XAU/USD Could Retest June Highs At $2,390 On US NFP Disappointment

Economic

Summary:

Gold price consolidates weekly gains above $2,350, as US NFP holds the key.

Gold price is consolidating near two-week highs of $2,365 reached on Wednesday, as the US Dollar (USD) continues to lick its wounds, shrugging off a minor bounce in the US Treasury bond yields. Gold price braces for the return of US traders from the July 4 holiday and the all-important Nonfarm Payrolls data for fresh impulse.

All eyes on US Nonfarm Payrolls, as dovish Fed bets intensify

With an Independence Day holiday in the US on Thursday, Gold price held higher ground near two-week highs while within a confined range due to thin liquidity conditions. Markets also stayed unnerved, as UK voters headed to polls, limiting the trading activity around the traditional safe-haven Gold price.

The Greenback continued to reel from the pain from the increase in the dovish expectations surrounding the US Federal Reserve (Fed) interest-rate cuts this year. This realized after Fed Chair Jerome Powell acknowledged progress in disinflation earlier this week. Additionally, a slew of recent US statistics also bolstered the Fed policy pivot bets, with the US private sector employment rising by 150,000 in June, following the 157,000 increase (revised from 152,000) recorded in May.

Meanwhile, the number of Americans filing first-time unemployment claims rose 4,000 last week to 238,000, according to Labor Department data released Wednesday.The figure was slightly higher than estimates of 235,000. Finally, US ISM Services PMI fell into contraction territory in June, arriving at 48.8 vs. May’s 53.8 and the expected 52.5 print.

Traders are pricing in a 73% chance of a cut in September, according to the CME FedWatch tool. Markets are also pricing in potentially two rate cuts this year.

All eyes now turn to the high-impact US labor market report due later on Friday at 12:30 GMT, which could have a strong bearing on the market’s pricing of the Fed rate cuts, affecting the value of the US Dollar and that of the Gold price.

US Nonfarm Payrolls are set to rise by 190K in June after recording a 272K gain in May while Average Hourly Earnings are expected to show a 3.9% growth annually, following a 4.1% advance previously. If these key data sets come in below the market consensus, it would reinforce bets for two Fed rate cuts this year and a September rate cut would be a done deal. In such a scenario, the US Dollar is likely to meet fresh supply, offering a fresh leg to the Gold price upside.

However, the Greenback could rebound firmly if the headline NFP and the wage inflation data surprise to the upside, prompting investors to dial down their dovish Fed expectations. This would render negative for the non-interest-bearing Gold price. XAU/USD Could Retest June Highs At $2,390 On US NFP Disappointment_1

XAU/USD Could Retest June Highs At $2,390 On US NFP Disappointment_1

Traders are pricing in a 73% chance of a cut in September, according to the CME FedWatch tool. Markets are also pricing in potentially two rate cuts this year.

Source:FXStreet

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Alex

Economic

The head of the Federal Reserve has warned the US economy is too strong to justify running such high deficits and urged Washington to address its fiscal imbalance “sooner rather than later”, in a sign of monetary policymakers’ rising concern about rampant government spending.

Jay Powell warned that the Biden administration was taking excessive risks by “running a very large deficit at a time when we are at full employment” and said “you can’t run these levels in good economic times for very long”.

The jobless rate in the world’s largest economy has not exceeded its current level of 4 per cent for more than two years, longer than at any time since Powell was “a teenager”, the Fed chair said on Tuesday.

Speaking at the European Central Bank’s conference in Sintra, Portugal, Powell said “the level of debt we have is completely sustainable but the path we are on is unsustainable”.

His comments came amid intensifying worries about debt levels as both President Joe Biden and Donald Trump are running on campaign pledges that seem unlikely to reduce the deficit whoever wins the November election.

Output in the US has grown at a faster pace than in other major advanced economies since the Covid-19 pandemic, but its fiscal deficit has remained larger than in G7 counterparts despite unemployment hovering close to record lows.

