Gold Price Vulnerable to Persistent US Inflation

The cost of gold might organize further endeavors to test the 2022 high ($2071) as it moves to a new week-after-week high ($1984), however new information print emerging from the US might prompt a pullback in bullion as the Individual Utilization Use (PCE) cost file is supposed to show tenacious expansion.

Late improvements in the cost of gold raise the extension for a move towards the month-to-month high ($2010) as it cleans the reach bound cost activity off of recently, and the valuable metal might follow the positive slant in the 50-Day SMA ($1892) as the Central bank gives off an impression of being on target to change gears.

Notwithstanding, the update to the US PCE, the Federal Reserve’s favored measure for expansion, may create headwinds for bullion as the center rate is supposed to hold consistent at 4.7% per annum in February. Indications of tacky value development might push the Government Open Market Panel (FOMC) to seek after a more prohibitive strategy as expansion stays well over the national bank’s 2% objective, and Executive Jerome Powell and Co. may convey another 25bp rate climb at the following loan fee choice on May 3 particularly as ‘financial pointers have commonly come in more grounded than anticipated.’

So, tenacity in the center US PCE might delay the cost of gold as it comes down on the Fed to execute higher loan fees, however, the valuable metal might organize further endeavors to test the 2022 high ($2071) as it returns quickly in front of last week’s low ($1934).

The cost of gold is minimally transformed from the outset of the week as it returns in front of last week’s low ($1934), and the valuable metal might follow the positive slant in the 50-Day SMA ($1892) as it clears the reach bound cost activity extended from the week before.

The move over the $1973 (78.6% Fibonacci retracement) to $1977 (half Fibonacci expansion) locale raises the degree for a run at the month-to-month high ($2010), with a break/close over the $2018 (61.8% Fibonacci expansion) to $2020 (78.6% Fibonacci augmentation) region opening up 2022 high ($2071).

In any case, the inability to clear the month-to-month high ($2010) may prompt a bigger pullback in the cost of gold, with a move beneath the $1928 (23.6% Fibonacci retracement) to $1937 (38.2% Fibonacci expansion) locale opening up the $1886 (23.6% Fibonacci expansion) to $1987 (61.8% Fibonacci retracement) region.

Australian Dollar Dips After RBA Leave Rates Unchanged

The Australian Dollar slipped slightly in the aftermath of the RBA standing still on rates for the first time since May 2022.

The RBA maintained some flexibility and didn’t rule out future hikes. In the accompanying statement on monetary policy, they said, “The Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target.”

Interest rate markets are currently pricing no more hikes and a better-than-even chance of a 25 basis point cut by the end of the year.

Today’s price action comes after a massive rally for the Aussie yesterday. Markets were rattled by the huge surge in crude oil prices after OPEC+ cut its crude oil production target by 1.1 million barrels per day. The move compounded existing tightening supply issues.

This saw Treasury yields slide lower, taking the US Dollar with it. AUD/USD was the largest beneficiary in the aftermath. The yield spread between Treasuries and Australian Commonwealth Government bonds (ACGB) moved back toward favoring AUD which may have played a role in the rally.

The RBA has raised the cash rate by 350 basis points since May 2022. In October 2021 the Australian Prudential Regulation Authority (APRA) released this statement.

“APRA has told lenders it expects they will assess new borrowers’ ability to meet their loan repayments at an interest rate that is at least 3.0 percentage points above the loan product rate.”

Previously, the hurdle was 2.5%. Much has been made of the so-called ‘mortgage cliff’ where borrowers will need to refinance their debt of the last few years at current levels. These debts might be near or exceed the upper end of APRA’s expectation of appropriate lending.

This might go some way to explain why the RBA is hesitating to tighten monetary policy while CPI remains much higher than its target of 2–3% over the business cycle.

Quarterly CPI will be released later this month and it will be only the second time that it can be compared to the new monthly CPI figure that the Australian Bureau of Statistics (ABS) introduced last October.

This new monthly gauge only covers around two-thirds of the basket of goods and services that is counted in the quarterly figure.

The RBA has previously cited the softening in the monthly CPI number as a reason to be less hawkish. Another disparity of 0.6% the wrong way could be a headache for the central bank and could see the monthly read defenestrated.

Looking ahead and across the Tasman Sea, the Reserve Bank of New Zealand (RBNZ) is anticipated to raise its official cash rate (OCR) by 25 basis points to 5.0% tomorrow. The Kiwi made a 7-week high above 63 cents against the US Dollar today.

