【MACRO Alert】Spot Gold's Downtrend Continues, Balancing Employment and Inflation Targets Become the Federal Reserve's New Mission

On July 19th, the gold market experienced significant fluctuations on Friday, with spot gold prices temporarily falling below $2,430 per ounce, a daily decline of 0.62%. At the same time, spot silver also fell by 1%, trading at $29.51 per ounce. On the COMEX gold futures market, huge trades occurred frequently, for example, within just one minute, there were hundreds of contracts traded, with a total value reaching hundreds of millions of dollars.

 Despite the market's widespread prediction that there is a very high possibility (98%) of the U.S. cutting interest rates in September, which usually has a positive impact on non-income generating assets like gold and silver, the International Monetary Fund (IMF) advised the Federal Reserve to keep interest rates unchanged until the end of 2024. The European Central Bank also chose to maintain interest rates at its recent meeting, with President Lagarde stating that the policy for September is not yet determined.

Despite strong expectations for an interest rate cut, the gold market is showing signs of overheating, with the 14-day Relative Strength Index approaching 70, which some investors see as an overbought signal. Daniel Ghali, a senior commodity strategist at TD Securities, pointed out that gold traders at the Shanghai Futures Exchange are increasing their positions, with net long positions reaching an all-time high. He also mentioned that discretionary traders at Comex gold are actively buying, which may be related to Trump's policies. However, Ghali warned that the upward momentum of gold may weaken in the short term.

Asian buyers' interest in gold seems to be waning, with the Shanghai Gold Exchange's benchmark price showing a slight discount, and China's gold ETFs also showing signs of capital outflow, indicating that retail investors' interest is weakening at the current high price levels. In addition, the position size of discretionary traders in gold is higher than the market's expectation for the Federal Reserve to cut interest rates in the next 12 months, which may indicate a certain bubble in the market. Ghali also mentioned that the asymmetry of CTA position risk is increasing, and it is expected that algorithmic trend followers may reduce some of their positions within the next week.

In the United States, the job market shows signs of cooling. Data from the U.S. Department of Labor shows that for the week ending July 13, the number of first-time claims for unemployment benefits reached 243,000 people, which is not only an increase from the previous week but also exceeded economists' expectations. This number has been consistent with the weekly data since June and is the highest level since August 2023. The number of people continuing to claim unemployment benefits also set a new high since November 2021.

Jefferies' U.S. economist Thomas Simons analyzed that the increase in the number of people applying for unemployment benefits last week may be partly due to workers being displaced due to hurricanes. He also mentioned that at this time of year, the number of people applying for unemployment benefits fluctuates greatly every week due to factors such as the Independence Day holiday and the summer vacation of schools. However, Simons also pointed out that the recent trend of data may indicate that the labor market is facing more problems.

In a research report released on Thursday, Simons wrote that the data over the past few weeks has consistently shown that the labor market is gradually weakening, although it is still strong. He mentioned that it is currently impossible to determine whether this is another step towards a better balance in the labor market or indicates that it is entering the early stage of a downward trend. Some economists believe that these weak signs in the labor market provide a reason for the Federal Reserve to cut interest rates as soon as possible. The chief economist of Goldman Sachs, Hatzius, said in a report on Monday that considering that inflation is slowing down and the labor market has recently loosened, the Federal Reserve should consider cutting interest rates in July.

In June, the U.S. unemployment rate rose to 4.1%, higher than the 4% in May. Hatzius pointed out that although layoffs are still limited, the unemployment rate is gradually rising because the recruitment strength is not enough to absorb all the new labor force. The rise in the unemployment rate has been welcomed by Federal Reserve officials. We agree with Federal Reserve Chairman Powell's assessment that the labor market has now fully restored balance. He may now be approaching a turning point, at which further decline in labor demand may lead to a larger and more unwelcome rise in unemployment rate. As of Thursday, the market estimated that the probability of the Federal Reserve cutting interest rates at the end of the September meeting is about 98%. However, according to the CME's FedWatch tool, investors estimate that the possibility of the Federal Reserve cutting interest rates at the next meeting on July 30th and 31st is less than 5%.

Mary Daly, the president of the Federal Reserve Bank of San Francisco, recently spoke at a conference. She believes that although some recent inflation data has been good, the Federal Reserve has not yet achieved its long-term goal of price stability. Daly emphasized that she needs to see more evidence that inflation is steadily declining towards the 2% target set by the Federal Reserve before considering supporting an interest rate cut. She pointed out that although the inflation data earlier this year was positive, it has not yet reached a level that can be sustainably returned to 2%.

As a voting member of the Federal Open Market Committee (FOMC) this year, Daly reiterated her views from last week that the risks facing the labor market and price stability are becoming more balanced. She also emphasized that the Federal Reserve remains committed to achieving the 2% inflation target, stating that it is currently at a critical turning point, and further slowdown in the labor market may lead to an increase in the unemployment rate. Daly also mentioned that the Federal Reserve needs to pay attention to its dual mission at the same time: achieving maximum employment and price stability. She called on the market to be patient with the expectations of an interest rate cut, emphasizing that Federal Reserve officials need to balance between taking quick action and avoiding policy mistakes. Federal Reserve officials have expressed their confidence in recent weeks that inflation is back on the right track.

Although most officials have not explicitly stated when they will reduce borrowing costs, market analysts and investors generally expect that the Federal Reserve may take action in September. Daly warned that expectations for an interest rate cut should not be too hasty. She believes that Federal Reserve officials must find a balance between taking swift action and the cost of making mistakes to avoid policy errors. This echoes the testimony of Federal Reserve Chairman Jerome Powell in Congress, who also emphasized that acting too early or too late could damage the progress of inflation. Currently, the Federal Reserve's preferred inflation indicator - the Personal Consumption Expenditures Price Index (PCE) has fallen to 2.6%.

Although the labor market is still strong, the decline in job vacancies and the rise in unemployment rate indicate that the job market may be approaching a turning point. When talking about the stress in the regional banking industry last year and the collapse of lending institutions such as Silicon Valley Bank, Daly said that the Federal Reserve is working to make the process of regional federal reserves conveying financial institution information to the board officials more formal to improve regulatory efficiency. After the turmoil in the U.S. banking industry last year, Daly and other regulatory agencies have been closely watched by the market.