Gold trading reminder: Inflation worries helped US bond yields hit a nearly four-week high, gold prices retreated to 200-day moving average

In Asian session on Tuesday (June 7), spot gold fluctuated slightly below the 200-day moving average of 1842.30, and is currently hovering around the 1840 mark. The market generally expects that the US inflation data may strengthen the reason for the Fed to raise interest rates sharply, and the US dollar and US bond yields fluctuated. Going higher, the dollar index refreshed a four-day high, and the yield on the 10-year-old U.S. Treasury bond hit a new high in nearly four weeks, putting the dollar under obvious pressure. Moreover, the market's cooling expectations for a U.S. economic recession also slightly dampened safe-haven demand. However, the geopolitical situation is still tense, which makes the bears still a little concerned.

For gold traders, the focus has turned to the U.S. consumer price index due on Friday (June 10), which will help gauge whether inflation has peaked. Although gold is considered a hedge against inflation, Interest rate hikes to ease rising price pressures have dented interest in non-yielding gold.

Edward Moya, senior analyst at OANDA, said, "If the data does show a slight increase in inflation, gold will weaken ... until we figure out how much the Fed will raise interest rates to control inflation, the market will be in a wait-and-see mode."

But Moya added that the general consensus that inflation is and will continue to decelerate, coupled with Fed policy already priced in, should bring some stability to gold prices.

While the Fed is on track to raise rates by half a percentage point at its June and July policy meetings, high inflation data would increase expectations for even aggressive monetary policy tightening in the second half of the year.

In addition, investors are still waiting for the European Central Bank meeting on Thursday, the current investment bank raised its forecast for the European Central Bank to raise interest rates. Investors need to pay attention to the RBA interest rate decision on this trading day. The market is generally expected to raise interest rates by 25 basis points, which will increase the opportunity cost of holding gold and is also slightly negative for gold prices.

The fundamentals are mainly bearish

[Deutsche Bank: There are few market signs that investors expect a recession in the U.S. economy]

Wall Street luminaries recently warned that raising interest rates by the Federal Reserve could drag the U.S. economy into recession. But stock market investors don't see it that way right now, according to an analysis by Deutsche Bank.

Strategists Parag Thatte and Binky Chadha looked at indicators such as short interest, call volume, market sentiment, and capital flows, and found that many indicate that investors generally expect the Fed to do the right thing, a so-called soft landing. will not undermine economic growth.

"While the prospect of a slowdown in economic growth appears to be fully priced in," they wrote, "it rarely predicts a slowdown to recessionary levels." The team expects the S&P 500 to end the year at 4,750, up from late Monday's close about 15%.

Deutsche Bank said in a June 3 report that short positions betting on falling stock prices were near record lows. In fact, overall short positions haven't changed much from years of downward momentum relative to stock market capitalization and are near 20-year lows.



In addition, volume in call options has fallen sharply from the heights of the pandemic. But the decline, relative to put trading, does not indicate that the market is expecting an economic contraction, they said. "The bearish/bullish ratio is now consistent with a slowdown in economic growth (ISM in the early 50s), but not a recession," they said.

[Dimon's "hurricane" theory continues to cool down, and JPMorgan's chief economist believes there is no danger of recession now]

Bruce Kasman, chief economist at JPMorgan, said the odds of an imminent U.S. recession are slim. For now, investors identify with him more than his boss.

"There's no real reason to worry about a recession," Kasman said in an interview Monday. "There is a certain level of slowdown."

Bruce Kasman, chief economist and head of global economic research at JPMorgan, discusses the outlook for global economic growth, the likelihood of a U.S. recession and the Fed's policy.

JPMorgan Chase CEO Jamie Dimon on Wednesday warned markets to prepare for a "hurricane" as the economy faces a series of unprecedented challenges, including quantitative tightening of monetary policy and Russia's invasion of Ukraine.

"The hurricane is coming our way," Dimon said at a conference. Still, he cited solid consumption, rising wages and plenty of jobs as "bright spots" in the economy.

JPMorgan shares fell 1.8% on the day and the broader market was also lower, with Dimon's remarks cited as a factor. There have been some rebounds since then, with shares rising on Monday.

“Currently, there is quite a tension between a tenacious downward force and a very resilient private sector, and the health of both households and businesses is excellent right now,” Kasman said. “We don’t see a recession in the short term. We expect the global economy to do well in the second half of the year as the U.S. economy slows and the rest of the world improves.”

JPMorgan economists last month cut their growth forecast for the second half of 2022 to 2.4% from 3%, the first half of 2023 to 1.5% from 2.1%, and the second half of 2023 to 1.4% from 1.4% %. They cited falling stock markets, rising mortgage rates and a relatively strong dollar.

Kasman said the Fed's rate hikes and balance sheet reduction were key determinants. "There's a good chance they'll slow down. But at the end of the day, I don't think the market pricing you're seeing is going to equal the Fed getting inflation under control," he said. "The Fed is going to have to do more. But I don't think the Fed is ready or is signaling that it is willing to do more in the near term. The Fed doesn't want to cause a recession right now."