The Congressional Budget Office now expects this year’s US fiscal deficit to hit $1.9tn, or 7 per cent of GDP, up from a forecast of $1.5tn in February. It projects that the debt-to-GDP ratio will hit 122 per cent by 2034, easily surpassing the post-second world war record high of 106 per cent.

Concern is mounting over the US’s ballooning national debt, which is set to reach 99 per cent of GDP this year.

Trump’s plans to make his 2017 tax cuts permanent would add just under $5tn to deficits over the next 10 years.

People in Trump’s camp have threatened to replace Powell as Fed chair if he returned to the White House. Powell, however, said: “There is a very broad support for an independent Fed in both political parties on both sides of Capitol Hill . . . where it really matters.”

The Fed chair welcomed the recent fall in its preferred measure of US inflation to 2.6 per cent in May as “really good progress” but said it still wanted to see more evidence that price pressures and the labour market are cooling before it starts to cut interest rates. US borrowing costs fell slightly in response, with the yield on the 10-year Treasury down 3 basis points to 4.44 per cent.

Governments have ramped up their debt issuance in recent years as they spent vast sums supporting households and businesses in response to the pandemic and energy crisis following Russia’s full-scale invasion of Ukraine.

But now central bankers worry politicians are being too slow to cut spending, which could threaten financial stability and keep inflation high.

ECB president Christine Lagarde only partially echoed Powell’s comments by stressing the need for governments in the EU to comply with the bloc’s reintroduced debt rules by reining in their deficits, while also urging them to support growth and productivity through targeted investment and structural reforms.

Financial markets have been spooked by the risk that France’s snap parliamentary election could deliver a far-right or far-left government that challenges the EU fiscal rules and increases spending sharply, risking a stand-off with investors and the bloc.

Lagarde declined to comment specifically on the election, saying: “The ECB has to do what it has to do,” while adding it was always “very attentive” to any threats to price stability.

Speaking on the same panel, Brazil’s central bank governor Roberto Campos Neto said high debt levels and elevated borrowing costs were starting to cause volatility in emerging markets. “It is time for us globally to think of a way to get some kind of stable trajectory of debt in the near future,” he said.

Source:Financial Times

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Daily News

[Quick Facts]

1. ECB minutes show disagreement on the need to cut interest rates.

2. ECB's Lane says easing wage pressures will help reduce inflation.

3. Lagarde says the ECB needs more data to reassure it on inflation.

4. Democrats explore possibility of Kamala Harris replacing Joe Biden.

5. Unemployment rate may be the biggest variable in non-farm payrolls.

[News Details]

ECB minutes show disagreement on the need to cut interest rates

The minutes of the European Central Bank's (ECB) June monetary policy meeting revealed policymakers' concerns that the cooling of inflation could slow down, while it also showed their confidence in inflation eventually returning to the target level.

While most members were optimistic that inflation would fall back to the 2% target by the end of 2025, some members disagreed with the need for last month's rate cut, worrying that the data did not fully support the move, according to the minutes.

Members noted that the unexpected rise in wage growth and the persistence of inflation posed additional risks that could lead to prolonged price pressures, even though wages are a lagging indicator. This adds to the difficulty of re-anchoring inflation expectations to the target level, especially in the final stages of inflation cooling.

Policymakers also talked about the potential boost to inflation from geopolitical risks, as well as the upside risks to inflation that could result from excess wage or profit growth. ECB members emphasized that, despite the uncertainty about the path toward the inflation target, at some point, it was necessary to make a judgment call based on the information available.

ECB's Lane says easing wage pressures will help reduce inflation

The European Central Bank's wage tracker and feedback from corporations both show that wage pressures are cooling and will continue to ease into next year and 2026, ECB chief economist Philip Lane said on Thursday.

The issues to be discussed at the July meeting will be on the economic front. Looking at the June inflation data, we still have questions on services inflation and these data do not settle that. What we've seen in the last few days is that services inflation remains the outlier, and what we need to see is whether higher services inflation is a backward element and is a legacy of rapid disinflation or is it a persistent element. We need time to work that out.

