- Treasury yields remained elevated on Tuesday after a rally in the previous session.
- Powell confirmed that inflation was on a downtrend.
- The US revealed an unexpected increase in job vacancies in May.
Gold prices fell on Tuesday as high Treasury yields reduced demand for the yellow metal. This overshadowed slightly dovish remarks from Fed Chair Powell. At the same time, employment data showed continued resilience in the US labor market.
Treasury yields remained elevated on Tuesday after a rally in the previous session. The 10-year yield rose to a one-month high on Monday as investors priced in the likelihood of Trump’s victory. The presidential debate on Thursday last week showed that Biden was weaker than Trump. Therefore, there was speculation about what a Trump presidency would mean for the US. Notably, tariffs and government borrowing would increase. Inflation would also increase, which could mean high rates and a stronger dollar. Meanwhile, gold prices would suffer.
The subsequent rally in yields raised the opportunity cost of holding bullion. Investors were drawn to high-yielding US assets. However, it is still early to predict who will win the presidential election in November. Still, a Trump win would likely hurt gold prices.
The rally in yields overshadowed an increase in Fed rate cut expectations after Powell’s speech on Tuesday. Notably, the US central bank chair confirmed that inflation was on a downtrend. However, he said policymakers will wait for more data to show that this trend will continue to the 2% target. According to Powell, policymakers still need more confidence that inflation will reach 2%.
Last week, the US PCE price index showed that inflation eased to 2.6% in May, which was a relief for traders. Consequently, after Powell’s speech, the likelihood of a rate cut in September rose from 63% to 69%. Although policymakers remain cautious, investors are gaining confidence that the Fed will cut twice this year.
US job openings (Source: Bureau of Labor Statistics)
Elsewhere, data from the US revealed an unexpected increase in job vacancies in May. Openings increased to 8.140 million, beating forecasts for 7.910 million.
The labor market has remained the most significant hurdle for the Fed in lowering demand. The sector has remained resilient despite high interest rates. This week, economists expect fewer new jobs in the economy. If this is the case, there will be a surge in Fed rate cut expectations. However, if the labor market remains resilient, policymakers will maintain their cautious stance.