Asia Shows its Strength as US Growth Prospects Dwindle

In Australia, the RBA was the focus of market participants’ attention. Outside the country, the RBNZ reaffirmed its hawkish resolve, while U.S. data weakened noticeably.

The RBA decided to leave the key interest rate unchanged at 3.60% in April, a decision that was in line with Westpac’s forecast. In line with the decision, the Governor’s statement included a subtle change to the guidance, indicating that further tightening “may be required” in March, rather than “will be required.” While this certainly still qualifies as a tightening bias, after 350 rate hikes in the past decade, the central bank board is increasingly concerned about the need to assess the full spectrum of risk.

In our view, the evolution of underlying inflationary pressures is critical to the near-term stance of monetary policy. Westpac projects that inflation will average 6.6% for the year in the first quarter, an outcome that the RBA is likely to find uncomfortably high against the backdrop of a historically tight labour market, thus warranting a policy response. As a result, we continue to expect a final 25 basis point rate hike in May, taking the policy rate to a peak of 3.85%, where we believe it will remain until the end of 2023. If economic momentum continues to slow and inflation risks subside, a series of rate cuts may be implemented in 2024 and 2025 to bring policy back toward neutrality and facilitate a recovery in economic growth.

Turning to domestic data, housing market data released this week was generally mixed. Most notably, the CoreLogic home value index seems to point to some stabilization in home prices, which rose 0.8% in March after falling only 0.1% in February. The pace of monthly declines in residential mortgage approvals continued to moderate in February; however, broadly speaking, this indicator continues to point to a further significant slowdown in residential loan growth as interest rate headwinds increase. Meanwhile, monthly housing permit updates remain hostage to their own seasonality: following the extreme volatility in high-rise permits and now emerging issues related to processing delays, February’s modest 4.0% increase appears to mask a fundamental slowdown in the trend, as evidenced by the 30% decline in permits over the past year. All in all, we maintain our view that increasing headwinds, particularly with regard to interest rates and the general economic outlook, will continue to weigh heavily on the housing sector this year, but we are wary of the possibility of a sustained stabilization.

The decision by the Reserve Bank of New Zealand (RBNZ) to raise interest rates by 50 basis points this week surprised the market, as the consensus was 25 basis points. The tone of the statement was also aggressive, as the RBNZ is concerned about the potential impact of post-cyclone reconstruction on inflation given the already strained state of the economy. As our New Zealand team, led by Chief Economist Kelly Eckhold, explained, the RBNZ appears to be focused on quickly achieving the absolute level of policy it believes is needed to bring inflation back to target. The RBNZ also indicated that the recent

decline in wholesale funding costs could lower borrowing costs across the economy; the 50 basis point move was then seen as a way to “maintain current lending rates for businesses and households.” This situation highlights the tension that is building between monetary policy in New Zealand and the rest of the developed world, where policy is seen at or near peak levels. Our New Zealand economics team now anticipates a 25 basis point hike to 5.50% in May and expects the RBNZ to maintain a tighter stance thereafter, pending further information.

As for the U.S., three data releases stood out this week: the ISM and JOLT labour market data.

Both the ISM manufacturing PMI and the ISM services PMI surprised sharply to the downside in March, with the manufacturing contraction accelerating (the overall index was 46.3) and the services index nearly stalling at 51.2. It is also significant that new orders in manufacturing were particularly weak (the index fell to 44.3), while new orders in services fell sharply (the orders index fell 10 points to 52.2).

These results point not only to continued economic weakness, but also to clear risks related to employment, which is expected to decline in the manufacturing sector and to be only marginally positive in the services sector. A sharp drop in JOLTS job openings in February was further evidence of the building downside risks to employment. The number of available jobs fell to 9,931k in February, down from 10,563k in January and the 2022 peak of 12,027k. While highly volatile and often off the mark as a lead for nonfarm payrolls (due Friday night), ADP private payrolls was also soft in March.

