Despite two negative quarters of GDP releases in a row, the strong jobs report proved that the US economy is still expanding. According to TD Securities, this means that the gold rally could be at risk.
“Plenty of money in the market indicates inflationary pressure”
cryptocoin.com As you follow, the US economy added 528,000 jobs in July. In response to this, gold fell 1% on Friday. Economist expectations were for an additional 250,000 jobs for the July report. However, incoming data indicated more than double the increase. However, on Monday, gold rebounded above $1,790.
Bart Melek, head of commodities strategy at TD Securities, notes a shift in market sentiment that it’s too early to price on the Federal Reserve axis from the aggressive tightening cycle. Melek says that the sales on Friday are also due to this. Melek made the following assessment on Friday:
A 528,000 increase in payrolls, unemployment falling to just 3.5%, and a massive 5.2% rise in wages suggest the US economy is expanding despite two consecutive negative GDP data. This is a sign of the robustness of the service industry. It also means that the US consumer has more cash than usual in their checking accounts and money market funds. Considering these, there is about three trillion dollars of money in the system. This abundance of money indicates inflationary pressure.
Gold investors focus on US CPI data
This week, attention will be on the US inflation report for July. Economists predict that the annual inflation rate, which rose to 9.1% in June, will reach 8.7%. According to Melek, inflation will continue to be stubbornly high. In this context, the metric to be monitored will be the number of core inflation, which excludes the food and energy sectors. The analyst makes the following statement:
Core CPI is likely to continue to rise even as low energy prices push the headlines. Next week, the US July CPI data, especially the core CPI, will be the data to watch. Because this data will help refute the early pivot argument that hints at any stubborn inflation pressures in the system.
“High probability of reversal of gold rally”
Meanwhile, the consensus forecast of economists is that the annual core inflation figure will rise to 6.1% after 5.9% in June. According to Bart Melek, this could mean a significant reversal of the move that took gold prices from below $1,700 to around $1,800. Melek also states that her purchases of precious metals have decreased. In this context, the analyst makes the following comment:
The recent rally took gold from a July low of $1,681 to a high close to $1,795. This situation is likely to be largely reversed as money managers reduce the risks of recently acquired longs. The combination of hawkish statements from Fed officials and stronger-than-expected data are possible catalysts that could trigger additional selling in the days and weeks ahead.
Fed’s hawkish speakers are against the idea of returning from rate hikes
Last week’s hawkish Fed speakers opposed the idea of the Fed returning from rate hikes. Chicago Fed President Charles Evans said the Fed will continue to raise interest rates until it sees inflation fall. “50 basis points is a reasonable assessment if you really think things are not improving,” Evans said. But 75 might be fine too. “I doubt that more will be asked for,” he said.
San Francisco Fed President Mary Daly stated that inflation is still a problem. In an interview with LinkedIn, Daily said the Fed has “a long way to go” before it achieves its price stability goals. “We are still determined and we are completely together,” the Daily explained. st. Louis Federal Reserve Chairman James Bullard also said that “we still have some ways to go to achieve restrictive monetary policy here.”
On top of that, Richmond Fed President Thomas Barkin admitted that the Fed was prepared to pay the price of controlling inflation. In this context, Barkin said, “There is a way to contain inflation. However, it is possible that there will be a recession in this process. If someone does this, we need to keep it in perspective. Nobody canceled the business cycle,” he commented.
