- The US PPI rose 0.5%, beating estimates for a 0.3% increase.
- Markets expect a smaller 44 basis points of Fed cuts this year.
- Powell’s speech supported gold as he maintained that inflation would continue to lower.
Gold prices recovered on Tuesday as demand rose due to a decline in US Treasury yields and the dollar. This decline came after the US released an upbeat wholesale inflation report that had the opposite effect on prices. At the same time, gold was stronger as Powell maintained his outlook that inflation would decline, hence no need for a rate hike.
US wholesale inflation (Source: Bureau of Labor Statistics)
The US Producer Price Index report showed much higher inflation than economists had expected in April. The PPI rose 0.5%, beating estimates for a 0.3% increase. This increase came from higher costs of goods and services in April. Ideally, such an increase should have weighed on gold prices and boosted the dollar.
However, after three months of higher-than-expected readings, investors had likely already priced in such an outcome. Therefore, after the release, there was only a momentary surge in the dollar before it reversed. Demand for gold went up because a weaker dollar made the yellow metal cheaper for foreign buyers.
Nevertheless, markets expect a smaller 44 basis points of Fed cuts this year. Clearly, inflation in the country remains high. Therefore, the Fed needs more time to ensure that it drops.
Investors are now eyeing the consumer inflation report on Wednesday for more clarity on the path for interest rates in the US. Economists expect a decline in inflation from 0.4% in the previous month to 0.3%. Another upside surprise would further reduce expectations that the Federal Reserve will cut rates in September.
Elsewhere, Powell’s speech on Tuesday supported gold as he maintained that inflation would continue to lower. Therefore, he removed any fears that the US central bank might consider raising interest rates. Powell expects inflation to return to the decline seen at the end of last year. However, he admitted that his confidence had fallen.
Furthermore, he expects growth in the country to remain robust, allowing the central bank to keep rates at current levels as inflation gradually falls. Most policymakers are confident that the policy is restrictive enough to lower inflation to the central bank’s target. Nonetheless, an upbeat CPI report might weigh on gold because it would mean high rates for longer, which weakens the appeal for non-yielding assets.
