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Gold trading reminder: The U.S. service industry continues to cool down, and bulls "play a triumphant song" hitting the 2300 mark

2024-04-04

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At the beginning of the Asian market on Thursday (April 4), spot gold remained strong, once hitting a record high of $2,302.46 per ounce, and currently trading around $2,297.02 per ounce; gold prices continued their momentum to set a new record high on Wednesday, and had a negative impact on inflation. Stress concerns boosted hedging demand for gold, U.S. service sector growth slowed further in March, and the U.S. dollar index fell from a four-and-a-half-month high to a one-week low, continuing to provide upward momentum for gold prices.

Matt Simpson, senior analyst at City Index, said, "As Ukraine continues to attack Russia's oil infrastructure, gold continues to receive safe-haven inflows, ignoring the prospect of rising U.S. yields and the Fed not cutting interest rates in June."

Federal Reserve officials consider three interest rate cuts this year a "reasonable" forecast, although recent stronger-than-expected economic data has cast doubt on that outcome among investors.

Data released this week showed an unexpected rebound in U.S. manufacturing, with rising raw material prices raising concerns that inflation may be picking up again.

"With the general rise in commodity prices comes the risk of a new round of inflation - so investors may be hedging against inflation," Simpson said.

Gold is used to hedge against inflation and as a safe haven during times of political and economic uncertainty. Since the beginning of this year, gold prices have risen by more than 10.8% and are expected to rise for the seventh consecutive trading day.

Growth in the U.S. services sector slowed further in March, while the input price index, which measures the prices companies pay, fell to its lowest in four years, a good sign for the inflation outlook.

Still, the slowdown in inflation is likely to be gradual, as other data on Wednesday showed companies were willing to give workers a big pay rise in March when they switched jobs. Although labor market conditions have eased, skilled workers in industries such as construction are still in short supply.

"This is a sign that services sector inflation should continue to ease in the coming months, which is a welcome sign for the Fed to start 2024 with price indicators above current levels," Nationwide senior economist Ben Ayers explain. "Nevertheless, the first rate cut may be delayed until the second half of 2024 due to strong labor market conditions."

The situation in the Middle East continues to push risk aversion

In the early morning of April 4, local time, the deputy governor in charge of security affairs in Sistan and Baluchestan Province in southeastern Iran said that the military headquarters in the province's Rask and Chabahar cities were attacked by terrorists. The terrorist organization "Justice Army" was involved in this terrorist attack.

The deputy governor in charge of security affairs of the province said that in the city of Lask, terrorists tried to break into the Revolutionary Guards base, but failed, and the conflict is still continuing.

It is reported that three Iranian soldiers have died in combat with the terrorist organization "Justice Army".

Iran blamed Israel for a deadly airstrike on its consulate in the Syrian capital Damascus on Monday. The strike killed seven officers. Tehran on Tuesday pledged retaliation for the attack, seen as a major escalation in the Israeli-Palestinian war.

Economists at ANZ Bank pointed out that the timing and pace of the easing cycle are crucial, and geopolitical risks are becoming increasingly prominent, which is conducive to safe-haven demand.

The U.S. service sector continued to cool in March, with the input price index falling to its lowest level in four years

The Institute for Supply Management (ISM) said the U.S. non-manufacturing purchasing managers index (PMI) fell to 51.4 in March from 52.6 in February. This is the second consecutive monthly decline since the index rebounded in January. Readings above 50 indicate expansion in the services sector, which accounts for more than two-thirds of the economy. Economists polled by Reuters had expected the PMI to rise to 52.7 in March.

The services PMI is consistent with the economy continuing to expand, albeit at a moderate pace. Since March 2022, the Federal Reserve has raised interest rates by a cumulative 525 basis points, and economic growth is slowing. The Fed is expected to begin cutting interest rates this year, but the timing will depend on the performance of inflation. The services sector is the main driver of inflation, with the impact coming from wage growth.

The new orders indicator for the services sector fell to 54.4 in March from 56.1 in February. Production remained strong and the business activity index rose to 57.4 from 57.2 in February.

Services inflation is also falling as demand slows. The survey showed that the input price index fell to 53.4 in March from 58.6 in February, the lowest since March 2020. Data last week showed that service-sector inflation, excluding energy and housing, cooled sharply in February after accelerating in January.

Still, businesses are worried about inflation. Stephen Brown, deputy chief economist for North America at Capital Economics, said: "This means that core services inflation excluding housing, which is super core inflation, will resume its trend of falling back to the normal pace before the epidemic."

