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Gold trading reminder: U.S. Treasury yields recorded the largest single-day drop in more than two months, and gold prices hit a high in more than a week

2024-10-16

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In the early Asian session on Wednesday (October 16), spot gold fluctuated in a narrow range and is currently trading around $2,660.40 per ounce. Gold prices rose 0.5% on Tuesday, hitting a more than one-week high of $2,668.80 per ounce and closing at $2,662.55 per ounce, helped by a pullback in U.S. Treasury yields as investors cautiously awaited more data that could provide new clues to the Fed's monetary easing cycle.

After the release of weak New York State manufacturing activity data, the U.S. 10-year Treasury yield fell by more than 2%, recording the largest one-day drop in more than two months, making non-interest-bearing gold more attractive. The U.S. dollar hovered near its highest level in more than two months, making gold bulls still cautious.

The New York Federal Reserve's New York State Manufacturing Index for October fell to negative 11.9 from 11.5 in September. A reading above zero indicates expansion in manufacturing activity.

Economists surveyed by Reuters had previously expected manufacturing activity to expand again in October, with a median forecast of 3.85.

"The upward trend in yields has run its course at these levels and it only takes a small catalyst to form a soft cap at these levels and that's it," said Jim Barnes, director of fixed income at Bryn Mawr Trust.

"You would need some type of substantial catalyst to get yields moving higher, and since we really don't have that right now, yields are probably going to be range-bound until we can get some evidence of what could affect the Fed's future actions."

The 10-year Treasury yield fell 3.9 basis points to 4.034% on Tuesday. The 10-year Treasury yield has risen for four straight weeks, hitting its highest level since July 31 at 4.12% last week after strong jobs data dampened expectations that the Fed would cut interest rates by another 50 basis points at its November policy meeting.

"We're seeing yields pull back a little bit and Treasuries are rising. That's providing a little bit of stability and a little bit of support for the gold market," said David Meger, director of metals trading at High Ridge Futures.

"The expectation is that gold will go through a period of pause or consolidation. We're more biased toward a sideways to higher uptrend right now, and we do think yields will pull back a little bit. We're going to see a little bit of a pullback in the dollar."

Currently, according to the CME FedWatch Tool, traders see about a 90% chance of a 25 basis point rate cut in November. The chance of keeping rates unchanged is just 10%. A month ago, the market was looking at a 27% chance of a 50 basis point rate cut.

There are relatively few economic data this trading day, and investors need to pay attention to the monthly rate of the U.S. import price index in September. Speeches by Fed officials, including Fed Chairman Powell, indicate that the Fed's focus has shifted from fighting inflation to maintaining a stable labor market, while also being cautious about the path of future rate cuts. Investors also need to pay attention to September retail sales data, industrial production data and weekly unemployment benefits, which will be released on Thursday, for clues about consumer health.

San Francisco Fed President Mary Daly said Tuesday that the Fed will continue to cut interest rates this year as long as data meets expectations, and she also noted that monetary policy is still pushing inflation pressures down despite last month's rate cut.

The 50 basis point cut in the federal funds rate in September was a "well-placed" adjustment in the interest rate policy stance, Daly said before an event at New York University, "acknowledging the progress we have made and easing policy constraints a little bit, but not letting go."

Daly pointed out that "even after this adjustment, policy remains restrictive, putting additional downward pressure on inflation to ensure that it returns to 2%."

If inflation weakens as policymakers expect, "I think it would be reasonable for the Fed to take one or two (rate cuts) this year," said Daly, who has a vote on the Federal Open Market Committee (FOMC) this year.

"We are a long way from the possible end point, so the decision really before us is how quickly to adjust" to an interest rate that is neutral in terms of economic impact, she said, referring to the end point of the Fed's rate cuts. The neutral rate is likely to be higher than the low level before the COVID-19 pandemic, she said.

She also said the Fed "must be vigilant and intentional" in trying to get inflation to its target level with a full employment labor market.

Speaking to reporters after her public remarks, Daly declined to say what pace she would like the Fed to follow in lowering the funds rate, or whether she thought it would be a good idea to pause adjusting rates at the November FOMC meeting.

Daly also told reporters after her remarks that while she is watching short-term market signals closely, she does not yet see a reason for the Fed to end its actions to reduce its bond holdings. The Fed purchased bonds on a large scale during the pandemic and immediately after the pandemic to stabilize markets and provide additional policy stimulus.

"Right now, today, I don't see anything that would suggest that this is something that needs to change immediately," Daly said of quantitative tightening.

She also said that "economic conditions have clearly improved," inflation pressures have fallen sharply, and the job market is now on a more sustainable path. "The risks to our goals are now balanced."

She said the current unemployment rate of 4.1% is close to the long-term average, and labor market conditions are now close to where they were before the pandemic began. She also said the job market "is no longer the primary source of inflationary pressure."

