Gold rallies, stocks ease as rate cut optimism fades
Gold prices hit fresh all-time peaks on April 2 with stocks on Wall Street closing mixed as optimism that the Federal Reserve was near to cutting interest rates faded due to a strong U.S. economy that rebuts the need for cuts anytime soon.
Chinese shares led a rally around most of Asia overnight amid a broadly optimistic global economic backdrop, while the dollar rose after data showed the U.S. manufacturing sector grew in March for the first time since September 2022.
What had been an optimistic reading of key U.S. inflation last week soon darkened as the market weighed the strength of the U.S. economy versus the need for immediate rate cuts.
The three government measures of U.S. inflation – CPI, PPI and PCE – show improvement has leveled off, leading to questions about when and by how much the Fed cuts, said Kevin Flanagan, head of fixed income strategy at WisdomTree in New York.
“The markets are reassessing what they thought was going to be a very aggressive rate-cut episode,” Flanagan said.
“Whether they go in June or July, whatever, what is it going to look like? Right now, the data would be showing you that it’s not going to be uniform.”
Fed Chair Jerome Powell said that inflation data released that day “is what we were expecting” and that “you won’t see us over-reacting,” suggesting the U.S. central bank is content to remain in wait-and-see mode.
Tim Ghriskey, senior portfolio strategist at Ingalls & Snyder in New York, said the Fed does not want to relive the 1970s when it cut too soon and inflation reignited.
Friday’s report on personal consumption expenditures (PCE) price index data earlier drove expectations for easier U.S. monetary policy, lifting gold to a fresh record high.
Gold pared gains as the dollar and bond yields rose. Gold prices tend to move inversely with interest rates because as rates rise, gold becomes relatively less attractive.
Spot gold hit an all-time high of $2,265.49 an ounce earlier in the session. U.S. gold futures settled 0.9 percent higher at $2,236.50 an ounce.
(Reporting by Herbert Lash and Kevin Buckland; Editing by Stephen Coates, Nick Zieminski and Rosalba O’Brien)
