Abstract: Gold took a big dive as Fed may outline taper plan. The dollar rebounded strongly and oil prices fell from their highs. Wall Street took a beating as interest rate hike fears grew. AUD depreciated as the central bank announced policy change for the first time. GPB fell despite stronger than expected CPI data.
Following the strong U.S. CPI data, U.S. bond yields had retreated to support gold's strong climb. Last week, however, gold’s bullish trend was sharply reversed. On the one hand, gold's appeal was dampened by the possibility that sharply higher-than-expected CPI data could prompt the Federal Reserve (Fed) to raise interest rates. On the other hand, the Fed was unusually aggressive in fighting inflation, dampening the bullish sentiment. On top of that, the hawkish tone from the Fed added to gold's woes. The Fed expected to raise rates twice by the end of 2023 and would start talking about scaling back its bond purchases, although Fed Chair Jerome Powell later played down the risk of an immediate rate rise. And gold fell below $1,800 an ounce after the decision. Finally, the metal closed last Friday at $1,763.3 an ounce, down 6.04% for the week. On the U.S. Dollar Index (DXY), the greenback extended gains last week, but traded in a sideways range as investors awaited the Fed's decision on interest rates. The Fed's hawkish stance later sent the DXY sharply higher, briefly reaching 92, its biggest gain in nearly a year. At the week’s close, the DXY traded at 92.321, up 2% for the week. Despite the dollar's surge, higher inflation and massive U.S. government spending could weigh on the currency in the long run.
The U.S. stock market started the week at record highs, driven by technology stocks. But subsequent U.S. economic data weighed on Wall Street. U.S. retail sales data showed consumers were shifting more of their spending to services as the economy reopened, leading to a 1.3% fall in retail sales, well below market expectations. Separately, the new Producer Price Index (PPI) was another sign that U.S. inflation was rising sharply, with a 0.8% month-on-month increase, up from a 0.6% increase in April. As a result, the weak U.S. retail sales data and the PPI rise pushed stocks off their highs. Not only that, but last week's hawkish comments from the Fed also took a beating on U.S. stocks. U.S. Treasurys continued to rise after the decision, while U.S. stocks slipped. As of last week's close, Nasdaq rose by 1.01% to 14,161.35 whereas the S&P 500 and Dow declined by 0.41% and 1.86% to 4221.86 and 33823.45, respectively. On the jobs front, the number of American Initial Jobless Claims unexpectedly rose by 412,000, the highest increase since May 15. This week, Mr Powell will testify before Congress, and investors should focus on what he says about the economy, jobs and inflation.
Oil bulls continued their rally early last week, pushing both U.S. crude and Brent crude above $72 / BBL and above $74 / BBL, following a positive demand report from the International Energy Agency (IEA) and the seeming inability of Iran to increase oil supplies in the near term. Later, API and EIA crude inventories data recorded a steeper drop of 8.537 million barrels and 7.355 million barrels, respectively, much better than expected. U.S. crude rose to a near three-year high of $72.9 / BBL after the data, while Brent crude briefly nudged $75 / BBL. However, both retreated from the highs as the dollar rose sharply after the Fed's comments favoring a tightening of quantitative easing (QE), denting the appeal of dollar-denominated commodities. Finally, U.S. crude and Brent crude ended the week at $71.41 / BBL and $73.22 / BBL, respectively, up 0.88% and 0.85% for the week. Going forward, the upside is likely to remain supported by a continued recovery in global oil demand and tighter supply controls by OPEC and its Allies. But given that crude has been rising for nearly a month, investors should be wary of wild swings in an overbought market.
The AUD depreciated last week on the back of falling commodity prices. Minutes of the June RBA meeting showed the central bank was willing to extend its bond-buying program beyond September next month to meet its employment and inflation targets. Not only that, but central bankers discussed the possibility of scaling back or even stopping large-scale QE in September, when the current A $100 billion round of QE expires. It was the first time the RBA had mentioned tightening its QE. The AUD found brief support after the minutes were released. Then, thanks to a strong rebound in the greenback, non-U.S. assets tumbled, as did the Australian dollar. Afterwards, Australian employment data released last week showed the economy added 115,200 jobs in May, about four times as many as expected. Also, unemployment dropped from 5.5% to 5.1%, almost back to pre-COVID-19 levels. AUD/USD pared some of its losses after the strong jobs data and finished the week at 0.74808, down 2.92% for the week. Going forward, as the RBA becomes more confident about the economic recovery, it may carefully consider tightening its QE, which could support the AUD. But if inflation fears continue to grow, the currency could be in for another wobble.
Last week, the UK employment report revealed that the unemployment rate fell to 4.7% in the three months from February to April, down from 4.8% in March and in line with market expectations. GBP remained in a tight range against the dollar after the data. According to the UK consumer price index (CPI) data, the inflation rate rose to 2.1% from 1.5% in May, unexpectedly exceeding the Bank of England's 1.8% forecast, as pent-up consumer demand was released as restrictions on business were loosened. The Bank of England had said it expected inflation to hit 2.5% by the end of the year because of the reopening of the British economy and higher global oil prices. Although the pound was briefly supported by the CPI data, it suffered as the dollar strengthened. By the end of last week, GBP/USD was at 1.3803, down 2.15% for the week. On top of that, the government's announcement that a full easing of blockade and movement restrictions scheduled for June 21 would be postponed until July 19 did little to dent confidence in a robust economic recovery. This week, the central bank will announce its interest rate decision and monetary policy. Therefore, investors should be watching for this meeting as UK inflation breached the central bank's target in May, while the Bank of England chair has previously stressed that rising inflation proved temporary and did not require the central bank to scale back its massive stimulus program.
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