Markets Get Mixed Signals on US Interest Rates
US CPI weaker than expected though re-escalation in the Middle East an inflation driver
Gold rebounded on Tuesday following weaker-than-expected US consumer price index data, which weakened the case for further interest rate hikes.
Headline CPI fell by 0.4%, marking the first monthly decline in just over six years, while the annual headline inflation rate fell to 3.5% from 4.2%.
“Within the CPI report, the weakness was broad-based and evident across categories including shelter inflation, education, transportation and medical care services, thereby providing some evidence that disinflation may be an underlying trend rather than noise,” IG market analyst Tony Sycamore said.
After briefly falling below US$4000 an ounce on Monday, spot gold rallied to close to US$4100/oz following the data release.
Shortly after, new US Federal Reserve chair Kevin Warsh appeared before the House Financial Services Committee.
“The members of our committee have no tolerance for persistently elevated inflation, and we share a resolute commitment to restoring price stability,” he said.
Westpac senior economist Mantas Vanagas noted that Warsh downplayed the significance of the softer CPI print, saying he would not want to place too much emphasis on one data point.
“Overall, his comments carried a hawkish tone, emphasising the Fed’s commitment to returning inflation to target,” Vanagas said.
Another risk to further inflation is the re-escalation of tensions in the Middle East.
However, Sycamore noted that despite the rise in oil prices and hawkish comments, the US rates market finished the overnight session pricing in just 6 basis points of rate hikes for the Fed’s upcoming meeting on July 29, down from 12bp previously, and around 33bp of hikes over the rest of the year, down from 44 bp previously.
Gold ‘oversold’
On Monday, Incrementum managing partner Ronald-Peter Stöferle, who will again be a keynote speaker at the Mining Forum Americas in September, said gold at below US$4000/oz was oversold.
“My message has always been over the last couple of months, we’re in a bull market, and this bull market is taking a breather, but we haven’t seen the top of this bull market yet,” he said during a webinar.
“In monetary terms, gold is still, I would say, fairly cheap at the moment.”
Stöferle said people should remember that gold rose by a “spectacular” 64% last year and had only fallen by 5.5% so far this year.
“I always compare it to, you cannot run up Mount Everest,” he said.
“You have to take your time. You have to get used to the altitude, settle down for a couple of days, and then start the next part of the expedition.
“So, we are now taking the big breather when it comes to gold, but after this spectacular performance last year, I think that’s just normal.”
Stöferle said Incrementum’s decade-end gold price target of US$8900/oz was still “very much realistic”.
“Therefore, I think we should all embrace this correction within the secular bull market,” he said.
Stöferle said the U-turn in interest rate expectations for 2026 was driving gold.
“Let’s not forget – we went into 2026 with the expectation that we would see one, probably two, rate cuts, and this has completely reversed,” he said.
While his comments were made before the CPI data was released or before Warsh’s testimony, Stöferle said inflation expectations had eased.
“This could be a driver for rate cuts, and we’ve got midterm elections coming up,” he said.
“We know that Donald Trump is quite vocal when it when it comes to lowering interest rates, and then there will be enormous amount of pressure on Kevin Warsh.
“But of course, he’s the new guy. He wants to show some strength. But from my point of view, we’ll see rate cuts rather than rate hikes.
“The market thinks that Kevin Warsh is the new Paul Volcker, but he doesn’t hold a bazooka – he’s holding a water pistol at max.”
Regardless of inflation, Stöferle said US debt levels would continue to rise.
“We shouldn’t really overemphasise the power of the Federal Reserve,” he said.
“I think if we zoom out, there is no way that Kevin Warsh can solve all those issues that the US has.”