Lagarde says the ECB needs more data to reassure it on inflation

ECB President Christine Lagarde said on Thursday that the ECB needs to ensure that inflation returns to its target level of 2% before lowering interest rates further. While disinflation continues in the euro area, officials must remain vigilant. Particular attention needs to be paid to rising service prices driven by rising wages.

We have to remain vigilant and we have to be confident that inflation is continuously down and that the data that we receive on wages, on profit, on activity, reinforce our confidence that we are on a path to win the fight.

We need a lot of data, but I'm not sure we're going to get it at every monetary policy meeting. In theory, it could happen at any of our meetings. But it has to be based on a strong set of data.

Democrats explore possibility of Kamala Harris replacing Joe Biden

Calls for President Joe Biden to quit the race are now rampant after his poor performance in the first election debate sparked concerns about his stamina and mental acuity.

Biden hosted the annual Independence Day celebration at the White House on Thursday and will be interviewed by ABC on Friday, which will be broadcast at 8 p.m. ET, and he will then travel to Wisconsin for a campaign rally.

Dozens of House Democrats are watching Biden's performance closely and are prepared to ask him to quit the race if he fails to perform well in the interview, sources said. Vice President Kamala Harris is the top alternative to replace U.S. President Joe Biden if he decides not to continue his reelection campaign, but Biden's allies believe he can allay the concerns of voters and donors.

Democrats see it as crucial to seize control of the House of Representatives in November because if Trump returns to the White House and Republicans take the Senate, it could be their last stronghold of power in Washington.

Unemployment rate may be the biggest variable in non-farm payrolls

The U.S. non-farm payrolls for June will be released soon. From a historical perspective, the pace of job growth remains solid. However, there are signs that employment may be weakening and could signal broader economic weakness ahead.

The unemployment rate rose slightly to 4% in May non-farm payrolls data, 0.5 percentage points above the 12-month low of 3.5% set in July 2023, which could trigger a recessionary indicator known as the "Sahm Rule". This indicator suggests that when the three-month average unemployment rate is half a percentage point higher than the 12-month low, the economy is in recession.

While there is little data to suggest a recession is imminent, the trend in the unemployment rate is causing concern because the likelihood of that happening has risen, even if it's not the most likely scenario at this point.

[Focus of the Day]

UTC+8 17:40 NY Fed President Williams Speaks

UTC+8 20:30 U.S. Nonfarm Payrolls (Jun)

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Samantha Luan

Economic

Central Bank

After months of investor speculation about its intentions, the People’s Bank of China disclosed the clearest outline yet of its unprecedented plans in a statement to Bloomberg News on Friday.

It said it has hundreds of billions of yuan worth of medium- and long-term bonds at its disposal to borrow, after signing agreements with several major financial institutions. The central bank said it would borrow the bonds on an open-ended unsecured basis and sell them depending on market conditions.

The PBOC’s reply came after Bloomberg reported it had signed an agreement with Industrial & Commercial Bank of China Ltd. and was in talks with Postal Savings Bank of China Co. to borrow bonds, according to people familiar with the situation.

“Hundreds of billions are decent amounts when it comes to monetary operations,” said Frances Cheung, strategist at Oversea-Chinese Banking Corp. “The intention to sell mid-to-long end bonds is in line with our expectation, given the current bullishness in the bond market.”

China's PBOC Readies Multibillion-Yuan Pool of Bonds to Sell by Tapping Major Banks_1

China’s sovereign bonds have surged this year on the back of the country’s gloomy economic outlook and expectations for interest rate cuts. The lack of attractive alternatives and a switch out of savings to financial investments has fanned demand and an increase in government borrowing to boost fiscal stimulus failed to put off buyers.

However, the PBOC has been pushing back against the rally, warning investors of the potential for losses should the market reverse. The central bank sees excessively low yields as endangering financial stability and weighing on the yuan.