Atlanta Federal Reserve Bank President Raphael Bostic said late Tuesday that another 25 basis point rate cut would be appropriate this year, with inflation expected to remain volatile and employment to remain strong.

The dollar rose against most major currencies on Tuesday, resuming a recent rally that had pushed it to a more than two-month high, driven by expectations that the Federal Reserve will cut interest rates at a smaller pace over the next year and a half.

The dollar fell for much of Tuesday's European and U.S. trading as risk aversion eased on media reports that Israel was reluctant to strike Iranian oil targets, easing concerns about supply disruptions in the Middle East. This pushed oil prices lower and inflation expectations fell, putting some pressure on the dollar.

However, analysts said the dollar's recent gains still have some way to go given continued geopolitical and election uncertainty.

"We think the dollar trend will not change as long as macro data remains good," said Boris Kovacevic, global macro strategist at Convera.

"Volatility ... and the dollar tend to rise in tandem ahead of U.S. elections, especially with the rise of (former U.S. President) Trump in betting markets and the Fed not cutting rates by another 50 basis points at least in November. This would be the best-case scenario for the dollar in the short term."

Traders see a near 100% chance of a 25 basis point rate cut by the Fed in November, and just a 0.2% chance of a pause and keeping the federal funds rate range unchanged at 4.75%-5.0%, according to calculations by the London Stock Exchange Group (LSEG).

The market also sees a 47 basis point rate cut this year and another 100 basis point cut in 2025, compared with expectations of 200 basis points before the September Fed meeting.

The dollar index closed at 103.18 on Tuesday, close to flat, not far from the highest level since August 8, 103.36, reached on Monday. Federal Reserve Governor Waller called for "greater caution" about future rate cuts. This boosted the dollar to some extent.

If media reports are true, geopolitical risks will be reduced and the support for gold prices from Israel's expected retaliatory strikes will also weaken if Israel avoids targeting Iranian oil and nuclear facilities in the expected retaliatory strikes, Commerzbank said in a report. "We believe that there is a slight downside risk to gold prices and expect gold prices to be $2,600 by the end of the year."

The United States opposes the scale of Israel's air strikes on Beirut and calls for improving humanitarian conditions in Gaza

Israel's closest ally, the United States, said on Tuesday that it opposed the scale of Israel's air strikes on Beirut in the past few weeks. The death toll in the current Middle East conflict is rising, and there are concerns that the situation involving Iran will expand.

According to the United Nations High Commissioner for Refugees, two weeks after Israel began its invasion of southern Lebanon (Israel says these actions are aimed at repelling Hezbollah), the evacuation order issued by the Israeli army has affected more than a quarter of Lebanon.

Some Western countries have been pushing for a ceasefire in the two neighbors and in Gaza, even as the United States has said it will continue to support Israel and send anti-missile systems and troops.

Matthew Miller, a State Department spokesman, said on Tuesday that the United States had expressed concerns about the recent attacks to Israeli Prime Minister Benjamin Netanyahu. "We have made clear to the Israeli government our concerns and opposition to the scope and nature of the bombing campaign we have seen in Beirut over the past few weeks," he told reporters, sounding a harsher tone than Washington has taken so far.

U.S. Secretary of State Blinken and Defense Secretary Austin sent a letter to Israeli officials on Sunday demanding specific measures to address the deteriorating situation in Gaza and telling them to take specific actions within 30 days.

Separately, Netanyahu told French President Emmanuel Macron in a phone call on Tuesday that he opposed a unilateral ceasefire and said he was "surprised" that Macron planned to hold a meeting on Lebanon, according to Israeli reports.

"Remind the French president: Israel was not established as a result of a United Nations decision, but as a result of a victorious war of independence..." Netanyahu's office said in a statement.

The French Elysee Palace did not immediately respond to a request for comment. The two have clashed before, including over Macron's call for an end to arms sales to Israel.

Diplomatic efforts have stalled and fighting has continued.

Israeli attacks have killed at least 2,350 people, injured nearly 11,000 and displaced more than 1.2 million people over the past year, according to the Lebanese Health Ministry. The figures highlight the heavy price paid by the Lebanese as Israel seeks to destroy the infrastructure of Iran-backed Hezbollah.

Israel has repeatedly issued evacuation orders to dozens of villages in southern Lebanon, meaning more than a quarter of the country is now affected, said Rema Jamous Imseis, the Middle East director of the United Nations refugee agency.

Two Israeli officials with knowledge of the plans said Israel could target a range of targets inside Iran, including missile and drone storage sites, military bases, key government buildings and nuclear research laboratories.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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Gold trading reminder: U.S. Treasury yields recorded the largest single-day drop in more than two months, and gold prices hit a high in more than a week

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