Fundamental Analysis

Gold Climbs as Yields Decline on Mixed US Data

  • Treasury yields dropped after the US released mixed data.
  • The US economy grew at a faster-than-expected rate in the third quarter.
  • The ECB ended its longest streak of rate hikes.

Gold closed higher Thursday as US Treasury yields retreated while investors absorbed mixed US economic data.

US Economic Surprise Index (Source: Bloomberg)

US Economic Surprise Index (Source: Bloomberg)

The US economy expanded at a faster-than-expected rate in the third quarter due to strong consumer spending and a strong labor market. Gross domestic product went up by 4.9% annually in the last quarter. It is the fastest since Q4 of 2021. Economists had expected GDP to rise at a 4.3% rate. 

Moreover, the economy expanded at a 2.1% rate in April-June. It is expanding well above what Fed policymakers believe is the non-inflationary expansion rate of about 1.8%. However, the GDP data will likely not impact near-term monetary policy due to the recent surge in US Treasury yields and the recent equities market selloff, which have tightened US financial conditions.

Moreover, business investment weakened as outlays on equipment fell, and the boost from the construction of factories disappeared. 

Treasury yields fell after releasing softer-than-expected US inflation and disposable income data. The data supported market estimates that interest rates are near their peak, lifting gold prices. Underlying inflation eased considerably last quarter. Most experts now believe the Fed can achieve a “soft landing” for the economy. 

The benchmark 10-year yield was down 10.4 basis points on the day, a decline from 5.021%, the highest level hit since 2007. 

Notably, the price index for personal consumption expenditures (PCE) minus food and energy rose at a 2.4% rate. It was the slowest pace since Q4 of 2020 and came after a 3.7% increase in Q2.

The core PCE price index is an inflation gauge the Fed tracks for its 2% target. The US central bank will most likely leave rates unchanged at its meeting next Wednesday. Since March 2022, it has lifted its benchmark overnight rate by 525 basis points to the current 5.25%- 5.50% range. 

Further supporting gold was a pause in rate hikes in Europe. The European Central Bank ended the longest streak of rate hikes on Thursday. It left its main rate at an all-time high of 4.0% and said the latest economic data pointed to inflation slowing down to its 2% target.