Gold headed for a weekly loss of nearly 2% on Friday as a hotter-than-expected August CPI report pushed the odds of a Federal Reserve rate hike next week to nearly 87%. A bond-market sell-off and an 18% two-week surge in oil prices, driven by escalating U.S.-Iran tensions, added to the pressure on bullion.
Gold prices moved in mixed directions on Friday even as they stayed on track for a weekly slide of almost 2%, weighed down by rising Fed rate hike expectations, a Treasury bond sell-off, and soaring oil prices.
At 15:34 ET (19:34 GMT), spot gold advanced 0.7% to $4,346.00/oz, while gold futures slipped 0.4% to $4,388.26/oz. For the week, both contracts had lost 1.9% each, with spot gold also set for a three-week losing streak.
Hot CPI cements rate hike odds
Market participants on Friday focused squarely on the latest consumer price index report. Headline and core CPI ticked up 0.4% and 0.3% month-over-month in August, compared with consensus estimates of 0.4% and 0.2%, and accelerating from July's readings of 0.1% and 0.2%.
On a year-over-year basis, headline CPI rose 3.4% in August, unchanged from July, while core CPI moderated to 2.4% from 2.5%. Both figures matched consensus estimates. As a result, the CPI print boosted the odds of the Federal Open Market Committee delivering a quarter-point hike next week: according to the CME FedWatch tool, the probability surged to nearly 87% after the data, up from about 69% before it. Higher rates tend to weigh on non-yielding assets such as gold and can firm the dollar, making bullion pricier for foreign buyers.
Hawkish expectations had been building since July, when three regional Fed presidents dissented with the FOMC's decision to hold rates steady. Fed Chair Kevin Warsh then delivered a hawkish speech at the Jackson Hole conference in late August, saying underlying inflation trends had not improved. Other indicators tipped the odds further toward tightening, namely last week's blockbuster nonfarm payrolls and Thursday's August producer price index report, which showed an acceleration in headline readings.
Oil surge and Iran conflict deepen inflation fears
Crude prices have surged more than 18% over two weeks. Both Brent crude and U.S. West Texas Intermediate futures surpassed $100 a barrel this week for the first time since late May. The rally has been driven by a resurgence in military action between the U.S. and Iran after a weeks-long stalemate over control of the Strait of Hormuz, with fighting in recent days among the most intense since their conflict began in late February.
The surge has exacerbated inflationary worries, and U.S. diesel prices surpassed $6 a gallon for the first time ever on Thursday. Oil prices did catch a break on Friday, however, falling after a Financial Times report that Oman was spearheading a meeting of top Gulf states and Iran over a deal to restore commercial shipping through the strait, scheduled for Monday in Salalah.
Bond market reels ahead of the Fed decision
The bond market has reflected the steady rise in hawkish expectations, undergoing a rout in longer-term maturities since roughly the Fed's July rate decision. The subsequent surge in yields took the U.S. 30-year yield to a nearly two-decade high and prompted the Treasury Department to increase the buyback sizes of longer-term instruments. That intervention has not had its intended effect: bonds slumped on Friday after the CPI print, with the 10-year yield up 3.2 basis points to 4.976%. The more rate-sensitive 2-year yield advanced 8.8 basis points to 4.638%.
Source: Investing.com
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