Good morning, traders; welcome to our market week preview, where we look at the economic data, market news, and headlines likely to have the biggest impact on the price of gold this week and beyond, as well as other key correlated assets.
Gold prices have started the week on the back-foot but still holding some potential energy while consolidating last week’s gains.
The reason for gold’s softening at this point in the season is fairly clear: investors are preparing their holds and positions ahead of Wednesday’s FOMC meeting, the final of a monumental year for Fed policy and its impact on gold markets alongside the US Dollar.
The first phase of the Fed's rate increases was big, fast and relatively widely supported.
The second phase is getting underway, and divisions are emerging.
The outlook for inflation and wage pressures sits at the center of budding disagreements https://t.co/PJevUzeSwz
— Nick Timiraos (@NickTimiraos) December 12, 2022
This week’s decisions for Jerome Powell & Co. are certain to (at least temporarily) inject some volatility into both assets, and the investor consensus seems keener to place the “safe money” in USD to start the week.
US Economic Data to Watch
Tuesday, December 13 at 830am EST // Consumer Price Index (Nov)
[(core CPI) consensus est.: +6.1% YoY // prev.: +6.3%]
[(headline CPI) consensus est.: +7.3% YoY // prev.: +7.7%]
The marketplace and investor mob’s expectations for November inflation data are pretty hard-set on at least seeing last month’s drop in inflation persist, with the year-over-year numbers holding tight as well. Given the realistic possibilities at this time (there’s virtually no chance of the CPI report printing a number that would compel the Fed to hit the brakes entirely and not hike rates this month or next,) this would be threading the needle for investors in most major asset classes besides USD cash: a positive indication that the eye-watering inflation of 2022 really has put in a top, which will encourage to Fed to more seriously plan for a deceleration of the hiking cycle (positive impacting both sentiment and projection for gold prices in the medium-term); but reflecting a stable pace of the cooling—the FOMC would be less likely to interpret a steep, acute drop in inflation as sustainable, in our view.
Wednesday, December 14 at 2 pm EST // FOMC Interest Rate Decision
[The FOMC is broadly expected to announce another interest rate hike.]
[The current consensus expects a hike of +0.50%]
For a while there, it seemed like this might be an “up in the air” FOMC decision, where the markets didn’t really come to a consensus on what action the Fed would take, and we all found out together at the same time. Over recent weeks, however, following mostly clear economic data supporting the argument that inflation is cooling, but remains hot, the investor and economist consensus has coalesced to projecting a hike of “only” +0.50% this time around. Mind you, this is still a historically large interest rate hike. It is easily sharper than the average up or down move in policy rates. But it will still likely be taken as a signal that the central bank really is willing to be “agile” in adjusting the pace and timing of its hikes while it attempts to finish the fight against inflation while bringing the economy into a soft, mostly recession-free landing. As such, it should ultimately be a positive signal for gold prices (although the reality of it still being a rate hike will probably mute some of gold’s upward momentum.) Outside of the hike itself, there will be a lot of attention on the Fed’s updated projection for the terminal funds rate at the end of next year. Along with the consensus, we expect this number will move up somewhat to account for at least a few more hikes next year. This data point might also set up a headwind against any gold rally, at least until investors digest the FOMC announcement and data sets as a whole. As always, plan for volatility around this key Fed meeting.
And that’s how the week lays out ahead of us, traders. As always, I wish you all the very best of luck in your markets in the coming days, and I’ll look forward to seeing you all back here on Friday for our market-week wrap-up.