Although the Federal Reserve in early November to raise interest rates by 75 basis points is almost certain, but the focus of the market has turned to December interest rate increases may be reduced to 50 basis points, the Federal Reserve "pigeon" expectations heating up, the global market "rising".
Us housing prices, consumer confidence and manufacturing data collectively underperformed on October 25, as bad news on economic data once again became good news for the market, which expects the Federal Reserve to slow down the pace of tightening soon. U.S. stocks continued to rise, and U.S. Treasuries also surged, with the 10-year yield down 14.7 basis points to 4.085% and the 30-year yield down 13.3 basis points to 4.229%. Gold prices also turned negative to positive on the 25th, and U.S. gold futures closed up 0.24% to settle at $1,658 an ounce.
On October 26, US bond yields fell again, the 10-year US bond yield approached the 4% mark, the US dollar index fell below the 110 mark, and US gold futures continued to rise by about 1%.
Lu Haomin, a researcher at the Research Institute of the Bank of China, told the 21st Century Business Herald that the risk of the US economy falling into recession is increasing, leading to expectations that the market will slow down the pace of interest rate hikes by the Federal Reserve. Since March 2022, the Federal Reserve has raised interest rates by a total of 300 basis points for five consecutive times and raised interest rates by 75 basis points for three consecutive times, resulting in a sharp rise in US dollar financing costs and a significant deterioration in the operating conditions of micro-entities such as enterprises.
Weak economic data boost Fed 'pigeon' expectations
Behind this round of global market "rising sound", the logic of "good news in economic data is bad news in the market" is once again fulfilled.
October 25, the United States released housing price data showed that after July 20 city housing prices fell for the first time in a decade, the decline in August continued, the largest monthly decline during the financial crisis in 2009. The S&P/CS index of home prices in 20 metropolitan areas fell 1.32% month-on-month in August, the biggest drop since March 2009, after falling just 0.44% in July.
In terms of consumer confidence, the Conference Board's consumer confidence index recorded 102.5 in October, the lowest since August, well below market expectations of 105.9 and down 5.3 points from the previous month's 107.8. The Consumer Current Situation index fell sharply to 138.9 from 150.2 in September, while the expectations index, which measures consumers' outlook for the next six months, also fell to 78.1 from 79.5.
In addition, the latest manufacturing data is similarly gloomy, the US Richmond Fed manufacturing index recorded -10 in October, hitting a new low since May 2020.
Kim Rupert, managing director of global fixed income at Action Economics, said the data Fed speculation that the Fed is considering how to start slowing the pace of rate hikes. "The market certainly thinks these data could cause the Fed to cower after November."
Bill Merz, head of capital markets research at Bank of America Wealth Management, said there was growing talk that the Fed was "near the end of the hiking tunnel," as the dollar's rise slowed and long-term bond yields retreated. Merz cautioned, however, that it won't be known for some time whether inflation, which is at multi-decade highs, is clearly headed toward the Fed's goal.
Overall, as the Fed enters a period of silence ahead of its rate-setting meeting this week, the downbeat economic data has renewed expectations that the central bank may consider slowing the pace of interest rate hikes in December. According to CME Group's Fed Watch tool, the market is still pricing in a 75 basis point hike in November, but the probability of a 75 basis point hike in December is now less than 50 per cent, down from 80 per cent a week ago.
In Lu Haomin's view, due to increasing signs of slowing demand, fears of a US recession are growing, leading to rising market expectations for the Federal Reserve to slow down interest rate hikes. From the manufacturing sector, affected by the tightening of financial conditions, the US manufacturing investment activity and service sector activity declined sharply. In October, the preliminary Markit manufacturing PMI of the United States was 49.9, falling below the 50 line of expansion and contraction. At the same time, the preliminary reading of the US services PMI was 46.6, shrinking for four consecutive months.
When will gold turn around?
Buoyed by the Fed's "pigeon" expectation, US Treasury yields have fallen from high levels, and gold prices have rebounded sharply in recent days. In contrast, due to the rising expectations of the Federal Reserve to raise interest rates, US bond yields soared, US bond real interest rates rose sharply, and gold prices were weak, once approaching the $1,600 / ounce mark in October.
Gold and the United States real interest rates are generally negatively correlated, if the United States real interest rates peak, superimposed geopolitical crisis impact, gold in the future or usher in a rebound.
Luzhe, chief economist of Depon Securities, analyzed that the price of gold is often considered to be negatively correlated with the US dollar index, and looking at the US dollar to do gold has become a "consensus misunderstanding" of some investors. Historically, the US dollar index and the gold price do have a trend correlation for some time periods, but in fact, if you compare the US real interest rate (TIPS) and the gold price, you will find that the trend is more perfect. Moreover, gold prices are influenced not only by U.S. TIPS, but also by global real interest rates.
From the basic logic of the impact of TIPS on gold prices, the asset attribute of gold determines that it is basically equivalent to zero interest assets, and the actual interest rate determines the return on investment of other interest-bearing assets. When the real interest rate changes affect the rate of return of other interest-bearing assets, the rate of return of gold relative to other interest-bearing assets determines the volatility trend of gold price.
Source: 21st Century Business Herald
