Weekly Gold Review: Gold prices narrowed losses, US non-farm payrolls suggest FED's plan is feasible
Spot gold fell to a new low of $1925.43 an ounce this week, its lowest since July 11, as the US economy remained resilient overall, markets largely ignored Fitch's downgrade of the US credit rating, and China announced measures to restore and expand consumption. However, the US July nonfarm payroll data showed the smallest increase since December 2020, suggesting that the Federal Reserve could achieve its inflation-fighting goals without triggering a US recession, narrowing gold's decline. As of press time, gold prices fell nearly 0.9% for the week to $1941.35 an ounce. July Nonfarm Payrolls Show Smallest Increase in Over Two and a Half Years Data from the US Department of Labor showed that US nonfarm employment increased by 187,000 in July, below expectations of 200,000, the smallest increase since December 2020. Many economists had previously predicted that the US economy would fall into recession in the fourth quarter of this year, but they are now increasingly confident that the Fed's envisioned "soft landing" scenario is possible. Bill Adams, chief economist at the Dallas Fed, said: "The combination of falling inflation and continued economic strength is easing concerns that the economy would fall into recession later this year or sometime in 2024." The economist stressed: "It's more likely that the economy can return to the Fed's inflation and employment targets without a significant downturn." A Boston-based fund manager commented on the July nonfarm payroll data: "Everyone was worried that the number of jobs would be higher than expected, but it wasn't today. This has given investors a sigh of relief and further encouraged the Fed to likely reflect on these numbers in a positive way, hopefully supporting their decision to stop raising interest rates in the future." The US labor supply and demand are indeed beginning to ease, but the problem is that the cooling of the labor market is clearly not fast enough for the Fed. The US only needs to create 100,000 jobs per month to absorb the new workforce. This is why the Fed, after resuming interest rate hikes in July, did not rule out the possibility of further hikes in September, and the gold price rebound was not smooth. Still Strong Economy However, it must be noted that the US labor market remains relatively tight, with the unemployment rate of 3.5% below expectations and the previous value by 0.1 percentage points, remaining stable near its lowest level in decades; the annual wage rate was flat at the previous value of 4.4%, expected at 4.2%, still maintaining a relatively fast growth rate, inconsistent with the Fed's 2% inflation target, although wage and unit labor cost growth slowed in the second quarter. Earlier US economic data showed that job openings fell to their lowest level in more than two years in June; manufacturing activity stabilized at a low level in July; and the increase in private sector jobs in July exceeded expectations, indicating resilience in the labor market, which could keep US interest rates higher for longer. Vandana Bharti, assistant vice president of commodity research at SMC Global Securities, said that the resilience of the US economy has led to increasing expectations that the Fed will continue to raise interest rates, further depressing gold. Atlanta Fed President Bostic said this week that the current unemployment rate of 3.6% may not ultimately rise further to 4%. Nevertheless, inflation may only fall slowly, and only under the pressure of the Fed's policy interest rates remaining high for a sustained period before the Great Recession. Chicago Fed President Goolsbee said on Tuesday (August 1) that the Fed is expected to lower inflation without triggering a severe recession, but whether it can achieve this without raising interest rates again will depend on the data. He also said that it is necessary to see "sustained and steady" progress by the Fed in achieving its 2% inflation target, which is a difficult path. ANZ strategists reported that: The Fed's 25-basis-point rate hike in July and the open door for another hike in September could limit gold price gains. They expect that changes in expectations surrounding its terminal rate could limit gold's upside in the near term. Investment demand remains weak as investors await the end of the Fed's tightening cycle. Fitch Downgrade Has Limited Impact The US debt ceiling crisis ended two months ago, but rating agency Fitch this week announced that it would downgrade the US credit rating from AAA to AA+, prompting strong dissatisfaction from the White House. Fitch became the second major rating agency after S&P to strip the US of its AAA rating. Fitch's downgrade of the US government's top credit rating raised questions about the US fiscal outlook. Fitch senior director Richard Francis