June Core Retail Sales Incresed2%, Expectations of Economic Soft Landing Growing
On July 18th, the US Department of Commerce released data showing that US retail sales in June increased by 0.2% MOM, significantly lower than the market's estimated value of 0.5%, with the previous value showing a growth of 0.3%. After the data was announced, the US dollar index initially declined but then rebounded, while gold prices fluctuated up and down, rising as much as $30 at one point during the session. Ultimately, gold closed at $1978.92, up more than 1.22%.
US consumer spending continues to show resilience, indicating the fact that a moderation in current US inflation, positive economic data, stable labor market performance, rising wages, and accumulated savings during the pandemic have made consumers more optimistic about the outlook for the US economy; these can be seen from the 21-month high in the University of Michigan Consumer Confidence Index for June, released earlier this week. The burden brought by high inflation on households is diminishing, and consumers are gradually increasing their spending.
Furthermore, the sustained demand from US households has increased the market expectations of a rate hike by the Fed in July. According to CME Group's FedWatch data, the market predicts a 99.8% probability of a 25 BP rate hike at the July 25-26 monetary policy meeting. It seems that a rate hike in July has become a highly likely outcome.
Source: CME
Although the July rate hike has been priced in by the market, some investors are starting to warm up to the expectation of the Fed pausing its rate hikes in September. This is based on the unexpectedly cooling inflation in June, with a YOY increase of 3.0% in the US CPI, down 1 percentage point from the previous month's 4%. This marks the smallest increase since March 2021 and is just slightly higher than the Fed's 2% inflation target.
Considering the lagged impact of interest rate hikes on the economy, the market's expectation of a pause in September is not unfounded. Fed officials have previously stated that future monetary policy decisions will be contingent on economic data, thus making a temporary halt to rate hikes in September seem consistent with the Fed's Intentions. If this is the case, it is likely to exert downward pressure on the US dollar in the short term.
In addition, the growing demand for gold from central banks around the world will provide significant momentum for the rise in gold prices. According to data from the World Gold Council in April this year, 71% of global central banks plan to significantly increase their gold purchases in the next six months, with an expected total volume of 700 metric tons. Therefore, the growth in global central bank demand for gold may provide medium to long-term support for gold, while the recent market expectation of a weaker US dollar will boost a rebound in gold prices.
