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Gold trading reminder
On Wednesday (October 16th), in the Asian morning session, spot gold was fluctuating narrowly, currently trading near $2660.40 per ounce. Gold prices rose by 0.5% on Tuesday, hitting a new high of $2668.80 per ounce for over a week, and closed at $2662.55 per ounce, supported by the retreat of US Treasury yields as investors cautiously awaited more data that could provide new clues for the Fed's monetary easing cycle. After the release of weak New York State manufacturing activity data, the US 10-year Treasury yield fell by more than 2%, recording the largest single-day drop in over two months, making non-yielding gold more attractive. The US dollar hovered near its highest level in over two months, which still made gold bulls cautious.
The October New York State manufacturing index released by the New York Fed fell from 11.5 in September to negative 11.9. A reading above zero indicates expansion in manufacturing activity. Economists surveyed by Reuters had previously expected manufacturing activity to expand again in October, with a forecast median of 3.85. "The upward trend in yields has reached its limit at the current level, and it only takes a small catalyst to form a soft top at the current level, that's all," said Jim Barnes, head of fixed income at Bryn Mawr Trust. "You may need some kind of substantial catalyst to allow yields to continue to rise, and since we really don't have such a catalyst now, so, before we can get some evidence of what may affect the Fed's future actions, yields may only fluctuate within a range." The US 10-year Treasury yield fell by 3.9 basis points on Tuesday to 4.034%. The 10-year Treasury yield has risen for four consecutive weeks, touching the highest since July 31st last week at 4.12%, after strong employment data weakened expectations for the Fed to cut rates by 50 basis points again at the November policy meeting. David Meger, head of metal trading at High Ridge Futures, said: "We see a slight retreat in yields, and Treasury prices are rising. This provides a bit of stability and a bit of support for the gold market." "People expect gold to experience a period of pause or consolidation. We are now more inclined to move sideways to a higher upward trend, and we do think yields will retreat. We will see a slight retreat in the US dollar." Currently, according to the CME FedWatch Tool, traders believe there is about a 90% chance of a 25 basis point rate cut in November, while the possibility of keeping rates unchanged is only 10%. A month ago, the market expected a 27% chance of a 50 basis point rate cut. There is relatively little economic data on this trading day, and investors need to pay attention to the US September import price index monthly rate. Speeches by Fed officials, including Fed Chairman Powell, indicate that the Fed's focus has shifted from fighting inflation to maintaining labor market stability, while also being cautious about the future path of rate cuts. Investors also need to pay attention to the September retail sales data, industrial production data, and weekly unemployment benefits to be released on Thursday to find clues about consumer health. San Francisco Fed Chairman Mary Daly said on Tuesday that the Fed will continue to cut rates this year as long as the data meets expectations, and she also pointed out that although rates were cut last month, monetary policy is still promoting a decline in inflationary pressures. The 50 basis point cut in the federal funds rate in September was a "suitable" adjustment to the interest rate policy stance, Daly said before an event at New York University, "acknowledging the progress we have made, and slightly easing policy constraints, but not letting go." Daly pointed out that "even after this adjustment, the policy is still restrictive, imposing additional downward pressure on inflation to ensure it returns to 2%." Daly said that if inflation weakens as policymakers expect, "I think it is reasonable for the Fed to take one to two (rate cuts) this year." She has a voting right on the Federal Open Market Committee (FOMC) this year. Speaking about the end of the Fed's rate cut actions, she said, "We still have a long way to go to the possible end point, so the real decision in front of us is how fast to adjust" to a neutral interest rate that has an economic impact. She said that the neutral interest rate is likely to be higher than the low level before the COVID-19 pandemic. She also said that the Fed "must remain vigilant and consciously" work to achieve the target inflation level while the labor market is at full employment. After making a public statement, Daly refused to disclose to reporters what pace she hoped the Fed would follow when lowering the fund rate, and also refused to disclose whether she thought it was a good idea to pause rate adjustments at the November FOMC meeting. Daly also told reporters after her speech that although she is closely monitoring short-term market signals, she does not yet believe the Fed has a reason to end the action of reducing bond holdings. The Fed had massively purchased bonds during and immediately after the pandemic to stabilize the market and provide additional policy stimulus. Speaking about quantitative tightening policy, Daly said: "Now, today, I do not see any signs that this is something that needs to be changed immediately." She also said that "economic conditions have clearly improved," inflationary pressures have significantly decreased, and the labor market is now on a more sustainable path. "The risks facing our goals are now balanced." She said that the current unemployment rate of 4.1% is close to the long-term average, and labor market conditions are now close to the level before the pandemic began. She also said that the labor market "is no longer the main source of inflationary pressure." Atlanta Federal Reserve Bank President Raphael Bostic said later on Tuesday that it is appropriate to cut rates by 25 basis points within the year, and he expects inflation to remain volatile and employment to remain strong. The US dollar rose against most major currencies on Tuesday, regaining the momentum that had recently pushed it to a level higher than in over two months, with market expectations that the Fed will cut rates in smaller steps over the next year and a half driving this momentum. The dollar fell for most of Tuesday's European and US sessions as media reports said Israel was unwilling to strike Iranian oil targets, easing concerns about disruptions to Middle East supplies, and safe-haven sentiment weakened as a result. This pushed oil prices lower, inflation expectations fell, and put some pressure on the dollar. However, analysts said that given the ongoing geopolitical uncertainty, the dollar's recent rise still has a way to go. Convera global macro strategist Boris Kovacevic said: "We believe that as long as macro data remains good, the trend of the dollar will not change." According to calculations by the London Stock Exchange Group (LSEG), traders believe there is a near 100% chance of a 25 basis point rate cut by the Fed in November, and the possibility of pausing rate cuts and keeping the federal funds rate range at 4.75%-5.0% is only 0.2%. The market also believes that rates will fall by 47 basis points this year, and another 100 basis points will be cut in 2025, with expectations before the September Fed meeting at 200 basis points. The US dollar index closed at 103.18 on Tuesday, close to flat, not far from the highest level of 103.36 since August 8th on Monday. Fed Governor Waller called for "greater caution" in future rate cuts, which has somewhat boosted the dollar. Commerzbank said in a report that if media reports are true and Israel avoids targeting Iranian oil and nuclear facilities in the expected retaliatory strikes, geopolitical risks will decrease, and the support for gold prices from this aspect will also weaken. "We believe there is a slight downside risk for gold prices, and we expect the end of the year gold price to be $2600."
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