The gold market is a bit quiet Tuesday as investors await some key inflation data due out this week. On Wednesday, markets will get the latest reading on the Consumer Price Index, or CPI. Thursday will feature the latest reading of the Producer Price Index, or PPI. The CPI data is expected to register a reading of 8.7%, following last month’s rise of 9.1%. PPI is expected to come in up .2% from its June reading.
The inflation data for release this week could be market-moving. It also has the potential of changing the Fed’s thinking over the next several weeks. Should the data come in as or hotter-than-expected, it could give the Fed a green light towards raising rates aggressively further in the months ahead. Should the data miss or come in lighter-than-expected, however, it has the potential of leading the Fed to the conclusion that it can afford to take a wait-and-see approach in the coming months.
With no FOMC meeting taking place in August, markets will have to await the September meeting for any decisions on rates. That extra time provides an ample opportunity for the Fed to closely examine the data stream and determine if it really needs to continue hiking at the pace it has already set. Markets are currently expecting another 75-point hike next month. Should the data stream soften, however, or should the inflation data point to a possible peak having already been reached, then the Fed may opt to consider taking a less aggressive approach. This could mean a smaller hike next month of 50 or even 25-points or even no hike at all.
In his latest commentary, Fed Chairman Jerome Powell seemingly suggested the Fed could pivot away from inflation fighting. While not overly dovish, his remarks did not strike the same hawkish chord of previous commentary. That led many to assume that Powell was laying the groundwork for the Fed to move away from inflation fighting and possibly start worrying more about the economy. The economy has slowed, although much of the data, including last week’s jobs data, remains quite strong.
The Fed may now find itself in a challenging conundrum. The central bank is way behind the inflation curve already. Regardless of whether it keeps hiking rates or not, the Fed is unlikely to catch inflation or even put a major dent in it without taking rates to Volcker-era levels around 20%. This is extremely unlikely, and the Fed may therefore elect to abandon its fight against inflation.
More may be known about the Fed’s plans next month as the FOMC meeting takes place. If the Fed does decide to pause its rate hikes or even reverse course and start easing again, markets may become confused. This could lead to a spike in volatility and widespread selling across asset classes. Gold may stand to benefit, however, as the opportunity cost would not be rising and could possibly even decline.