U.S. economy continues to shrink, markets focus on Jackson's annual central bank meeting

The focus of this week is the annual global central bank meeting to be held on Friday (August 26) in Jackson Hole, Wyoming. Federal Reserve Chairman Jerome Powell will speak at the meeting. Facing the worst inflation since the early 1980s, the Fed had to raise interest rates quickly. Powell is expected to remain focused on the fight against inflation and how the Fed is committed to winning it.

​​

Ahead of the annual meeting of central banks in Jackson Hole, some Fed officials reiterated their hawkish stance, stressing the need for further rate hikes to rein in upward pressure on prices now at multi-decade highs. But they have yet to decide on a specific rate hike at the next policy meeting.

​​

The market currently expects that the probability of the Fed raising interest rates for the third consecutive 75 basis points in September is less than 50%. The minutes of the Fed's FOMC meeting in July mentioned for the first time that there may be the risk of excessive interest rate hikes, and gold went up in the short-term. However, the minutes also repeatedly mentioned the seriousness of inflation, and gold finally closed down.

​​

The overall U.S. economy shrank for two consecutive quarters, but still added more than 500,000 jobs in July and the unemployment rate fell to a pre-pandemic low of 3.5%. That makes policy more challenging for officials as some economic data may be revised. The Fed has abandoned forward guidance for the coming months, only outlining its current policy intentions after each meeting.

​​

This means that it has become very difficult for people to wonder what will happen next. The second half of the year will be turbulent, with corporate and personal financial planning on a weak footing, especially for stock investors who have recently pushed up share prices and workers who may face layoffs. Risk aversion may limit the downward momentum of gold prices.

​​

The key question for the Fed and the U.S. economy is whether the rate hikes that have been implemented will be enough to dampen demand. If it doesn't, and doesn't confirm a continued trend of slowing inflation in the coming months, the Fed will have to reset expectations for higher borrowing costs, which could lead to a fresh sell-off in stocks, layoffs, and even a recession.

​​

This is the outcome Powell and his colleagues wanted to avoid. But, as he has and is expected to continue to stress, the economy needs to slow for inflation to fall, or the Fed will have to tighten policy further and continue to benefit the dollar, which has resumed its rally.

​​

The Fed's hawkish stance is rooted in market expectations. U.S. Treasury yields are also rising again. For gold, real interest rates have a strong correlation with gold prices. Gold prices will normalize and real rates will have a more neutral impact as interest rate hike expectations take hold.

​​

Bob Haberkorn, senior commodities broker at RKO Futures, warned ahead of the Jackson Hole seminar that the dollar could see a sharp rise this week. It is difficult for gold to rise in this environment. Support for gold is around $1,720, and a break below will drop to $1,700, but below that level there will be buying. "

​​

U.S. Treasuries continued to trade on a heavy tone in early trade, with the 10-year yield rising as much as 10 basis points on the day to 2.983%, surpassing the 50-day moving average. The 10-year yield widened its gap from the 100-day moving average, which has limited its advance since July 22. Yields on the 10-year Treasury note rose, but have not risen above the 3 percent level since July 21. As of 9:50 a.m. ET, the trading volume of treasury bond futures was consistent with the 20-day average, and the trading volume was concentrated in the ultra-long-term treasury bond contract, which was 10% higher than the average level.