CPI data unexpectedly broke the table, and the trend of gold prices is still variable

Last week (June 6-June 10), gold fluctuated widely due to the inflation environment and expectations of interest rate hikes, with the highest and lowest fluctuations reaching as high as $50. The gold trend is difficult to unfold, mainly related to the current complex economic environment. First of all, the hawkishness of the European Central Bank makes the US index weaken, which supports gold. The prospect of interest rates has weighed on gold again. The decisive impact on gold prices this week is the Fed’s interest rate decision on Thursday, and the market is expected to make more hawkish remarks from Powell.

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The latest non-farm payrolls report showed that the US non-farm payrolls increased by 390,000 in May, higher than the expected increase of 325,000. After the data was released, expectations for the Fed to continue raising interest rates soared, the U.S. index soared, and gold pared earlier gains.

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Nonfarm payrolls rose better than expected in May, marking the seventh better-than-expected increase in nonfarm payrolls in the past eight months. With job creation quite good and inflationary pressures in the labor market likely already starting to peak, the Fed is expected to hike rates by 50 basis points in June and July still the default option. At the same time, uncertainty about the geopolitical situation, rising costs and the Federal Reserve raising interest rates have increased concerns about economic growth and also affected the prospects for substantial employment growth.

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The stunning performance of the non-farm payrolls data this time allows the Federal Reserve to temporarily reassure its concerns about a hard landing of the economy, which greatly increases the possibility of raising interest rates by 50 basis points in September.

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On Tuesday (June 7), Yellen once again warned of high inflationary pressures caused by the situation in Russia and Ukraine, pointing out that inflation is the most important economic problem at the moment.

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U.S. Treasury Secretary Janet Yellen told a Senate Finance Committee hearing that inflation is likely to remain high and she shouldn't call last year's sharp price hikes "transitory." Meanwhile, Yellen continued to defend President Biden's $1.9 trillion U.S. rescue plan at the hearing, which Republicans blamed for pushing inflation to a 40-year high, adding to investor sentiment about U.S. Concerns about the prospect of a recession.​​

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Affected by Yellen's speech, U.S. bond yields fell sharply, and gold rebounded again, recovering the losses caused by non-agricultural jobs. On the one hand, high inflation will stimulate the Fed's demand for interest rate hikes, and on the other hand, it will be good for gold, which has anti-inflation content. After the Fed's expectations of aggressive interest rate hikes were released as non-farm payrolls improved, the stimulus for gold from high inflation began to return to the market.

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On Thursday (June 9), the European Central Bank announced its interest rate decision, keeping the three key interest rates unchanged, in line with market expectations. The European Central Bank said that based on the latest assessment, the European Central Bank decided to take further steps to normalize monetary policy; decided to purchase net assets in the asset purchase program from July 1, 2022, and plans to raise interest rates by 25 basis points in July, Another rate hike is expected in September, after which the key rate will continue to rise gradually. In terms of economic forecasts, the European Central Bank raised its inflation forecast for the next three years and lowered its economic growth forecast for this year and next.​​

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After the announcement of the European Central Bank's interest rate decision, traders raised their bets on the European Central Bank's interest rate hike, and they are expected to raise interest rates by 150 basis points by December. Money markets have ramped up bets on a rate hike by the European Central Bank, expecting a cumulative 140 basis points of rate hikes by the end of the year, including 75 basis points by early September.​​

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After the European Central Bank announced its interest rate decision, the euro rose slightly against the dollar, but then European Central Bank President Christine Lagarde held a press conference and said that inflation is at an unwelcome high level, and inflation risks are mainly skewed to the upside. High inflation is a major challenge and needs to be monitored for early signs that inflation expectations are above target. The Russian-Ukrainian conflict will weigh on market confidence and dampen economic growth. EUR/USD retreated as Lagarde only reiterated her previously outlined plans for a 25bps rate hike in July and September, and was not open to a 50bps hike in July, falling short of market hawkish expectations Because of all the gains and further extended losses.​​

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The European Central Bank mainly affects the trend of the euro, and the euro is the largest component currency of the US index, so the trend of the euro will also affect the US index to a large extent. Gold transactions are priced in US dollars, so the rise in Europe and the United States will be short-term bullish for gold. But from another point of view, any central bank that exceeds expectations is bad for gold, so this ECB interest rate decision has not played a role in boosting gold, but aggravated the shock.

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On Friday (June 10), the most announced new U.S. CPI in May rose by 8.6% year-on-year, a new high; the core CPI increased by 6% year-on-year, also higher than expected. In terms of sub-items, prices of almost all important items are increasing, indicating that the endogenous driving force of inflation is strong. If the CPI in June continues to rise at the current month-on-month growth rate, the inflation level will be even higher.​​

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The record high inflation has brought a major challenge to the Fed. If it wants to control inflation, it may need more aggressive monetary tightening strategies, and tighter monetary policy will increase the downward pressure on the economy and increase the probability of economic recession. One possibility is that the Fed had to trade a recession for price stability, thus recreating the "Volcker moment" of the year. Judging from the market's initial reaction, although the short-term interest rate hike is expected to increase, the long-term economic outlook has declined, and the decline in US stocks and concerns about economic recession have supported the strength of gold prices, so the US index and gold have both pulled up. This Thursday will usher in the Fed's interest rate decision, and there are still large variables in the trend of gold.

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The Fed's 50 basis point rate hike in June is a certainty, but it is still necessary to beware of unexpected hawkish signals from Powell in the early hours of this Thursday. The May CPI data reinforced the market's expectation that the Fed will continue to raise interest rates by 50 basis points through September, and some investors in the market began to bet that the Fed may raise interest rates by 75 basis points if inflation pressure does not cool down.​​

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It is expected that at the press conference after this week's interest rate meeting, Powell may refuse to rule out the probability of raising interest rates by 75 basis points, strengthening market expectations, and there is a high probability that Powell will say that inflation is still on an upward trajectory. Both meetings raised rates by 50 basis points. Once the actual situation changes and exceeds the above expectations, the gold market may usher in a new round of huge fluctuations.