said that the reasons for the downgrade were fiscal concerns, worsening US governance, and political polarization, leading to a lack of confidence in the US government's ability to address fiscal and debt issues. However, judging from the market reaction, the impact of the downgrade was limited. Media quoted investment tycoon Buffett as saying that he was not worried about Fitch's downgrade of the US rating. Buffett said that his view of the US dollar and US Treasury bonds had not changed. Goldman Sachs noted in a report that the downgrade did not contain new fiscal information and did not believe that any meaningful US Treasury bond holders would be forced to sell US Treasuries because of the downgrade. UBS foreign exchange and macro strategist Vassili Serebriakov said, "US economic activity data shows significant resilience compared to the rest of the world." Jane Foley, head of foreign exchange strategy at Rabobank, said: "Even with bad news, businesses and people will say, 'I need dollars to pay invoices and dollar-denominated debt.' That's why I don't think this kind of news has caused a huge shock, because it hasn't changed the fact that people around the world still need dollars." China Implements Measures to Restore and Expand Consumption Also on Monday, the State Council of China issued "Measures on Restoring and Expanding Consumption," requiring that restoring and expanding consumption be given priority, and that mechanisms for optimizing employment, income distribution, and the entire chain of virtuous cycles of consumption be promoted. In addition to expanding support for the purchase of electric vehicles and the cultural tourism industry, the Measures will also promote home renovation consumption, live-streaming e-commerce, and implement paid leave systems to promote holiday consumption. Li Chunlin, vice chairman of the National Development and Reform Commission, said: "Next, we will implement the employment-first policy, strengthen the bottom-line support for employment of vulnerable groups, encourage hard work to get rich, improve the policy system for distribution according to factors, promote the basic synchronization of residents' income growth and economic growth, and improve residents' consumption willingness through improved consumption capacity." Ricardo Evangelista, senior analyst at ActivTrades, said: "The US is increasingly likely to achieve a soft landing...while China continues to signal its intention to deploy large-scale stimulus measures. These have created a wave of optimism in financial markets, thus hitting safe-haven gold." He expects gold prices to fluctuate narrowly around $1950 unless there are surprises.
Time:
2023-08-05 10:13
Spot gold fell to a new low of $1925.43 an ounce this week, its lowest since July 11, as the US economy remained resilient overall, markets largely ignored Fitch's downgrade of the US credit rating, and China announced measures to restore and expand consumption.
However, the US July nonfarm payrolls data showed the smallest increase since December 2020, suggesting the Fed could achieve its inflation-fighting goals without triggering a US recession, narrowing gold's decline. As of press time, gold prices have fallen nearly 0.9% this week to $1941.35 an ounce.
July nonfarm payrolls show smallest increase in over two and a half years
Data from the US Department of Labor showed that US nonfarm employment increased by 187,000 in July, below expectations of 200,000, the smallest increase since December 2020. Many economists had previously predicted a recession in the US economy in the fourth quarter of this year, but they are now increasingly confident that the Fed's envisioned 'soft landing' scenario is possible.
Bill Adams, chief economist at the Dallas Fed, said: "The combination of falling inflation and continued economic strength is easing concerns that the US economy would fall into recession later this year or sometime in 2024." The economist emphasized: "It's more likely that the economy can return to the Fed's inflation and employment targets without a significant downturn."
Boston Andersen Capital Management founder's comment on July nonfarm payrolls: "Everyone was worried that the number of jobs would be higher than expected, but it wasn't today. This has given investors a sigh of relief and further encourages the Fed to likely reflect on these numbers in a positive way, hoping this will support their decision to stop raising interest rates in the future."
The US labor supply and demand is indeed starting to ease, but the problem is that for the Fed, the cooling of the job market is clearly not fast enough. The US only needs to create 100,000 jobs per month to absorb the new workforce. This is why the Fed, after resuming interest rate hikes in July, did not rule out the possibility of further hikes in September, and the gold price rebound was not smooth.
