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The inflation report published yesterday shows that inflation in the United States has cooled further. This seems to pave the way for the US central bank (Fed) to cut interest rates. What is going on and what impact could it have on the gold price?
The data published this week from the Bureau of Labor Statistics (BLS) show that prices increased by 3 percent in June 2024 compared to June 2023. An improvement compared to the month of May, when this figure was 3.3 percent, and lower than the expected 3.1 percent. As a result, inflation rates have fallen to the lowest level since 2021.
U.S. annual inflation rates (source: Bloomberg)
The month-on-month figures also show a cooling of price increases. The consumer price index for urban consumers fell by 0.1 percent. The first drop in total prices since 2020. According to the BLS, this is partly due to cheaper petrol, cars and airline tickets. Critics point out inflation is much higher for many basic necessities such as healthcare, housing and insurance. Despite that, the numbers are likely to give Fed Chair Jerome Powell and his colleagues the confidence they need to cut rates, presumably as early as September.
U.S. inflation figures (source: Washington Post)
On Wall Street, expectations are growing that the Fed will cut interest rates soon. After the release of the inflation report, U.S. Treasury prices rose (and thus yields on those bonds fell) as traders priced in the likelihood of rate cuts in September and December. Analysts and economists point out that inflation appears to be on track for the 2% target. The unemployment rate, which has been rising slightly for three months, also contributes to the expectation of an interest rate cut.
Joseph Brusuelas, Chief Economist at RSM US, says: "We are sufficiently convinced that inflation is on track for the 2% target, even if the Fed is not yet willing to admit it. The way is now clear for a rate cut."
"This is, without too many reservations, an unequivocally good outcome," Said Andy Schneider, senior economist in the U.S. at BNP Paribas. "If you work at the Fed, this is exactly what you wanted to see."
The Fedwatch tool of the Chicago Mercantile Exchange measures market expectations for future interest rate changes and is based on futures prices. According to the Fedwatch tool, the probability of a rate cut in September is a whopping 92.5 percent, according to the market. According to the market, a rate cut in July is unlikely to happen.
Fedwatch tool (source: CME Group)
Torsten Slok, chief economist at Apollo Global Management, warns of potential financial market tensions in the event of interest rate cuts. Lower interest rates make it easier for U.S. debt (T-bills) Less attractive, while U.S. debt continues to rise.
The initial reaction to the stock market was a shift in the Big tech stocks to the riskier small businesses. The Russell 2000 rose Thursday by 3.6% while the Nasdaq 100 fell by 2.2%. The index for smaller U.S. companies thus beat the Nasdaq 100 by 5.8 percentage points, the largest difference since November 2020. Steve Sosnick of Interactive Brokers noted that this is a "healthy rotation" that many had hoped for.
Gold price and interest rate cuts (source: Ronnie Stoeferle)
Ronnie Stoeferle, fund manager and author of the well-known IGWT reportis positive about the impact of interest rate cuts on the Gold price. Gold has an inverse correlation with real interest rates because it is a safe investment that does not earn interest. If interest rates fall, the Opportunity Cost for the possession of gold, so that gold comparatively more attractive Is it not a good idea? Historically, gold has outperformed during periods of interest rate cuts.
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On behalf of Holland Gold, Paul Buitink interviews various economists and experts in the macroeconomic field. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
