Risk aversion in the market heats up, and the gold market rises!

Gold rose 0.6% to $1,765.76 an ounce, a multi-week high. U.S. dollar pared initial gains after data showed U.S. inflation jumped again, adding to gold’s safe-haven appeal, and current price range appears to be attracting buying; U.S. dollar’s ​​reversal as markets decipher the data is pushing gold higher again. Some of that may be safe-haven buying, but overall it's also a trend to buy the metal, which is "pretty cheap" right now. Gold prices are still set for a fourth straight monthly decline. Gold has lost more than $300 since climbing to $2,000 an ounce in March, with the Federal Reserve on a path to rapid rate hikes and the U.S. dollar becoming the safe-haven asset of choice amid growing recession risks.

The Federal Reserve raised interest rates by 75 basis points for the second time in a row on Wednesday (July 27). Chairman Jerome Powell said another "unusually large" rate hike at the September policy meeting may be appropriate, but a decision to do so will depend on upcoming economic data, and the Fed will not give forward guidance. The U.S. economy unexpectedly contracted by 0.9% in the second quarter and declined for the second consecutive quarter, increasing the risk of an economic slowdown, which boosted gold’s safe-haven appeal, with gold prices hitting a new high of $1,767.80 an ounce since July 6.

BBVA expects the Fed to raise interest rates by 50 basis points in September, followed by two consecutive interest rate hikes of 25 basis points in November and December, and the federal funds rate will rise to 3.25-3.50% by the end of the year; It peaks at 3.75-4.00% in the first half of 2023, when core inflation is expected to remain sticky. But the path of monetary policy in 2023 and beyond will be more uncertain as risks to the economic outlook may become more two-way. Rising odds of a recession in 2023 will make the Fed's job more challenging. But for now, the most likely scenario remains that the Fed will need to insist on a series of further rate hikes.

Barclays strategist Joseph Abate and economist Jonathan Millar said in a report that the Fed is likely to slow quantitative tightening early next year to slow the decline in bank reserves and prevent them from falling below sufficient levels. The goal of the normalization of the Fed's balance sheet is to establish an adequate reserve mechanism, that is, the central bank's liquidity supply is sufficient, and the Fed does not need to intervene in the overnight market, and its goal is not a clear reserve level. Barclays estimates that bank reserves will shrink to $2.1 trillion by the first quarter of 2023, possibly close to the level where banks start pushing up unsecured rates and "resulting in a sudden rise in deposit rates." The Fed may try to "smooth the cycle" by adjusting the RRP facility to reduce its balances while slowing the decline in reserves and prolonging quantitative tightening, but this could pull down Treasury and repo rates and raise political concerns.

The release of US GDP data is certainly weaker than expected. The second consecutive negative GDP reading will further fuel the recession, but I agree with Chairman Powell that the economy, while slowing, is not exhibiting the characteristics of a recession. Most notably, the labor market remains strong.

Initial jobless claims have generally risen in recent months and are hovering near their highest levels since November, while big-name companies in industries such as technology and real estate have cut jobs and halted hiring. In recent weeks, tech companies including Spotify and Alphabet's Google have said they will slow hiring amid global economic uncertainty. Companies in other industries, such as cryptocurrencies and autos, have also said they are laying off workers.