We have long highlighted the risks for the US economy from tighter policy and the shock to household finances from high inflation. These concerns led us to remain of the view that the US is likely to experience a lengthy period of stagnation, with an output gap in the order of 3.0% by end-2024. As discussed last week, given recent developments in the US banking sector, the risks to this view are skewing to the downside. Most significant is the potential for US GDP growth to get stuck at a rate below potential beyond 2024. This is why we see need for the FOMC to act aggressively on policy in 2024, once inflation risks have abated; but also why it is necessary banking sector regulatory reform occur with haste to restore confidence amongst both borrowers and lenders. If the latter is delayed, the benefit of 2024’s monetary easing could be offset.

Bank of Canada to hold rates steady

Bank of Canada (BoC) is widely anticipated to maintain its pause this week, leaving interest rates unchanged at a 15-year high of 4.50%. Governor Macklem has emphasized that there’s no need for additional rate hikes if the economy unfolds according to central bank’s projections, which forecast stalling growth for the rest of the year, subsequently cooling inflation. Macklem also stated that an “accumulation of evidence” would be required before considering resuming tightening.

Consequently, it’s unlikely that BoC’s announcement on Wednesday or Macklem’s speech on Thursday will trigger significant volatility in Canadian Dollar. Instead, Loonie is expected to be more reactive to developments in oil prices, as WTI crude remains stuck around 80 mark. Additionally, the currency could be influenced by US CPI data and the release of FOMC minutes when paired against the greenback.

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Constructive Developments for the Consumer

Developments in Australia and the US this week were supportive of our views for the RBA and the FOMC.

The Westpac- MI Consumer Confidence Survey provided a positive update on confidence. The RBA’s decision to leave the policy rate unchanged in April proved to be an important support, with the overall index rising 9.4% this month from 78.5 to 85.8. This is underscored not only by the upswing in the housing subindexes of the survey-mortgage borrower confidence rose 12.2%, the index for the timing of home purchases rose 8.2%, and house price expectations rose 16.7%-but also by the general recovery in households’ expectations for the near-term economic outlook and family finances. While these developments represent a marked improvement over the very pessimistic readings of February and March-a situation comparable only to the major economic dislocations of the 1980s and 1990s-the overall index, at 85.8, must still be considered weak.

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EUR/USD April 2022 High Offers Resistance

EUR/USD cleared the February high (1.1033) last week to register a fresh yearly high (1.1076), but lack of momentum to breach the April 2022 high (1.1076) may lead to a near-term pullback in the exchange rate as it snaps the recent series of higher highs and lows.

EUR/USD forecast: April 2022 high offers resistance

EUR/USD is under pressure on the back of US Dollar strength, and it seems as though the Federal Reserve will continue to combat inflation as Governor Christopher Waller insists that ‘monetary policy needs to be tightened further.’

At the same time, Fed Governor Waller warns that ‘monetary policy will need to remain tight for a substantial period of time, and longer than markets anticipate,’ and the comments suggest the Federal Open Market Committee (FOMC) is in no rush to switch gears as inflation remains well above the central bank’s 2% target.

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NZ Consumers Price Index

Consumer prices rose 1.2% in the March quarter and are up 6.7% over the past year. The March result was below our forecast, and much lower than the RBNZ’s expectation.

New Zealand consumer prices rose 1.2% in the March quarter, with prices up 6.7% over the past 12 months.

Today’s result was lower than forex market expectations, and well below the RBNZ’s forecast for a 1.8% rise.

Annual inflation remains painfully high. However, inflation looks like it has now peaked.

Core inflation, while still high, is not pushing higher.

Today’s result supports our forecast for just one more OCR hike from the RBNZ in May.

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US Dollar strength weighs on Gold price

Gold is struggling to capitalise on Friday’s modest rise from the $1.970 region and is coming under selling pressure on the first day of the new week. The XAU/USD pair is trading around the $1.977 level during the Asian session, remaining within striking distance of a two-week low reached last Wednesday.

The prospect of further monetary tightening by the U.S. Federal Reserve (Fed) is helping the U.S. dollar to see some buying on Monday, which in turn is seen as the main factor pulling gold prices lower for the second day in a row. Markets now seem convinced that the Fed will continue to raise interest rates to curb high inflation in the U.S. and have fully priced in a 25 basis point hike at the next Federal Open Market Committee (FOMC) meeting in May. Moreover, Fed funds futures suggest a low probability of another rate hike in June.

False expectations from the Federal Reserve are supporting the USD

Bets were boosted by recent hawkish remarks from several Fed officials and incoming positive U.S. macro data, which suggested that the world’s largest economy remains resilient. The flash version of S&P Global’s PMI survey showed Friday that overall U.S. private sector activity expanded at a faster pace in April. Service sector activity grew for the third straight month and at the fastest pace in a year, while the U.S. manufacturing indicator moved into expansion territory for the first time since October 2022.

