The precious metals sector got hit hard last Friday as the market re-priced its Federal Reserve rate cut expectations — taking a 50-basis point cut off the table in July.
The analysts are now busy debating whether or not the Fed will cut rates in July and by how much in light of the latest solid job numbers out of the U.S.
The economy added 224,000 new positions in June, while the unemployment rate edged up to 3.7% and wage growth remained at 3.1%.
"The employment report was a lot stronger than expected. And if you look at the three-month average payroll employment growth, it clearly slowed so far this year, but remained at a reasonably solid level,” Capital Economics U.S. economist Andrew Hunter told Kitco News.
"It is now looking less likely that the Fed is going to start cutting rates as soon as this month as the markets have been expecting. We still think the Fed will cut rates when the economy slows. It is probably more likely that they will start in September rather than July," Hunter added.
In response to the data, the market has readjusted its rate cut expectations, now projecting 95.1% chance of a 25-basis point rate cut on July 31st and just a 4.9% chance of a 50-basis point rate cut, according to the CME FedWatch Tool.
"Markets got a bit ahead of themselves during the past few weeks," said Hunter, noting that traders went from believing that the Fed might consider cutting rates to suddenly pricing in the possibility of a 50-basis point cut in July. "In light of the data last Friday, it is almost certainly likely to prove premature," he stated.
This market's readjustment had a big short-term impact on the precious metals, as the U.S. dollar rose, taking gold and silver down about 2% on the day. At the time of writing (5/7/19), August Comex gold was last at $1,400.05, down 1.44% on the day and September silver was at $15.00, down 2.19% on the day.
Digesting the sudden move in gold prices, analysts have pointed out that even though the metal lost some of its previous strong gains, gold’s long-term outlook remains supported around the $1,400 an ounce level on global growth concerns.
"While the price of gold could pare some of its gains in the near term, we think that it will remain high during the rest of this year. As such, we are happy to reiterate our end-2019 forecast for gold at $1,400 per ounce," said Capital Economics assistant commodities economist Kieran Clancy.
Some analysts see a recovery in gold prices as soon as this week.
"Gold prices are heading upward," TD Securities strategist Daniel Ghali told Kitco News. "At this point, the likelihood of a 50-basis point cut is getting priced out of the market. For gold that is a negative. But, the Fed is still likely to cut 25 basis points regardless in July."
The strong employment data might have even been a good thing for gold long-term, Ghali pointed out.
"[An employment] miss probably would have seen gold prices react more aggressively to the upside. Whereas, … when the dust settles [from strong data], it wouldn't be much of a damper on gold prices. We still expect gold prices to trade north of the $1,400 level," he said.
On the upside, Ghali is watching the last high of $1,440 an ounce and on the downside $1,380.
The U.S. dollar has responded positively to the U.S. nonfarm payrolls data and pressured the commodities space down with the U.S. dollar index last trading at $97.31, up 0.61% on the day, said RJO Futures senior market strategist John Caruso.
"It is not a question on whether or not the Fed is going to cut. They are going to cut. It is a question of how aggressively they are going to cut and how soon," Caruso told Kitco News.
Short-term, Caruso sees gold prices ticking down this week, but then recovering closer to the Fed meeting at the end of July.
"This is just a near-term corrective setback based on Fed expectations,” he said. “As we start to approach the Fed meeting, you are going to start to see gold finding its footing and turning back significantly higher in August and September."
Long-term, Caruso is expecting great things from gold. "I am still overwhelmingly bearish dollar and bullish gold and silver prices throughout the back half of this year. I am a buyer of gold between $1,380- $1,360 as your accumulation zone in gold," he said.
What To Watch This Week
The biggest event this week likely be the Fed Chair Jerome Powell's testimony in front of Congress on Wednesday and Thursday with the market scouring for clues as to the timing and pace of the next rate cut.
"Powell is going to be testifying to Congress this week. It's possible that if they are planning to wait a bit longer and see more data before cutting rates, he could give a hint that the expectations of a July cut are premature," Hunter said.
The FOMC meeting minutes from June are also due out on Wednesday but are likely to sound dated and take a backseat to Powell’s testimony, according to Capital Economics.
"Powell testimony could make June FOMC minutes old news," economists wrote. "If Fed officials still want to wait for more data before pulling the trigger, the release this week of the minutes from the previous meeting is an opportunity to push back against those market expectations. That said, they will be pre-empted by Chair Jerome Powell's semi-annual testimony to the House earlier the same day."
U.S. inflation data from June is also a key event to watch on Thursday, said Ghali while noting that Fed's approach to inflation could tame the impact of this release on the markets.
"The Fed is increasingly comfortable with the symmetrical inflation targeting approach. I don't think CPI on its own is going to change the outlook for gold," he explained.
Source: Kitco News