Gold price despite hot PPI report sets a hawkish undertone

By News Room Last updated Oct 11, 2023

Gold price extends upside as Fed policymakers expect that higher bond yields could be substituted for further rate hikes.
The release of FOMC minutes and PPI data are expected to trigger volatility.
Fed’s Bostic sees current monetary policy as sufficiently restrictive and believes inflation will come down to 2% without triggering a recession.

Gold price (XAU/USD) holds onto gains despite the hotter Producer Price Index (PPI) report for September. The monthly headline PPI grew at a higher pace of 0.5% against expectations of 0.4% and the core PPI expanded at a higher pace of 0.3% vs. expectations and the former release of 0.2%. On an annualized basis, the headline PPI accelerated to 2.2%, higher than expectations of 1.6% and the former reading of 2%. The prices of core goods and services at factory gates jumped to 2.7%. A hotter PPI report indicates that robust consumer spending forced producers to raise prices of goods at factory gates.

The precious metal extended its rally on Wednesday as Federal Reserve (Fed) policymakers continue favoring steady interest rates at the 5.25 to 5.50% range through year-end. The precious metal is also capitalizing on the deepening conflict between Israel and Hamas, which could extend beyond Gaza. Investors should be prepared for volatility in the Gold price ahead as Federal Open Market Committee (FOMC) minutes from the September meeting and inflation data for the same month are due.

Bullion remained the first choice of investment this week as Fed policymakers signaled support for an unchanged interest rate policy due to a multi-year high in US Treasury yields. FOMC members expect that higher bond yields could be substituted for further rate-tightening as the pace of spending and investment could slow down due to higher borrowing costs.

Daily Digest Market Movers: Gold price remains upbeat despite hot PPI report

Gold price seems bullish near a fresh weekly high at $1,870 despite a surprisingly hot producer inflation report.
The monthly headline and core PPI grew at a higher pace of 0.5% and 0.3% respectively. US producers raised prices of goods and services at a higher pace in September due to strong consumer spending.
This could set a hawkish undertone for the Fed’s November monetary policy meeting.
The Gold price is expected to remain volatile ahead of the release of the FOMC minutes.
The release of the FOMC minutes for the September monetary policy is expected to provide a detailed explanation behind a steady interest rate decision. Apart from that, the outlook on inflation and interest rates will be keenly watched.
For US producer inflation, investors expect monthly headline PPI to expand at a slower pace of 0.4% against 0.7% recorded in August. The core PPI is seen growing at a steady pace of 0.2% in the same period.
On an annualized basis, headline PPI is foreseen steady at 1.6%. The Core PPI accelerated marginally to 2.3% against the former reading of 2.2%.
The precious metal has witnessed significant investment from investors this week amid the conflict in Israel/Palestine. The appeal for Gold remains upbeat as a firmer risk-aversion theme improves demand for safe-haven assets.
In addition to higher demand for safe-haven assets, neutral interest rate guidance from Federal Reserve policymakers has kept the Gold price upbeat.
On Tuesday, San Francisco Fed Bank President Mary Daly said that the risk of over-tightening is not expected to outweigh the risk of raising rates too much. She further added that higher long-term US Treasury yields could be substituted for higher rates since it should lead to lower spending and investment.
This week, Dallas Fed Bank President Lorie Logan drew less emphasis on raising interest rates further if long-term Treasury yields remain elevated.
Fed Vice Chair Philip Jefferson also warned that the central bank needs to be very careful with a further hike in interest rates.
Atlanta Federal Reserve Bank President Raphael Bostic said on Tuesday that current monetary policy is sufficiently restrictive and inflation will come down to 2% without triggering a recession.
The US Dollar Index (DXY) delivered a five-day losing spell and stabilized below 106.00 amid an improved market mood and squeezing expectations of one more interest rate increase from the Fed for the remainder of 2023.
As per the CME FedWatch Tool, traders see an 86% chance of the Fed keeping interest rates unchanged at 5.25 to 5.50%, where they’ve stood since July. The odds of one more interest rate increase in any of the two remaining monetary policy meetings in 2023 have dropped to 25%.
The US Dollar carries the potential of recovering after a corrective move as the US economy is resilient amid tight labor market conditions and robust consumer spending. The global economy is expected to face further calamity due to Israel-Palestine tensions.
Going forward, investors will focus on the inflation data for September, which will set an undertone for the Fed’s November monetary policy.

Technical Analysis: Gold price seeks stability above $1,870

Gold price prints a fresh weekly high above $1,870.00 as long-term Treasury yields move down from a multi-year peak. The precious metal recovers close to the 20-day Exponential Moving Average (EMA) at $1,871.00, but the market’s mood could turn volatile amid a data-packed week. The yellow metal remains broadly bearish, trading below the 200-day EMA. Momentum oscillators rebounded swiftly after turning oversold.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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