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Riksbank to Deliver 50bp Rate Hike Today

Today’s main event will be the Riksbank’s policy rate decision at 9:30 CET, where we expect a 50 basis point hike in line with market prices. We also expect the Riksbank to announce another rate hike in June (more on this in the Nordic section).

On the data front, Swedish and Norwegian unemployment rates for March and German consumer confidence will be released this morning. This afternoon, new orders for durable goods in the U.S. will be published.

Macroeconomics: Risk appetite dominated global markets, with equities down across the board and core yields falling amid widening intra-euro area spreads. Mixed corporate earnings and concerns about First Republic Bank were the main drivers of risk-off sentiment. Poor risk sentiment continued overnight in Asian trading.

Bank turmoil: First Republic Bank’s earnings report showed a 41% deposit outflow in the first quarter to just over $100 billion and is also considering divesting part of its business, reminding markets of the significant banking turmoil in March.

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RBA Board to Pause Again at its May Meeting

The Reserve Bank Board meets next week on May 2.

Following the release of the March quarter inflation report Westpac now expects the Board to extend the pause it instigated at its April meeting to the May meeting.

This decision comes despite the likelihood that the FOMC will announce its decision to raise the federal funds rate by 0.25% to 5.125% two days after the RBA meeting (see below). However, as with the RBA, we expect this decision to mark the peak of the cycle.

We have always argued that May is likely to be the peak of the tightening cycle, so we are now lowering our forecast for the peak of the policy rate from 3.85% to 3.6%.

Given the uncertainty about the current outlook and the need to contain inflation expectations, it is almost certain that the Board will maintain its clear bias toward tightening. However, as 2023 progresses, the credibility of this tendency is likely to fade.

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RBA Board Hikes the Cash Rate by 0.25%

Choosing to raise is the better policy option, even if it is not consistent with our interpretation of the implicit guidelines.

The Reserve Bank Board raised the policy rate by another 0.25% at its May meeting, bringing the policy rate to 3.85%.

The decision came as a great surprise to markets, which had priced in less than five basis points. In this tightening cycle, there have been a number of decisions that came as a surprise to markets – the decision to raise the rate by 50 basis points (instead of 25) in June and 25 basis points (instead of 50 basis points) in October

Markets and the majority of economists, including Westpac, had difficulty following the Bank’s guidance.

In our bulletin last Friday, we stated. “We have argued over the past six months that the peak of the current cycle will be the May Board meeting. We believe the peak should be 3.85%, with the final 25 basis point increase in May based on the current situation – record low unemployment and very high inflation – rather than relying on forecasts. We continue to believe that this would be the better policy approach given the risks, but it does not seem consistent with the Board’s intentions.”

Our assessment of the Board’s intentions relied heavily on the references in the Governor’s recent speech to the importance of ensuring that the inflation path is consistent with the Bank’s forecasts. The Inflation Report for the March quarter indicates that inflation is consistent with (if not somewhat better than) this trajectory.

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Will Nonfarm Payrolls Hint at a Fed Pause in June?

The Federal Reserve delivered its tenth consecutive rate hike on Wednesday, as expected, but reset its guidance to indicate increased emphasis on incoming data. Hence, Friday’s nonfarm payrolls will be the next test for the US dollar at 12:30 GMT, with forecasts pointing to a discouraging outcome.

The Federal Open Market Committee (FOMC) decided to increase its funds rate by a quarter percentage point to the highest range in sixteen years of 5.0-5.25% for the sake of fighting inflation, despite three private banks collapsing recently. Although Powell reiterated that the banking system remains sound and resilient, he acknowledged that downside risks in the sector have grown, and a more cautious approach might be needed.

Unlike the ECB, the Fed is now more confident that a pause in monetary tightening could be around the corner but with inflation standing at 5.0% y/y – more than twice its symmetrical 2.0% target – it could not make any promises. Alternatively, it chose a safer path, adopting a less hawkish guidance to state that additional tightening could still be possible if there are signs of stronger-than-expected growth, inflation, and hiring. Previously, policymakers were focused on signs of slowing inflation to ease the pace of tightening.

Nonfarm payrolls might be the next challenge for markets

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