Is the Fed about to beat inflation?

Market report Michael Blumenroth – 14.07.2023

Weekly market report

This week, June’s US inflation data caused strong market movements. Consumer prices rose by 3.0 per cent year-on-year, the lowest level in 27 months. In May, US inflation was still at 4.0 per cent. Core inflation also saw a more dramatic drop than expected by analysts, from 5.3 to a 20-month low of 4.8 per cent. The Fed is keeping a watchful eye on the core rate, to be brought back into the target range of around 2.0 per cent as quickly as possible.

Lower US inflation – end of interest rate hikes?

There is still a long way ahead, and the Fed is likely to again raise key interest rates by 0.25 percentage points on 26 July. However, many market participants are now doubtful about the likelihood of further interest rate hikes in the meetings ahead, as inflation rates have been on a steady retreat for nine months. US producer prices have provided a further signal that inflation is currently on the wane. After 0.9 per cent in May, they rose by only 0.1 per cent year-on-year in June. As a rule, changes in producer prices sooner or later have an impact on trade and thus on consumers.

US Treasury bond yields fall

The crumbling confidence that the Fed will take further restrictive steps in monetary policy is particularly evident in the decline in yields on two-year US Treasuries. Last Thursday, they intermittently stood at their highest level in 16 years, at 5.12 per cent, but have since fallen by around 0.5 percentage points to 4.62 per cent. The yield on Bunds of the same maturity dropped by only 0.2 percentage points over the same period; the markets continue to price in two ECB interest rate hikes by the end of the year. As a result, the US dollar depreciated against the euro to its lowest level since March 2022. This morning, the currency pair traded at US$1.1240 per €.

Week-on-week gains for gold in US dollars

In this environment, gold prices rose as expected and alongside the euro/US dollar exchange rate. They did not, however, rise disproportionately, as for example silver prices did.

While gold was still trading at 1,914 US$ per ounce last Friday morning, it had already fought its way up to 1,940 by Wednesday morning. Following the publication of US inflation data, the precious metal traded at a weekly high of 1,963 yesterday. This morning, it opened at 1,960.

Strong euro slows Xetra-Gold

Due to the strong euro, the Xetra-Gold price, on the other hand, was unable to create significant momentum this week. From 56.50 € per gram on Friday morning, it reached its weekly high in the afternoon at 56.80. Against the significant rise of the euro, it already dropped to 56.20 on Monday. After some ups and downs within a narrow trading range, it was expected to start trading this morning at a slightly lighter 56.10.

The markets will continue to digest the US inflation data and possible asset revaluations in various markets. Coming up, a consolidation week may be in store before the Fed and ECB meetings, scheduled for the following week. 

I wish all readers a calm and breezy weekend.

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