- The US economy added more jobs than expected in May.
- Inflation data on Wednesday revealed softer-than-expected numbers for May.
- The Fed will release crucial projections for growth and price increases.
Gold prices edged lower on Tuesday as the dollar rose to a four-week peak, making the yellow expensive and reducing demand. Investors were on the sidelines on Monday and Tuesday as they awaited Wednesday’s crucial inflation report and the Fed policy meeting.
Markets have been preparing for this month’s inflation report since the last one showed a cooler economy. As a result, there was more optimism about Fed rate cuts. However, since then, rate cut expectations have fluctuated as incoming data has shown a mixed picture of the economy. Investors went from expecting one rate cut this year to two. However, this outlook shifted slightly on Friday last week after an upbeat US employment report.
The US economy added more jobs than expected in May, increasing the average hourly earnings rate. This greatly affected expectations that the first Fed cut would come in September. Moreover, it came after figures in the previous month showed a much smaller job increase than expected. Therefore, there has been a lot of uncertainty about the economy and monetary policy.
US Treasury yields (Source: Bloomberg)
Gold prices fell over 3.5% on Friday as the US employment report led to a surge in Treasury yields. Bullion became less attractive compared to yielding assets like the dollar. At the same time, the decline came due to a report that China’s central bank held off on buying gold in May. Lower demand weighs on prices. However, experts believe China will resume purchases when prices pull back from recent peaks.
And now, markets are back to pricing in two cuts this year after Inflation data on Wednesday revealed softer-than-expected numbers for May. The headline figure fell from 0.3% to 0.0%, while the core CPI fell from 0.3% to 0.2%. Meanwhile, the annual figure fell from 3.4% to 3.3%. These numbers will likely give policymakers more confidence that inflation is back on a downtrend. As a result, there is a higher chance that the Fed will implement the first rate cut in September.
Markets will now wait for the Fed policy meeting and for policymakers to comment on the state of inflation. Moreover, the Fed will release crucial projections for growth and price increases. These will show when the central bank sees inflation returning to target.
