of $23.00 billion in June.
An alternate measure tracking the monthly change in the total amount of credit outstanding increased by the most since December 2010, the data showed. That measure showed that revolving credit, which mostly measures credit-card use, rose by $17.858 billion, the largest gain since 2006, after climbing by $9.089 billion in May.
But growth in non-revolving credit, which includes auto loans as well as student loans made by the government, slowed to a pace of $19.831 billion from a rate of $27.601 billion in May.
Consumer spending, which accounts for more than two-thirds of U.S. economic activity, notched a second straight quarter of double-digit growth. That helped to pull the level of gross domestic product above its peak in the fourth quarter of 2019.
The U.S. Senate voted to advance a$1 trillion infrastructure package on Saturday but remained on a slow path toward passage with two Republicans openly opposing behind-the-scenes efforts to wrap up work on one of President Joe Biden’s top priorities.
What Will happen to yields?
An unexpectedly strong jobs number for July has bolstered the case for investors who believe Treasury yields will head higher over the rest of the year, potentially weighing on an equity rally that has taken stocks to record highs. Yields on the benchmark 10-year Treasury, which move inversely to prices, stood at about 1.3% on Friday, their highest level since July 23, after Labor Department data showed the U.S. economy added 943,000 jobs last month. Analysts polled by Reuters forecast payrolls adding 870,000 jobs.
Some investors believe the robust jobs numbers could support the view that the Federal Reserve, faced with rising inflation and strong growth, may need to unwind its ultra-easy monetary policies sooner than expected. Such an outcome could push yields higher while denting growth stocks and other areas of the market.
That view, however, is complicated by worries over rising COVID-19 cases across the United States that threaten to weigh on growth and the Fed’s insistence that the current surge in inflation is transitory.
In any event, the data will likely ramp up investor focus on this month’s central bank symposium in Jackson Hole, Wyoming. And if August’s job growth proves equally as torrid, the summer hiring spree would raise the stakes for next month’s Fed meeting, at which the central bank may outline its plans for rolling back monthly asset purchases
The data “gives markets some sort of direction,” said Simon Harvey, senior FX market analyst at Monex Europe. “It makes the upcoming Jackson Hole event and September’s Fed event live.”
Strong data, though, could make dollar-denominated assets more attractive to yield-seeking investors, potentially boosting the U.S currency. A stronger dollar can be a headwind for U.S. exporters because it makes their products less competitive abroad, while hurting the balance sheets of domestic multinationals that must convert foreign earnings into dollars.
Goldman Sachs, BofA Global Research and BlackRock are among firms that have said yields will rise to near 2% by year-end — an outcome that could be hastened if a strong economy pushes the Federal Reserve to begin unwinding its ultra-easy monetary policies sooner than expected. Others, like HSBC, have called for yields below current levels.
“We think the recovery in long-dated Treasury yields that has taken place over the past week or so is a sign of things to come,” analysts at Capital Economics said in a note published Friday. We suspect that growth in the US will be quite strong in the coming quarters, and that the recent surge in inflation there will prove far more persistent than most anticipate,” the firm said.
UBS Hefele expected the U.S. 10-year Treasury yields to move closer to 2% in the second half of 2021, and said he was “underweight” on high-grade bonds due to the risk around them.
“Historically, the rates are so low that we just don’t see them (high-grade bonds) able to perform the same role in portfolios in terms of providing that stability during crisis.”
Among big central banks, the hot inflation issue has been most pronounced for the Federal Reserve. Its preferred measure of price pressures is well above its target at 3.5%, the highest in three decades. Headline consumer inflation hit 4.5% in June. But while some policymakers are starting to acknowledge that price pressures are stickier than they first thought, the Fed as a whole is sticking to the line that this is transitory.
Chair Jerome Powell said last month that the factors driving prices higher now – a 45% surge for used cars from last year or a 25% bump-up for airline tickets – are unlikely to be repeated in perpetuity. “We’re anxious like everybody else to see that inflation pass through,” Powell said.
Same message at the European Central Bank. “Inflation has picked up, although this increase is expected to be mostly temporary. The outlook for inflation over the medium term remains subdued,” ECB President Christine Lagarde said on July 22.
More fundamentally, central bankers in the United States and the euro zone are wary of repeating mistakes of the past decade, where they tightened policy at the earliest signs of growing price pressures that never fully materialised in the end.
Producer prices have been rising by 5%-10% in developed economies. But to what extent companies are willing and able to pass on higher costs to consumers is less clear.
For central bankers, the litmus test of whether price rises will be sustained is whether they start to push wages higher. Here the picture differs across the main regions.
Wages in the euro zone were up a modest 1.5% in the first quarter.
Even in the United States, where wages and salaries have been increasing throughout the pandemic and they were up 3.2% year-on-year in the second quarter, the Fed remains sanguine. “I think we’re some way away from having had substantial further progress…toward the maximum employment goal,” Fed chair Jerome Powell said on July 28.
