A recent set of economic data from the US have pointed to a slowing economy and improved the conviction that the Fed may not need to raise rates much further and could even pause the tightening cycle in May.
This was followed by a sharp fall in the US 10-year yields to an 8-month low of 3.25%, while the dollar index declined to a 10-week low, boosting the appeal for the non-yielding yellow metal.
US ISM Manufacturing PMI has been in contraction for the fifth straight month, while the ISM Services PMI fell to 51.2 in March 2023 from 55.1 in February, pointing to the slowest growth in the services sector in 3 months, in a sign that tighter credit conditions are already hurting the economy.
At the same time, JOLTs job openings data showed that the number of job openings in the United States fell by 632,000 to 9.9 million in February 2023, the lowest level since May 2021 and below market expectations of 10.4 million signalling the labour market might have started cooling.
Meanwhile, the ADP employment data showed that the US created 145K jobs in March 2023, below an upwardly revised 261K in February and forecasts of 200K, in a sign the labour market is slowing as consumer demand ebbs and the cost of borrowing goes up.
Job gains were seen in the leisure and hospitality sectors, while the financial sector, IT and manufacturing sectors saw job losses, which is not a sign of strength in the labour market.Investors now see a 45.3% probability that the US Fed will leave the Fed funds rate steady during the May FOMC meeting. Markets mostly shrugged off hawkish comments from the Fed officials, calling for higher rates.
According to a recent World Gold Council report, March saw gold ETFs net inflows of $1.9 billion for the first time in 10 months. Overall, global gold ETF total assets under management rose by 10%, aided by both inflows and the gold price appreciation, to$220 billion by the end of March.
Gold holdings increased by 32 tonne to 3,444 tonne. A separate report showed that global gold reserves rose by 52t during February 2023 (excl Russia), the 11th consecutive month of net purchases by central banks, following January’s 74t and showed no signs of stalling.
Lower yields, a weaker dollar, and safe-haven buying lifted the gold price in March by 9%, fuelled by the recent banking industry crisis.
This was a key contributor to net inflows into physically-backed gold ETFs during March as investors flocked to gold in bulk after 12 March, following the collapse of the Silicon Valley Bank, the organization said.
US non-farm payroll data might shed further insights into the strength of the Labour market.
Risk appetite might be tested in the coming week, as US CPI data and Retail sales data will be released, which might provide further cues on Fed’s monetary policy path.
Retail demand might take a hit owing to record high prices, which might be offset by ETF inflows and Central bank buying.
Signs of weakness in the economy and prospects of a Fed pivot might continue to weigh down on the dollar index and aide the yellow metal.
Having said that, any upside surprise in Labour data or CPI might prove to be a short-term headwind.
(The author is VP-Head Commodity Research, Kotak Securities Ltd)
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