Still strong economy
However, it must be seen that the US labor market remains relatively tight, with the unemployment rate of 3.5% below expectations and the previous value by 0.1 percentage points, remaining stable near its lowest point in decades; the annual rate of wages was flat compared to the previous value of 4.4%, and the expected value of 4.2%, still maintaining a relatively fast growth rate, which is inconsistent with the Fed's 2% inflation target, although wage and unit labor cost growth slowed in the second quarter.
Earlier released US economic data showed that job openings in June fell to their lowest level in more than two years; manufacturing activity in July stabilized at a low level; and the increase in private sector jobs in July exceeded expectations, indicating resilience in the labor market, which may keep US interest rates higher for longer.
Vandana Bharti, Assistant Vice President of Commodity Research at SMC Global Securities, said that the resilience of the US economy has led to increasing expectations that the Fed will continue to raise interest rates, further depressing gold.
Atlanta Fed President Bostic said this week that the current unemployment rate of 3.6% may not ultimately rise further to 4%. Nevertheless, inflation may only fall slowly, and only under the pressure of the Fed's policy interest rates remaining high for a sustained period before a major recession.
Chicago Fed President Goolsbee said on Tuesday (August 1) that the Fed is likely to lower inflation without triggering a severe recession, but whether it can achieve this without raising rates again will depend on the data. He also said that it is necessary to see "sustained and consistent" progress by the Fed in achieving its 2% inflation target, which is a difficult path.
ANZ Bank strategists reported that,
The Fed's 25 basis point rate hike in July and the open door for another hike in September could limit gold price
increases. They expect that changes in expectations surrounding its terminal rate could limit gold's upside in the near term. Investment demand remains weak as investors await the end of the Fed's tightening cycle.
Limited impact of Fitch downgrade
The US debt ceiling crisis ended two months ago, but rating agency Fitch this week still announced that it would downgrade the US credit rating from AAA to AA+, prompting strong dissatisfaction from the White House. Fitch became the second major rating agency after S&P to remove the US AAA rating.
Fitch's downgrade of the US government's top credit rating has raised questions about the US fiscal outlook. Fitch senior director Richard Francis said that the reasons for the downgrade were fiscal concerns, worsening US governance, and political polarization, leading to a lack of confidence in the US government's ability to address fiscal and debt issues.
However, judging from the market reaction, the impact of the downgrade was limited. Media quoted investment tycoon Buffett as saying that he was not worried about Fitch's downgrade of the US rating. Buffett said that his views on the US dollar and US Treasury bonds have not changed.
Goldman Sachs noted in a report that this downgrade did not contain any new fiscal information and did not believe that any meaningful US Treasury bond holders would be forced to sell US Treasuries because of this downgrade.
Vassili Serebriakov, a foreign exchange and macro strategist at UBS, said, "US economic activity data shows considerable resilience compared to the rest of the world."
Jane Foley, head of FX strategy at Rabobank, said: "Even with bad news, businesses and people will say 'I need dollars to pay invoices and dollar-denominated debt.' That's why I think this kind of news hasn't had a huge impact, because it doesn't change the fact that people around the world still need dollars."
China implements restoration and expansion of consumption
Also on Monday, the State Council of China issued "Measures on Restoring and Expanding Consumption," requiring that restoring and expanding consumption be given priority, and that mechanisms for optimizing employment, income distribution, and the virtuous cycle of the entire consumption chain be promoted. In addition to expanding support for the purchase of electric vehicles and the cultural tourism industry, the Measures will also promote home renovation consumption, live streaming e-commerce, and implement paid leave systems to promote holiday consumption.
Li Chunlin, vice chairman of the National Development and Reform Commission, said: "Next, we will implement the employment priority policy, strengthen the bottom-line support for employment of vulnerable groups, encourage hard work to get rich, improve the policy system for distribution according to factors, promote the basic synchronization of residents' income growth and economic growth, and improve residents' willingness to consume through improved consumption capacity."
Ricardo Evangelista, senior analyst at ActivTrades, said: "A soft landing for the US economy is increasingly likely... while China continues to signal its intention to deploy large-scale stimulus measures. These have created a wave of optimism in financial markets, thus hitting safe-haven gold." He expects gold prices to fluctuate narrowly around $1950 unless there are surprises.
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