The FED Expectations Index:
Central bankers like to filter out such volatility, since it comes and goes, and focus on so-called core inflation that strips out energy and food prices. On this measure, prices rose by just 0.9%.
U.S. core consumer prices, the Federal Reserve’s preferred inflation measure, have been growing by more than 3% year-over-year but even this has been blamed on supply disruptions, with containers still stuck in long queues in Asian ports. Arguably even American consumers, whose views on inflation are typically guided by things like swings in gasoline prices, buy into this logic.
A regular University of Michigan survey shows that while they expect price increases over the next year of roughly 4.7%, that drops to just 2.8% over a five-year horizon – squarely in the range of the past two decades.
If the current surge in prices lasts long enough to affect wages and people’s expectations about future inflation, then chief executives will have won the day and central bankers will adjust their stances – and ultimately their policy.
For now they are betting this won’t be the case, notably in economies where the population is ageing, such as Japan, and unemployment is high, such as parts of the euro zone. Over 70% of economists polled by Reuters agree.
“Temporary inflation must not be allowed to become structural inflation,” said the ECB’s de Guindos. “So far…, there have been no indications that this is the case, but we should remain vigilant.”
Since data of this week doesn’t include yet NFP impact – we have minimal changes, as well as on EUR. Open interest has dropped slightly, investors have taken a bit more bearish positions, but in general volumes are quite low and make no impact on the total picture :
So, puzzle on gold market is collecting not in favor of the bulls. As technical as fundamental factors point on downside continuation. Our huge bearish engulfing pattern on monthly, achieved inflation Fed target, jump in interest rates and forecast of 2% by the end of the year, finally – superb NFP report leave no room to the bulls on gold market now. Theoretically we could argue that price stands above major lows and keeps chance on rebound – but this odd is mostly hypothetical. So, our hopes that retracement might be a bit higher haven’t come true. Only some extended deteriorating in US data could support gold. Even new 1Trln infrastructure pack hardly bring any valuable support. But if we get 3-4 months of poor NFP and inflation data – this could help. Because NFP is the only thing that Fed now is watching closely. They need 5.5-6 Mln more jobs and employment-to-population ratio around 80% to free their hands for rate change (now it stands around 77%).
Any slowdown in recovery could postpone Fed action. But now it looks fantastic and hardly possible, mostly unbelievable issue. Let’s keep it in mind, but meantime – watch for bearish setups that we have…
So, miracle has not happened, although just last week it was seemed that it is possible. Strong monthly sell – off and YPP hold price and now push it lower. Gold already stands below July lows. Market inability of return above YPP is a bearish sign.
As we already said since June collapse – overall picture remains bearish in long term as June price action leaves small room to bullish outlook. Trend is bearish, huge engulfing pattern lets market to show minor inside retracement, but inevitably suggests drop to 1650$ at least. And I would say, it doesn’t exclude reaching of YPS1 around 1540$ as well. In fact here we have few different targets. They are based as on initial “small” AB-CD as on the large one. Thus “small” OP agrees with “large” COP around 1650$, next is “large” OP agrees with YPS1. Finally “small” XOP agrees with 1540 K-support area. Thus, first destination point is re-testing of 1680 K-support area and reaching of “small” OP.
To break bearish construction gold has to climb above 1925$ that looks now like not very probable.
Appearing huge bearish engulfing pattern is a strong reason to not buy gold for long-term perspective. And we already see that investors don’t, running out of the gold market, based on COT data.
Drop below YPP of 1807 also brings nothing positive and price now is just coiling around, can’t return back solidly above it. Downside reversal has happened right from the major 5/8 Fib resistance area. As monthly gold stands not at oversold Potential downside target is K-area of 1685 and 1650 OP.
As we’ve said – classical price shape suggests minor pullback to 3/8-1/2 of engulfing range and then downside extension to next major target. 50% level has been reached and now it seems that gold is ready to proceed lower.
Sell-off on weekly chart also promises nothing good to the market. In fact single week action crosses 2 month consolidation. Trend stands bearish by far. Flag consolidation is broken down. Our doubts on reverse H&S pattern are confirmed right now – too strong sell-off on the slope of the head and too slow recovery lead to downside drop. Although bottom of the right arm stands in harmony with the left one by far, but these moments make it tricky and not reliable for position taking.
By taking a look at larger scale, market could forming the big triangle pattern as well. With the flag downside breakout and no solid barriers inside, market might be aiming on lower border of triangle:
So Fed and NFP numbers have broken the back of upside retracement. Now we have no choice but to turn to larger scale and consider more extended targets here. Although we have ones on weekly chart, here stands another one that is actually of bearish monthly engulfing. While its OP stands too far now and agrees with the same 1650$ area, we’re mostly interested with the COP that coincides with butterfly 1.27 extensions. Both stand near daily oversold and right below recent lows. So – this is interesting object for daily performance:
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