Gold Gains on Dollar Weakness and Lower Yields, Investors Brace for CPI

Gold futures regained ground on Tuesday, recouping about half of the previous day's losses, as market participants reacted to the U.S. producer price index data. The dollar weakened, and yields on U.S. debt instruments declined, providing tailwinds for the precious metal. The dollar index fell 0.21% to 105.027, while the U.S. 10-year Treasury yield dropped 0.036 percentage points to 4.445%, and the 30-year Treasury Bond yield slipped 0.05 percentage points to 4.587%.

The Labor Department reported that the producer price index (PPI), a key measure of wholesale inflation, rose 0.5% in April, resulting in a 2.2% annual increase. This figure exceeded the estimates by Econoday, which projected a 0.3% monthly increase and a 2.2% annual rise. The core PPI, which excludes food and energy costs, climbed 0.5% on the month and 2.4% year-over-year, surpassing expectations of 0.2% and 2.3%, respectively.

The PPI data came in higher than expectations, with the index rising 0.5% in April, nearly double the expectations for the second quarter's start. The index, which measures wholesale pricing, climbed by 2.2% annually, marking the highest reading in a year.

As of 5:45 PM ET, gold futures for the most active June 2024 contract settled at $2,359.90 in New York trading, up $16.90. In Globex trading immediately following the New York close, gold prices extended gains, currently trading around $2,363.50.

During his comments at a banking conference in Amsterdam, Federal Reserve Chairman Jerome Powell acknowledged the persistence of inflation, stating, "I expect that inflation will move back down on a monthly basis to levels that were more like the lower readings we were having last year … I would say my confidence in that is not as high as it was, having seen these readings in the first three months of the year. So, we're just going to have to see where the inflation data fall out."

Market participants are now bracing for tomorrow's Consumer Price Index (CPI) report. According to the Federal Reserve Bank of Cleveland's "Inflation Nowcasting," headline CPI for April is expected to increase by 0.41%, and core inflation, which excludes energy and food costs, is projected to rise by 0.31%. This would translate to a 3.5% year-over-year increase in headline inflation and a 3.65% rise in core inflation.

Investors will scrutinize the CPI report, paying close attention to housing data, as they seek insights into the persistence of elevated inflation levels. If the CPI report exceeds expectations and forecasts, it could diminish the probability of the Federal Reserve adopting a more accommodative stance regarding the timing and magnitude of interest rate cuts this year.

According to Dan North, Senior Economist at Allianz Trade North America, "This will be the most important read of the month [excluding nonfarm payrolls] as inflation continues to defy expectations. It will be inadequate progress for the Fed to consider a cut until September."

The consensus among economists regarding future monetary policy changes by the Federal Reserve anticipates two rate cuts this year (down from three), with the first-rate cut occurring no earlier than September.

EDITOR'S NOTE: I am including an interview that was recorded on Thursday May 9 and released today. Therefore, some of the information may be dated.

Wishing you as always good trading,