US CPI and Gold
The Bureau of Labor Statistics reports that the CPI rose 0.1% in August after remaining unchanged in July. Even though the fuel index fell by 10.6%, it doesn’t seem to be a significant increase, but it did happen. The broad-based monthly item rise would have resulted in substantially greater inflation if gas prices hadn’t fallen.
The recent CPI report did not bode well for gold. Treasury yields rose and reinforced the expectations of a hawkish Fed. Therefore, despite widespread perception that gold can act as a hedge against inflation, the stronger-than-expected result should have a negative impact on gold prices.
Gold has finally broken through the massively key $1,680 support level and reached the low of $1,654 due to inflation data and the expectations of a hawkish Fed. Although the yellow metal rebounded last Friday as the University of Michigan report showed a decrease in inflation forecasts, the dollar and treasury yields fell, causing gold to bounce from multi-month lows toward $1680 but this move seems to be limited ahead of the FOMC meeting will still keep gold under pressure.
FOMC in focus
FOMC monetary policy meeting is scheduled on Wednesday, and it looks like the 75bps rate hike was already priced in.
August CPI reading from last week was 8.3% YoY as opposed to the projected 8.1% YoY and the previous reading of 8.5% YoY. The Core Inflation Rate attracted the markets’ attention even though the reading was better than anticipated. Against a forecast of 6.1% YoY and a previous reading of 5.9% YoY, the Core CPI for August came in at 6.3% YoY. The print not only exceeded forecasts, but it was also significantly higher than the reading from July.
This has set the stage for predictions of a 100bps rate hike. Expectations of a 100bps increase rose to almost 50% at one point after the CPI release. The markets are currently only pricing in a 16% likelihood of a 100bps rate hike which implies that markets are also pricing in an 82% possibility of a 75bps hike, indicating that calmer heads appear to be in control. The August NFP came in at 315,000, and for the week ending September 10, US Initial Jobless Claims decreased for a fifth week in a row to 213,000.
Bank of England rate decision
Last week was the scheduled date for the Bank of England (BOE) interest rate decision. The meeting was moved this Thursday due to the passing of Queen Elizabeth. BOE raised rates by 50bps last August bringing the benchmark rate up to 1.75%. The BOE forecasted that inflation would stay high for the most of 2023 and may increase as high as 13.3% in October. The central bank also anticipated that a recession would start in Q4 2022. A 75bps rate increase in September meeting was promptly priced into the markets.
Meanwhile, UK CPI data which was released last week showed that inflation decreased from 10.1% YoY in July to 9.9% YoY for August. Many experts are anticipating that inflation will be lower than the forecast of 13.3% in October due to the new ceiling on energy prices. Regarding the economy, August saw a significant slowdown in retail sales and decreased from +0.4% in July to -1.6% in August versus -0.5% which was the consensus expectations. The ex-Fuel print decreased by the same amount. The BOE raising interest rates by 50bps this week is now expected by the markets.