The J.P. Morgan economist said his chief executive had "a view of his own," noting that the company's leadership "has a better understanding of the dynamics of financial conditions and how they will affect the macroeconomy."

Still, "we make our recommendations based on what we know," Kasman said. "We're seeing a slowdown. We're not seeing a financial storm right now. We think the economy will avoid a recession for the rest of the year.

[Investment banks raise their forecast for the rate hike of the European Central Bank]

The ECB is now expected to raise rates by 150 basis points this year, including 50 basis points in July and September, BofA Securities said in a report on Monday.

The bank had expected a 100 basis point rate hike this year and said last week's euro zone inflation rate was well above expectations of 8.1 percent, confirming that 100 basis points would be the ECB's lowest rate hike.

"Our views were inherently more hawkish than consensus, and are even more so now. We continue to worry that this is too much too soon," the analysts said in a note.

In a separate report on Monday, Barclays said it now expects the ECB to raise rates by 25 basis points at each meeting between July and December. It expects another rate hike thereafter in the first quarter of next year, which would bring the ECB's deposit rate to 0.75%.

The ECB last raised interest rates in 2011, and its deposit rate is now minus 0.50%.

[The dollar rises as risk appetite fades, and the market pays attention to inflation data]

The U.S. dollar index continued its gains on Tuesday, reaching a four-day high of 102.67 as of 09:35, and the daily line is expected to be positive for three consecutive days. As risk appetite fell from earlier levels, the U.S. stock market was far below the intraday high, which was later in the week. Safe-haven appeal increases ahead of key inflation data.



The dollar fell back to near 102 after hitting a near 20-year high of 105.01 on May 13, though Friday's strong jobs report helped the greenback post its first weekly gain in three weeks.

The Fed is widely expected to announce a 50 basis point rate hike on June 15. Until then, investors will be watching Friday's consumer price index (CPI) for signs of how long the Federal Reserve may continue to raise interest rates.

"Risk appetite has set the market tone ahead of this week's big event, which does affect expectations for central bank policy for the rest of the year," said Joe Manimbo, senior market analyst at Western Union Business Solutions.

Manimbo added: "The Fed is serious about lowering inflation, and it appears that aggressive rate hikes are still on the table until they see inflation moving materially closer to their target."

[U.S. yields hit a four-week high, approaching a three-and-a-half-year high]

U.S. Treasury bond yields rose sharply on Monday and continued their gains on Tuesday. The 10-year Treasury bond yield once refreshed a nearly four-week high of 3.0565 on Tuesday, approaching a nearly three-and-a-half-year high, as the U.S. Treasury Department will issue new bonds this week, which will be released on Friday Data are expected to show inflation remains elevated.



The U.S. Treasury Department will sell $96 billion in Treasuries, including $44 billion in three-year notes on Tuesday, $33 billion in 10-year notes on Wednesday and $19 billion in 30-year notes on Thursday.

That could push yields higher as banks and investors prepare to digest the offerings.

"The rise in yields is consistent with what the market will do to prepare for new supply, especially long-term debt, ahead of new supply," said Thomas Simons, money market economist at Jefferies in New York.

Inflation expectations also rose, with the breakeven yield on five-year inflation-protected bonds (TIPS), a measure of expected average annual inflation over the next five years, rising to 3.07%. The yield has recovered from a three-month low of 2.86% hit on May 24.

Inflation data due on Friday (June 10) may boost expectations that the Federal Reserve will continue to raise interest rates aggressively. Currently, U.S. price pressures are rising at the fastest pace in 40 years.

Yields on the 10-year U.S. Treasury note fell from a 3-1/2-year high of 3.203 percent on May 9, as investors worried that the Federal Reserve's tightening policy would dent economic growth and risk tipping the U.S. economy into recession. It also raises the possibility that the Fed may pause rate hikes in September.

But yields recovered last week as officials including Fed Vice Chairman Brainard played down the possibility of a pause in rate hikes and expressed concern that inflation will remain high.

“The September moratorium has lost a lot of credibility from the way Fed officials have talked about the issue lately, but I think when we see the (inflation) data, that should really be the case. ," Simons said.

The median forecast of economists showed that the consumer price index (CPI) was expected to rise 0.7% in May, after rising 0.3% in April, with annual inflation unchanged at 8.3%.

Analysts currently generally expect the Fed to raise interest rates by 50 basis points at both June and July meetings, and may increase interest rates by 50 basis points in September. Fed funds futures traders expect the Fed's benchmark interest rate to rise to 3.19% in March from the current 0.83%

Fundamentals are mostly bullish

[Russian and Ukrainian troops compete for control of North Donetsk and start fierce street battles]

Ukrainian and Russian troops fought fierce street battles on Monday for control of the industrial city of Severo Donetsk. Severo Donetsk is a key battle in the Russian offensive against the Donbas region of eastern Ukraine.

It was unclear which side had the upper hand, and "the situation is changing every hour," Stryuk Stryuk, the chief executive of Severo Donetsk, said on television.

