Gold rises again as financial markets don’t believe Powell’s words

The main theses of the speech of Fed Chairman Jerome Powell:

• Another 25bp rate hike at the next meeting is possible, but it will all depend on incoming macro data;
• FOMC is committed to getting inflation back to 2.00% to ensure price stability;
• Inflation in commodity prices is declining, but progress in services is still insufficient;
• The US banking system remains strong and resilient;
• A Fed rate cut this year is not a baseline scenario;
• Asset reductions in Treasury securities will continue (quantitative tightening – QT).

The benchmark Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred measure of inflation, is projected to be 3.6% in 2023, up from the previous forecast of 3.5%. Inflation is expected to slow to 2.6% in 2024, but this is higher than the previous forecast of 2.5%. The 2024 rate forecast was raised from 4.1% to 4.3%. GDP growth forecast slightly lowered from 0.5% to 0.4% and from 1.6% to 1.2% in 2024. Labor market strength, which has played a role in sustaining basic services, is also expected to remain unchanged in the near term. The unemployment rate is expected to be 4.5% in 2023 from the previous estimate of 4.6% but will rise to 4.6% next year.

Meanwhile, the Fed’s balance sheet has also been in the spotlight after it began to expand again due to problems in the banking system. The Fed’s balance sheet now stands at $8.6 trillion, up from $8.34 trillion last month. The sharp change in the Fed’s balance sheet from contraction to expansion followed the rising cost of funding and the central bank’s new line of credit to support the banking system.

Bank of America, citing tightening lending standards, said it now expects just one more 25 basis point rate hike to raise rates to a ceiling range of 5.0% to 5.25%.

Overall, UK inflation rose in February, rising to 10.4% y/y, up from 10.1% y/y in January and market expectations of 9.9%. Core inflation also rose sharply to 6.2% from 5.8%, half a point above market expectations. Such data will undoubtedly require the Bank of England to be more hawkish. Therefore, analysts are expecting a 0.25% rate hike today, with a possible another hike at the next meeting.

UK inflation is expected to fall sharply at the end of the second quarter due to lower energy costs. The Office of Budget Responsibility (OBR) forecasts that inflation will fall to 2.9% by the end of the year.

Falling US government bond yields on the back of the FOMC meeting caused gold prices to spike. Though earlier, when the words tightening and rate hike were used, gold declined. This suggests that investors have overestimated the current US Federal Reserve policy and do not trust the US central bank to tighten further. Although the Fed continues to reiterate that “the banking system is resilient and sound,” US Treasury Secretary Jennet Yellen said that “universal deposit insurance” is not an option – bank stocks immediately plummeted again. In fact, the market is showing that it does not believe the Fed’s words/forecasts. Gold prices may continue to rise, analysts suggested. In their opinion, the chance of new growth in gold prices is indicated by the banks’ difficulties and a possible turning point in the Fed’s policy.

Asian markets were mostly rising on Tuesday. Japan Nikkei 225 (JP225) grew by 1.93%, China FTSE China A50 (CHA50) gained 0.47%, Hong Kong Hang Seng (HK50) jumped by 1.73%, India NIFTY 50 (IND50) added 0.26%, and Australia S&P/ASX 200 (AU200) was up by 0.87% on the day.

Singapore’s core consumer price index remained at 5.5% y/y in February. The decline in service prices was generally offset by higher prices for retail sales as well as other goods and utilities, the Monetary Authority of Singapore (MAS) said in a statement. Analysts believe that core inflation in the country has peaked. At the same time, MAS said it forecasted a core inflation rate in the range of 3.5% to 4.5% in 2023.

On Thursday, the Hong Kong Monetary Authority (HKMA) raised its benchmark rate by 25 basis points to 5.25%. Hong Kong’s monetary policy is in step with that of the US Federal Reserve, as the HKD currency is pegged to the US dollar in a narrow range of 7.75-7.85 per dollar.