by (Kitco News) Next week will be all about monetary policy as gold closes under heavy selling pressure on Friday. A fourth rate hike of 75 basis points is already priced in for Wednesday, so the main question is whether the Federal Reserve will slow down after the November meeting.
A few data points are already pointing to slower growth and a looming recession, and some central banks, including the Bank of Canada, are moving to lower rate hikes.
“Has the strongest phase of the tightening cycle of global monetary policy passed?” asked Michael Pearce, senior US economist at Capital Economics. “The Fed is still expected to deliver its fourth straight hike of 75bp next week, but this increase could come as signals of a moderate rate of tightening. This would follow the Bank of Canada’s cut to 50bp this week. hike and a perceived bullish tone that followed the European Central Bank’s 75bp hike on Thursday.”
A move to a slower pace of rate hikes would be positive for gold, which is why some analysts have started to bullish on the precious metal.
“The Fed is backing away from hiking so aggressively. We can talk about exit at the next meeting,” said Daniel Pavilonis, senior commodities broker at RJO Futures. “Gold hasn’t done too well when priced in dollars. If we see the dollar go down, gold can do very well.”
The Fed has been very quick to raise interest rates and could be willing to “let the pieces fall and see where they land,” Pavilonis told Kitco News.
However, not everyone is convinced that the Fed is ready to take its foot off the gas pedal.
“There are more signs of weakness and investors are eager to price it in. But it’s not going to be an easy call to trade down. The market is getting complacent,” said Edward Moya, senior market analyst at OANDA.
The market could still get a strong labor market release and a hot November inflation report.
Next week will be volatile for gold, Moya told Kitco News. “Despite the catalysts, gold is here to stay for a while. I’m not hesitant to join the pivot camp just yet. Many Fed speakers are advocating a move to 50 bps in December, but I think we’re in for a volatile market,” he said.
The cap rate, which tells how high the Fed is willing to raise interest rates, is also very important for the market. And many analysts don’t see the Fed stopping until it reaches 5%.
At the last meeting, the Fed’s forecasts indicated that interest rates will rise by 4.4% this year and 4.6% next year.
After next week’s meeting, the Fed would have raised its key rate by 375 basis points this year, raising the federal funds rate to between 3.75% and 4%.
“Unfortunately, the data has not been moving in the right direction and we should probably see a noticeable slowdown in the monthly rate of increase in CPI … to give the Fed the confidence to moderate the pace meaningfully,” said James Knightley, chief international economist at ING. “At this point, we’re just not confident that this will happen in time for the December FOMC meeting, so there’s a strong possibility that we’ll get a fifth consecutive 75bp hike versus the current 50bp view.”
Gold’s support levels have fallen from $1,675 to $1,620. And so far that level has been maintained despite a stronger US dollar and higher Treasury yields, said MKS PAMP metals strategist Nicky Shiels.
At the time of writing, December Comex gold futures were trading at $1,644.10, down 0.7% on the week.
“Prices generally underperformed risk assets throughout October, but held up well at the end of the month due to the destruction of Chinese and US tech assets,” Shiels said. “Flows were fairly neutral overall (ETF selling offsetting COT short coverage) indicating prices are on track to close only ~1% MoM.”
There is also the Bank of England
The Bank of England will also make its interest rate decision next week, and market expectations vary between a 100 point and a 50 point increase.
“We now think a 50bp rate hike is marginally more likely than the 75bp market the BoE and most economists seem to expect,” Knightley said. “The committee is likely to be heavily divided. But in recent speeches, policymakers have indicated that markets are overestimating the amount of tightening to come.”
Details next week
Tuesday: US ISM manufacturing PMI
Wednesday: US ADP nonfarm payrolls, Federal Reserve rate decision, Powell press conference
Thursday: Bank of England rate decision, US jobless claims, US ISM non-manufacturing PMI
Friday: US non-farm payrolls
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