The supply of inputs to the service industry further improved in March. The supplier delivery indicator fell to 45.4 in March from 48.9 in February. Below 50 indicates faster delivery. This is also one of the reasons why the PMI of the service industry declined. The services employment index rose to 48.5 from 48.0 in February. Comments from interviewed companies included “slow attrition and approval processes to fill vacant positions” and “still dealing with year-end retirements and vacancies remaining unfilled.”

After the U.S. ISM service industry PMI data was released, the U.S. dollar index was significantly dragged down, falling 0.5% to a one-week low on Wednesday, after setting a new high of more than four and a half months on Tuesday. In the Asian market on Thursday, the U.S. dollar index fell slightly to 104.20, a new low since March 26.

Fed Chairman Powell reiterates that he may start cutting interest rates this year, but will have time to think carefully

Federal Reserve Chairman Jerome Powell reiterated on Wednesday that given the strong economy and higher-than-expected recent inflation data, the Fed has time to consider when to cut interest rates for the first time.

"Recent job growth and inflation data have been higher than expected," Powell said in remarks prepared for the Stanford Graduate School of Business. "However, recent data have not materially changed the overall picture. The economy continues to grow at a solid pace, the labor market is strong but returning to balance, and inflation is falling back towards 2%. There are bumps in the road."

"Given that the economy remains strong and progress has been made so far on inflation, we have time to let incoming data guide our policy decisions," Powell said, adding that decisions would be made at his discretion "at each meeting."

"If the economy develops generally in line with our expectations," Powell said he and his Fed colleagues broadly agreed that lowering policy rates would be appropriate "at some point this year."

Powell said interest rates would be cut only when policymakers have "greater confidence" that inflation is continuing to move back toward the Fed's 2 percent target. Powell also repeated language the Fed has adopted recently to reflect the central bank's efforts to balance the risks of cutting interest rates before inflation is truly under control with the risks of overly suppressing economic activity.

Currently, the Fed's preferred inflation measure remains a half percentage point or more above its target, and there has been little recent progress on inflation. This has led some officials to believe that a rate cut may not be necessary until the end of the year.

Investors still expect the Federal Reserve to cut interest rates for the first time at its June 11-12 policy meeting, but expectations for a rate cut have gradually declined due to stronger-than-expected data recently released. The U.S. employment report for March will be released on Friday, and the latest inflation data will be released next week. Powell said it was "too early" to tell whether recent stronger-than-expected inflation data was "more than just a bump."

Tai Wong, an independent metals trader in New York, said, "Gold prices surged to another all-time high on increased trading volume after Powell emphasized that 'bumps' in the road will not change the overall optimistic outlook." "Powell's usual cautious approach is not That will worry gold bulls... I think the bulls want to see $2,300 an ounce, and I think more 'tourists' are participating in the trade."

FXStreet analyst Christian Borjon Valencia pointed out that a weaker U.S. dollar supported a surge in gold prices on Wednesday. Gold prices are currently hovering around $2,300 per ounce.

Valencia said Federal Reserve Chairman Powell's hint that interest rates would be cut during the year, subject to continued decline in inflation, boosted gold prices. Gold rose as well, despite ADP data showing a strong job market, and signs of slowing service sector activity.

Atlanta Fed President: May not cut interest rates before fourth quarter

Atlanta Fed President Bostic said in an interview on Wednesday that there may not be an interest rate cut before the fourth quarter of this year. Bostic predicts that only 25 basis points of interest rate cuts will be appropriate in 2024, far less than the three or more rate cuts expected by most of his colleagues.

"We've seen inflation become more volatile," Bostic said. "If the economy develops as I expect, with GDP and employment continuing to be strong and inflation slowly declining this year, I think it would be appropriate for us to start cutting interest rates at the end of the year, in the fourth quarter."

Daniel Pavilonis, senior market strategist at RJO Futures, noted that "the possibility of a rate cut remains, but the data is still very strong. This is an election year, so I don't think the Fed will be willing to be responsible for any type of market collapse."

Outlook

This trading day will usher in the number of U.S. challenger company layoffs in March, the U.S. trade balance in February, and changes in the number of U.S. initial jobless claims for the week ending March 30. Investors need to focus on this. In addition, many Federal Reserve officials will deliver speeches one after another, including Philadelphia Fed President Harker, Richmond Fed President Barkin, Chicago Fed President Gurrs, Cleveland Fed President Mester, Minneapolis Fed President Card Shkari, investors need to pay attention.

At 07:53 Beijing time, spot gold was trading at $2,296.74 per ounce.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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Gold trading reminder: The U.S. service industry continues to cool down, and bulls "play a triumphant song" hitting the 2300 mark

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