Benchmark yields rebounded from a record low this week after the PBOC said it would borrow bonds from primary dealers, a sign it may be contemplating selling the securities to cool the market.

“We think that hundreds of billions of amounts are likely to change the short-term momentum of the market,” said Yongbin Xu, co-chief investment officer of U-shine fund. “It is still difficult for PBOC’s action to change the long-term trend of bonds, the fundamentals plays a key role.”

The idea of the PBOC trading bonds as a potential tool came to the market’s attention via an old speech by President Xi Jinping, although such operations are also seen as a longer-term plan for better liquidity management in the financial system.

But a practical issue quickly became apparent that there may not be enough bonds for the PBOC to sell, or at least those with the maturities it wants to guide. Unlike peers such as the Federal Reserve or Reserve Bank of Australia which accumulated sizable amounts of debt before subsequently reducing their balance sheets, the PBOC has only bought a few batches of special sovereign bonds more than a decade ago.

Some speculated that the PBOC would look to borrow securities from primary dealers or big banks and sell them into the market, a move with little precedent in the global central bank playbook. The central bank held about 1.5 trillion yuan ($207 billion) of government debt on its balance sheet as of April. China's PBOC Readies Multibillion-Yuan Pool of Bonds to Sell by Tapping Major Banks_2

China's PBOC Readies Multibillion-Yuan Pool of Bonds to Sell by Tapping Major Banks_2

Analysts expect that yields may now settle into a range as the fundamentals driving the demand linger. China’s 10-year yield edged up one basis point to just over 2.25% on Friday, up from an all-time low of 2.18% on Monday, according to data compiled by Bloomberg.

Traders will closely watch the results of a 30-year government bond auction on Friday as a test of how the PBOC’s borrowing arrangement impacts investor demand.

“We still expect the PBOC would prefer ten-year yields to rise back up to close to 2.5% at least,” said Stephen Chiu, chief Asian foreign-exchange strategist at Bloomberg Intelligence. “So 2.3%-2.4% could be an achievable range, especially given that demand will be intact.

China watchers are also preparing for one of the country’s biggest annual policy meetings later this month, the so-called Third Plenum. Leaders at an economic meeting in December said they were contemplating a “new round of fiscal and tax reform,” sparking hopes that details may be unveiled there.

“The agreement opens the door for the PBoC to intervene in the market to stem off volatility,” said Gary Ng, senior economist at Natixis. “However, the current scale seems like it is more for a cyclical purpose as it will not be big enough to revert the market forces driven by economic rationale, such as the expectation of lower rates.”

Source:Bloomberg

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Cohen

Economic

Cryptocurrency

The future of Bitcoin (BTC) and the United Kingdom is under intense debate following the region’s general elections. The Labor Party is gearing up for the country’s leadership after an exit poll showed a landslide victory over Rishi Sunak’s Conservatives Party.

Bitcoin Under New UK Government

If the exit poll is confirmed, the Labor Party leader Keir Starmer will take over as the Prime Minister of the United Kingdom. This is a very big deal for the country and its financial market considering the Conservatives have led the UK for the past decade.

The crypto ecosystem is now in a gray area as it becomes quite hard to project what policies will come to guard the industry. The Conservatives, especially under Rishi Sunak have set a major standard for the Labor Party to trail. Over the past year, there has been a number of advances in the UK crypto ecosystem.

For example, Strike launched its Bitcoin services in the region recently as reported by Coingape. Additionally, the clamor surrounding Artificial Intelligence (AI) regulation is high. This has a unique bearing on the broader crypto ecosystem because several Web3-linked projects are now pivoting to AI.

Based on key trends observed this week, young UK voters were notably concerned about the future of crypto in the country. This concern is justifiable considering the fact the the electioneering campaign from all the parties was silent about the Bitcoin and the industry

With Labor Party likely to take over the affairs of the nations, it remains uncertain what to expect for the coin.

Will Web3 Thrive Under Keir Starmer?

