Gold Market doused for a March Fed rate cut

In the Gold Market Commentary for the month of January, World Gold Council (WGC) said, Inflation risks seep back in! Protestations from some Fed members and a couple of hot data prints, appear to have finally doused expectations for a March Fed rate cut, coupled with a hawkish ECB turn.

Falling rates (typically at the longer end of the curve, see here) are on average good for gold, but the first Fed cut after a hiking cycle has been a bit of a damp squib in the past, producing near-term rallies only if and when a material economic or equity correction has ensued, pushing longer maturity yields lower.

This makes sense if the cut is highly anticipated, or if it is bathed in soft-landing rhetoric. After all, recessions historically didn’t become evident until sometime after that first cut, if they materialised at all.

The path back to target inflation, as much as a path to a soft landing, was always likely to be bumpy and narrow. And there are some concerning developments that could shake up the ‘immaculate disinflation’ the US has experienced over the past few months, potentially pushing back policy easing beyond March.

Easy conditions: Financial conditions, a leading indicator of real GDP, has gone from bottom 10% to top 90% of readings in six months. This suggests economic conditions are likely to remain at ease at least in the short term. And, if GDP does pick up, inflation may have a tough time falling.

Labour costs not yielding ground: Rebalancing in the labour market has occurred in job openings and quit rates, not unemployment.

The employment cost index tends to go where the National Federation of Independent Business’s small business compensation plans go. At the moment that is up, and up close to where the Fed last squirmed hawkishly.  

Helter Skelter Shelter: Rents are not forecast to fall much in 2024 and are likely to contribute 17-20bps to core inflation in January and February. That leaves almost no room for other contributions before core inflation exceeds the Fed’s target. The Red Sea tensions have started to impact freight costs, which could lead to more general supply-chain pressures that were a major cause of the inflation surge in 2022, particularly in Europe.

And while, at this juncture, US core Personal Consumption Expenditures (PCE) on a 3- and 6-month annualised basis look right on cue for cuts, the inflation genie may not be firmly back in the bottle.

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