- The People’s Bank of China plans to cut borrowing costs by 50-bps and inject more money into the economy.
- US consumer confidence unexpectedly fell to 98.7 from 105.6 in August.
- The Federal Reserve cut borrowing costs by a massive 50-bps last Wednesday.
Gold prices eased slightly on Wednesday after reaching new highs in the previous session. The rally came after the People’s Bank of China announced stimulus measures to support the economy. At the same time, the dollar dropped after economic data revealed that US consumer confidence missed forecasts.
China’s stimulus package, announced on Tuesday, boosted commodities like oil and gold. The People’s Bank of China plans to cut borrowing costs by 50-bps and inject more money into the economy to support the slow recovery. China is a big consumer of gold. Therefore, a stronger economy improves the outlook for demand, boosting prices.
Elsewhere, gold prices got support from a weaker dollar, which increased foreign demand. The greenback fell after data revealed a significant drop in consumer confidence. Consumer confidence unexpectedly fell to 98.7 from 105.6 in August. The decline came as most consumers worried about the health of the US labor market.
High interest rates have weighed heavily on labor demand. As a result, job growth has eased, and the unemployment rate has risen to 4.2%. Although the risk of a recession remains low, the job market is deteriorating.
Gold Futures Chart (Source: Bloomberg)
The Federal Reserve cut borrowing costs by a massive 50-bps last Wednesday, taking gold to an all-time high. Powell noted that the cut was meant to keep the unemployment rate low. The US central bank has closely monitored the labor sector, which drives much of the economy. Therefore, a massive cut could raise fears that policymakers are worried about the sector. Still, as borrowing costs drop, demand for labor will recover in the long run.
Moreover, lower borrowing costs will keep gold prices high as demand for the non-yielding metal soars. Market participants are currently pricing an almost 50% chance of another super-sized rate cut in November. However, this outlook might keep shifting with incoming data.
The next major US economic indicators include the GDP and core PCE reports. If the GDP shows a resilient economy and the PCE shows lower inflation, the chances of a soft landing for the Fed will increase. On the other hand, deterioration in the economy could pressure the central bank to cut rates faster, boosting gold prices.