The city has become the main target of Russia's offensive in the Donbas region. The Donbas region includes the Donetsk and Luhansk regions. "Our heroes have not given up their positions in Severo Donetsk. In the city, fierce street fighting continues," Ukrainian President Volodymyr Zelensky said in a video address on Monday night.

Ukraine's Defense Ministry said Russia was investing troops and equipment to take Severo Donetsk. This is the largest city in the Luhansk Oblast still under Ukrainian control.

Luhansk Oblast Governor Serhiy Gaidai said earlier on Monday that the situation had deteriorated after Ukrainian defenders pushed back Russian troops over the weekend.

Street fighting is raging and neither side is ready to retreat, Stryuk said. Both sides said they inflicted heavy casualties on the other.

The Ukrainian military released an update late in the evening that two civilians were killed in Russian shelling on Monday as Russian troops opened fire on more than 20 communities. Russia denies targeting civilians in the conflict.

[Russia announces personal sanctions on more than 60 people including U.S. Treasury Secretary, Energy Secretary, Defense and Media Executives]
Russia's foreign ministry said on Monday that it had imposed individual sanctions on 61 U.S. officials, including Finance Minister Yellen and Energy Minister Granholm, as well as key defense and media executives.

Russia's foreign ministry said it had imposed individual sanctions on the named individuals, barring them from entering Russia in retaliation for "the US has continued to expand sanctions against Russian political, public figures and representatives of domestic businesses."

The individuals were the heads of major military-industrial companies, media platforms, rating agencies, aircraft and shipbuilding companies, and U.S. State Department officials who "participated in false reports of Russian 'malicious' cyberattacks," the report said.

Also on the list are: U.S. Trade Representative Dai Qi; Delta Air Lines DAL.N Chief Executive Edward Bastian; White House Communications Director Kate Bedingfield; White House Budget Director Shalanda Young; State Department Sanctions Coordination Office Director James O'Brien; Exchange Chairman Jeffrey Sprecher and Fitch Group President and CEO Paul Taylor, among others.

[Singapore Precious Metals Conference Guest: Gold's safe-haven appeal has doubled amid a series of economic slowdown warnings]

Gold could be in for a fresh rally, with warnings of a global economic slowdown paving the way for prices to reclaim $2,000 an ounce.

The combination of decades-high inflation, geopolitical turmoil and intensifying talk of a recession should benefit the traditional safe-haven asset, speakers interviewed ahead of this week's precious metals conference in Singapore said.

Gold prices have fallen about 10% from their mid-March highs after fears that Russia’s invasion of Ukraine could turn into a broader conflict dissipated. But banking executives are now warning of a fresh economic shock and the looming threat of stagflation, which would be bullish for gold.

"After decades of massive deficit spending and ultra-easy monetary policy, we are heading for a period of stagflation," said Gregor Gregersen, founder of Silver Bullion Pte. “In this environment, safe-haven assets like physical gold and silver are the best things you can own.”

Gregersen expects gold and silver to rise to around $2,000 and $26 an ounce, respectively, by the end of the year -- from around $1,840 and $22 now, and possibly beyond those levels in the event of an unexpected "black swan" event.

Gold prices are facing resistance at $1,930 an ounce, but once that level is breached, it could hit $2,000, driven by technical trade, said Rhona O'Connell, head of market analysis in Asia and elsewhere at StoneX Group.

"Economic and geopolitical fundamentals are more supportive than bearish for gold," O'Connell said in an interview ahead of the conference.

While rising interest rates and rising bond yields have weighed on gold, the Federal Reserve's aggressive tightening stance has also raised fears of a recession, especially in the United States.

Gold prices have fallen in recent months as the Federal Reserve kicks off its rate hike cycle. Fed officials at the time raised interest rates for the first time since 2018 and signaled they would raise rates at the remaining six meetings this year.

Goldman Sachs President John Waldron and JPMorgan Chase CEO Jamie Dimon both warned about the hit to the economy last week. Challenges include inflation risks and the impact of war. These uncertainties may prompt more investors to seek asset preservation.

Outlook

Anil Panchal, an analyst at the well-known financial website FXStreet, wrote on Tuesday that if the price of gold falls below the next support of $1,828 per ounce, the market outlook may fall further.

Panchal believes that gold's recent weakness may be related to the strengthening of the U.S. dollar index, which in turn takes cues from U.S. Treasury yields. The dollar's strength has been supported by stronger U.S. bond yields amid expectations of faster or larger rate hikes by the Federal Reserve.

Panchal pointed out that after the price of gold fell below the key support of $1,840 an ounce, the price of gold may fall further towards the recent shock lows around $1,828 an ounce. Once it falls below the above level, it cannot be ruled out that the price of gold will fall to the $1,800/oz mark, or even to a May low close to $1,785/oz.

On the upside, Panchal said gold bulls need to see a clear break above $1875/oz to challenge the 50-day and 100-day moving average confluence area (close to $1888-90/oz).

In the short term, Panchal expects further weakness in gold prices.



At 10:00 GMT+8, spot gold is now at $1,840.82 per ounce.