Disappointing US data, dovish Fedspeak lift Gold's appeal

Spot gold closed with a gain of 1.94% at $2083 Friday. The ten-year US yields fell 1.74 % to 4.18%, whereas the two-year yields fell 1.94%. The US Dollar Index slipped around 0.26% to close at 103.89.

Spot gold was up around 2.40% on the week, whereas the ten-year US yields were down nearly 1.40%. The twos fell roughly 3.90%. The US Dollar Index was down 0.04%.

Fedspeak: Softening of hawkish stance

Fedspeak in the week ending March 1 was not as hawkish as it was in the previous week.

US yields gained further downward traction on Federal Reserve Governor Christopher Waller’s comments on Friday as he said he would like the central bank to boost its share of short-term Treasuries. He added that before the financial crisis, about one-third of the Fed’s Treasury securities holdings were bills, whereas presently, these short-term securities comprise less than 5% of their Treasury holdings and 3% of their total securities holdings.

Fed Bank of Chicago President Austan Goolsbee said that he believes the Fed funds rate is quite restrictive. The Richmond Fed President Thomas Barkin said markets are pricing in fewer rate reductions in response to economic data, whereas Dallas Fed President Lorie Logan struck a dovish tone as she said that it will likely be appropriate to start slowing the pace of balance sheet shrinking.

Data round-up

Germany's unemployment rose more than expected in February. Germany's and the Euro-zone's manufacturing PMIs in February came in better than expected, though contraction in the manufacturing sector continued. Euro-zone's headline and core CPI data y-o-y in February were noted at 2.60% (forecast 2.50%) and 3.10% (forecast 2.90%), though were lower than respective prior figures.

Similarly, UK manufacturing data at 47.50 beat the forecast of 47.10. Japan's national CPI y-o-y in January was noted at 2.20% Vs the forecast of 1.90%; super core national CPI at 3.50% was hotter than the expected 3.30%, though lower than 3.70%, the prior data. China's NBS manufacturing data (February) at 49.10 was better than the expected data of 49 but eased from the prior data of 49.20. February was the fifth straight month of contraction. NBS non-manufacturing PMI at 51.40 beat the forecast of 50.70 and was better than January's data of 50.70.

US data released in the week ending March 1 were mostly not so inspiring on the balance, which may be the reason behind the Fed officials toning down their hawkish rhetoric despite hot PCE deflator data.

US GDP (Q4 QoQ annualized) came in at 3.20% in the second estimate, which was slightly lower than the forecast of 3.30% on the downward revision in inventories; however, there was an upward revision in personal consumption, which reflects the underlying strength of the consumer as real income trends above or at the same pace as price growth. Personal consumption rose 3% in the third quarter, which was higher than both the initial reading of 2.8% and the forecast of 2.70%. Both GDP price and PCE core price Indices were hotter than expected. Government spending at 4.20% was higher than the prior quarter's figure of 3.80%.

New Home Sales (January) came in at 661K Vs the forecast of 684 K, while the previous data was revised lower to 651K from 664K. US durable goods orders (January) fell by 6.10% as against the forecast of a decline of 5%; durables ex-transport data down by 0.3% Vs the expectation of a rise of 0.20%, though shipments were stronger than expected. House price purchase Index QoQ (4Q) rose 1.50% as compared to the prior data of 2.10%.

Conference Board Consumer sentiment fell to a three-month low at 106.7 (forecast 115) in February. The weekly job report was disappointing as initial jobless claims rose to 215K (forecast 210K) from 201K and continuing claims at 1905K were higher than the estimate of 1875K. Similarly, pending home sales fell 4.90% in January Vs the forecast of a gain of 1.50%. Real personal spending (January) at -0.10% was in line with the forecast and down from the prior data of 0.60%. This was the first decline in five months.

The US PCE deflator inflation readings matched their respective forecasts as PCE deflator m-o- was up 0.30%, up from the revised prior data of 0.10%; y-o-y reading was up 2.40%, lower from the prior data of 2.60%; PCE core deflator m-o-m was noted at 0.40%, up from the previous reading of 0.10%; and PCE core deflator y-o-y reading came in at 2.8%, down from the previous reading of 2.90%.PCE core deflator m-o-m rose the most in a year.

Data and events next week: Fed’s Powell’s testimony, US ISM services and US nonfarm payroll in focus

Next week's major US data include ISM services (February), durables goods orders (January final), ADP employment change (February), JOLTs job openings (January), Unit labour costs (4Q final), and nonfarm payroll report (February). Out of the Eurozone, major data and events of interest include Sentix investor confidence (March), retail sales (January), the European Central Bank's monetary policy decision, services and composite PMI, GDP (4Q final), employment (4Q final) along with Germany's services and composite PMI, trade balance, factory orders and PPI. UK's major data on tap include services and composite PMI. Investors will look forward to China's Caixin manufacturing, services and composite PMIs and trade balance data, too.

Fed Chair Powell’s testimony will also be crucial for the metal. He will give the Senate Banking Committee its biannual monetary policy update on March 7; The House Financial Services Committee will host Powell before that.

Investing demand continues to be weak:

Total known global gold ETF holdings fell 0.211 MOz during the week through Thursday, which is the lowest level since September 2019.

Weekly outlook

Spot gold is expected to be highly volatile next week as the US bond gains apart from weak US data have been driven by month-end balancing as well. US ADP data, JOLTs job openings, Powell’s testimony, ISM services and Friday’s nonfarm payroll data will be market-moving factors. The US inflation is proving to be sticky. Core PCE deflator inflation m-o-m reading (January) at 0.40% is the fastest pace of rise in a year. At the same time, some of the recent US data have come in softer than expected. However, yields may start climbing once again should the key data come in stronger than the data. Support is seen at $2065/$2050/$2032. Resistance is at $2100/$2135.

Investors will buy the dips towards $2065, the previous resistance, which will act as a support now.

(The author is Associate Vice President, Fundamental Currencies and Commodities at Sharekhan by BNP Paribas)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)