By Barani Krishnan
Investing.com -- The likelihood of another Consumer Price Index shocker for markets is very much alive this week, though the question is whether the jolt will be to the upside or downside.
Those long gold seem to think that the July CPI report will be subdued compared to the runaway inflation indicated in June, and that helped the yellow metal’s prices return to the key $1,800 per ounce berth on Monday.
A weak dollar, even weaker U.S. Treasury yields and a reversal to the early gains on U.S. stocks also reintroduced some safe-haven buying in gold.
If Wall Street and risk assets remain in a bear market trend, “then we should ignore these signals at our peril,” StoneX’s equities analyst Fawad Razaqzada said in commentary on Monday that offered at least one reason for gold’s rally.
The benchmark gold futures contract on New York’s Comex, December, settled at $1,805.20, up $14, or 0.8%.
The spot price of bullion, more closely followed than futures by some traders, was at $1,788 by 3:30 PM ET (19:30 GMT), up $13.12, or 0.7%.
Economists tracked by Investing.com are projecting the CPI report, due on Wednesday, will show a growth of 8.7% for the year to July, versus the rise of 9.1% during the 12 months to June. If true, it will be a sign that the Federal Reserve’s efforts in fighting inflation are starting to work.
Yet, a reduction of less than half a percent in year-on-year inflation barely makes a difference to what the Fed is fighting for. The central bank, as we all know, wants to bring inflation back to its long-cherished target 2% a year; or 4.5 times less than what the CPI was for July.
That suggests that the Fed will have to keep raising rates in the near future to get inflation as close as possible to its target. While the mere threat of rate hikes once sent gold bulls scurrying for cover, recent weeks have shown the yellow metal holding its own against such worries, even after last week’s epic U.S. non-farm payrolls for July that showed a job creation more than twice the level forecast by economists.
Until the release of the July nonfarm payrolls report, the consensus among money market traders was for a 50-basis point hike next month.
As of Monday afternoon, Investing.com’s Fed Rate Monitor Tool showed a 67% chance that the September rate hike will be 75 basis points — the same as in June and July. The 75-basis point hike, incidentally, was the highest in 28 years when it was introduced two months back.
Aside from the CPI, the producer price index figures for July will be released on Thursday, along with the weekly report on initial jobless claims, while the University of Michigan consumer sentiment index will be published on Friday.