Good morning, traders. Welcome back to another week in the metals and currency markets. It’s going to be a big one, so let’s jump right in.
Gold prices are up slightly this morning to start the week, but mostly in-line with Friday’s close as the market wait quietly for the FOMC’s rate path pronouncement on Wednesday afternoon. As you’ll see, there are other meaningful data points on our calendar this week, like the July Jobs Report, but their impact on US Dollar and gold markets will be subject to how the Fed may change the landscape. Likewise, there are other more headline-driven macro stories to be aware of (US-China talks and looming Brexit fallout) but how those narratives may influence our markets will depend on timing as well; headlines ahead of the Fed meeting will likely be brushed off whereas a bombshell on Friday has a chance to move prices.
Let’s jump in!
US Economic Data to Watch
Tuesday, July 30 at 8:30am EDT // PCE Price Index (June)
[core PCE consensus expectation: +1.7% YoY // previous: +1.60%]
[headline PCE consensus exp.: +1.5% YoY // prev.: +1.52%]
The PCE Price Index, if you’re not tired of hearing it by now, is the FOMC’s “preferred measure of inflation,” so often when Jerome Powell or his committee are talking about the 2% inflation target, they’re thinking of this variant much more than the better know CPI.
Taking the June performance of CPI (and PPI) and data from the most recent GDP report into account, most of the market is anticipating a small uptick in core PCE this time around. If so, it would be another tally for the Fed’s more hawkish members who won’t vote for further rate cuts if they don’t feel like they have to in order to prevent stagnation in the economy. An as-expected print would likely be bearish for gold prices in the immediate term, although I suspect any impact will be abnormally muted this time around as the data will be released just after the start of the FOMC’s meeting.
Tuesday, July 30 at 9am EDT // Case-Shiller Home Price Index (May)
[consensus exp.: +0.3% MoM // prev.: flat]
The US housing sector, it seems, is content to stay the course: it’s been a while since we saw much heat in that part of the economy, but we also haven’t seen much of a decline even in recent months when other components like the industrial sector seemed to be signaling a downturn. As long as investors can point to a healthy(ish) looking housing input as a leading indicator of economic health, there will always at least be some buyers for the US Dollar (and resistance to gold prices in the same measure.)
Wednesday, July 31 at 8:15am EDT // ADP Employment Report (July)
[consensus exp.: +150k // prev.: +102k]
Last month’s ADP release was a good lesson in why we recognize a correlation between the expected/actual differential in the relationship between ADP and NFP data, but not the direction: June ADP was a real disappointment, nearly 40k lower than expected, and sure enough June’s NFP job’s added number was also very different from estimated, but to the upside.
As far as this week goes, and I’ll say this a few times in this week’s piece, we can’t really say what the markets’ reaction to employment data will be until we Wednesday afternoon when we can view in context of what the Fed does and says. For that reason, unless there’s a May 2019-sized miss above or below the anticipated data this week then I’d expect a fairly muted market reaction while everyone is sitting on their hands.
Wednesday, July 31 at 8:30am EDT // Employment Cost Index (2Q)
[consensus exp.: +0.7% QoQ // prev.: +0.7%]
Same goes for the quarterly ECI; doubly so, considering how flat the number has been and looks to remain. I expect this is the kind of data point that Fed officials will have some commentary on next week when giving post-meeting public remarks and that may be when this employment data fully lands.
Wednesday, July 31 at 9:45am EDT // Chicago PMI (July)
[consensus exp.: 51.5 // prev. 49.7]
US manufacturing sector PMIs have been a mixed bag lately: important surveys like those of the New York and Philly Fed’s rebounding from a worrying May while Richmond’s survey fell to a six-year low and into contraction territory. The “sometimes important” Chicago PMI reading will be another useful data point but, again, only once we’re on the other side of Wednesday’s Fed meeting.
Wednesday, July 31 at 2pm EDT // FOMC Interest Rate Decision
[0.25% rate cut expected]
The (maybe) “insurance cut” of 25 basis-points is fully priced in to the market now. In the lead up to Wednesday afternoon if gold has been trading below $1420 on the spot market, I suspect we’ll see prices move up to that level as traders positions themselves ahead of the announcement. There is a remote chance of a deeper 0.50% cut, but with some of the strong US data over the last two weeks I’m having a hard time giving that better than 10% odds.
Assuming the cut is delivered as expected, the real mover for gold prices will be the committee’s statement and Chairman Powell’s press conference afterwards as gold holders and US Dollar traders begin trying to predict the Fed’s next move along the rate path
We’ll have an FOMC preview for you later this week and, as always, a recap on Wednesday afternoon.
Thursday, August 1 at 8:30am EDT // Initial Jobless Claims
[consensus exp.: +212k // prev.: +206k]
Thursday, August 1 at 10am EDT // ISM Manufacturing Index (July)
[consensus exp.: 52.0 // prev.: 51.7]
Manufacturing PMI has dropped for three consecutive months and the overall trendline for the data has been falling for nearly a year. A slight uptick (as expected) may provide some resistance for gold prices if Wednesday shows us a Fed that is unsure about a second rate cut this year. Another decline, if it’s minimal, would boost the argument for further easing but probably gets overshadowed by recently improved US economic data elsewhere. A bigger decline, one that pushes the metric in to contraction territory below 50.0 for the first time since 2016, would be much harder to ignore.
Friday, August 2 at 8:30am EDT // July Jobs Report
[NFP consensus exp.: +170k // prev.: +224k]
[unemployment consensus exp.: 3.7% // prev.: 3.7%]
It’s not often that the monthly Jobs Report plays second fiddle when it comes to the most important point on the economic calendar for a given week, but we really can’t make any confident comments about how gold markets might react to this July’s labor market update until we’ve heard from the Fed on Wednesday. We can say that, based on the overall consensus, markets are looking for the NFP number to moderate down from last month’s blowout but still remain a healthy indicator. Headline unemployment is expected to remain unchanged as we start to forget a world where it was ever not pinned to 3.7%. If the number plays out this way, it would seem like another argument against a rush to further easing by the FOMC.
Global Economic Data to Watch
Monday, July 29 at 11pm EDT // Bank of Japan Interest Rate Decision
[no monetary policy changes expected]
Thursday, August 1 at 7am EDT // Bank of England Interest Rate Decision
[no monetary policy changes expected]
Neither the BoJ nor the Bank of England are expected to even hint at changes to their current monetary policy this month, but it will be worth keeping an eye on both to see their remarks on how that might change in the near future. As the US economy potential moves into a cutting cycle, the monetary environment around it—how easy the other major economies of the developed world are making their money—will be an important input for gauging the market reaction to the Fed’s own action. If the Fed is easing policy, but so is the rest of the developed world, there will be a limit on how much the US Dollar will weaken, and subsequently on how high it will drive gold prices.
And that is your week ahead, traders. It’s a big one, and I wish you all the very best of luck out there. I’ll see you back here on Friday for a look back at the week in the metals market.