The blockchain ecosystem has continued to expand beyond Bitcoin. Today, the industry is evolving at a very fast pace to now feature Real-World Assets (RWA) and tokenization.

Since the Labor Party fundamentally supports industrial growth, it might tilt toward supporting Web3. Many experts have projected that the tokenization industry will be worth more than $16 trillion in the coming decade. Already, many Web3 firms and financial giants like BlackRock are already solidifying their foothold in this regard.

With the right Labor policies, the industry may get more clarity, benefitting not just Bitcoin but other areas as well.

Source:Coingape

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Alex

Economic

Japanese household spending unexpectedly fell in May, government data showed on Friday, as higher prices continued to squeeze consumers' purchasing power, further threatening the fragile economy.

Consumer spending contracted 1.8% in May from a year earlier, far short of the median market forecast for a 0.1% uptick, as rising food prices weighed on spending for other items.

Consumption is among key factors the Bank of Japan (BOJ) is scrutinising to gauge the strength of Japan's economy and decide how soon to raise interest rates.

The weaker yen weighed on spending, including pushing down demand for overseas package tours, a government official told reporters at a briefing.

On a seasonally adjusted, month-on-month basis, spending decreased 0.3% versus an estimated 0.5% rise.

Sluggish private consumption is a source of concern for policymakers striving to achieve sustained economic growth underpinned by solid wages and durable inflation, which are prerequisites for normalising monetary policy.

BOJ Governor Kazuo Ueda has said he expects consumption to recover as big wage hikes offered by many Japanese companies, and government subsidies to curb electricity bills, prop up household income.

"I still think consumer spending is on a recovery trend in April-June, given rising wages and income tax cuts that kicked in from June," said Atsushi Takeda, chief economist at Itochu Economic Research Institute, adding that he expects the BOJ to raise interest rates in September.

The Japanese economy shrank more than initially reported in the January-March quarter, the government said earlier this week, in a rare, unscheduled revision to gross domestic product (GDP) data.

Economists, though, expect GDP to rebound this quarter thanks to higher wages and capital spending driving up domestic demand. A survey conducted by Japan's largest trade union group showed workers' monthly pay will rise 5.10% on average this fiscal year, the biggest hike in three decades.

Source:Reuters

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Cohen

Economic

Commodity

Australia’s east coast could see shortages of natural gas as early as in 2027 unless more supply is made available soon, the Australian Competition and Consumer Commission (ACCC) said in a report on Thursday, adding another warning about the domestic market of one of the world’s biggest LNG exporters.

“Long-term solutions to gas market shortfalls will require a range of policy and market responses,” ACCC said in its interim Gas Inquiry report, as carried by Bloomberg.

“Amongst these, there is an urgent need to develop new sources of gas production and supply,” the watchdog added.

Unless new supply is made available to the populous east coast of Australia, gas shortages could emerge in 2027, a year earlier than ACCC’s previous forecast from December 2023 that a shortfall could hit eastern Australia in 2028.

The revised date is due to “lower forecast supply due to delays in anticipated regulatory approvals for new projects and problems with legacy gas fields,” ACCC said.

To prevent shortages, Australia may have to redirect supplies earmarked for the spot market to consumers in the east coast, the watchdog said.

ACCC issued today the latest official warning of a possible shortage on Australia’s east coast.

The Australian energy regulator, the Australian Energy Market Operator (AEMO), said last month that Australia’s east coast could face imminent natural gas shortages due to supply outages and higher gas-fired power demand amid cold weather and unusually low wind generation.

In May, the industry group Australian Energy Producers said that Australia could face a natural gas shortage later this decade without action to boost domestic supply.

Australia’s energy producers and utilities are also calling on the government to support the existing natural gas-powered generation as a smooth market mechanism to move to growing shares of renewables in the electricity system. Australia has been closing coal-fired power generation and raising solar and wind power, but without enough baseload generation, it risks power shortfalls and blackouts, industry officials have warned.