The Federal Reserve's interest rate cut trading has begun
On July 12th Eastern Time, Bloomberg reported that bond traders on Wall Street are increasing their bets on the Federal Reserve cutting interest rates by 50 basis points in September instead of the standard 25 basis points.
This is evident in the federal funds futures market, where the latest June inflation data released by the United States has cooled down across the board, triggering a buying frenzy for October contracts that continued until Friday local time.
According to the open futures contract data of the Chicago Mercantile Exchange Group, Thursday's buying has triggered new risks. The trading volume was slightly lower than 260000 contracts, setting a record for October. The buying interest remained high on Friday, with over 150000 transactions as of 1:30 pm New York time.
These contracts will expire on October 31st, which fully reflects the expectation of the Federal Reserve cutting interest rates by 25 basis points at its September meeting. But any purchase at a higher price level means that more people are expected to believe that the Federal Reserve may initiate a cycle of interest rate cuts with massive measures.
These positions will also benefit from the increased expectation of a 25 basis point rate cut in July and September, but traders had already given up hope for a Fed rate cut in July a few weeks ago, and no Wall Street bank predicted a rate cut in July.
The settlement value of the swap contract is determined by the policy of the Federal Reserve, which fully reflects the expectation that the Fed will cut interest rates by 25 basis points in September and a total of 60 basis points by the end of the year. This means that the Federal Reserve will cut interest rates twice, each by 25 basis points, with a 40% chance of a third rate cut.
The Federal Reserve has four more interest rate meetings this year, with the September meeting considered the most likely time window for a rate cut. At that time, in the early morning of September 19th Beijing time, global financial markets will hold their breath as they await the release of the Federal Reserve's decision.
Strong bullish sentiment towards gold
This week, the overall price of gold continued to rise, rising above $2400 per ounce for the first time since May.
Li Mingyu, Deputy Director of Xinhu Futures Research Institute and Senior Gold Investment Analyst, told Futures Daily reporters that the gold price first suppressed and then rose this week. At the beginning of the week, it weakened slightly under the strong suppression of the US dollar. However, with the dovish signals released by Federal Reserve Chairman Powell's two hearings and the unexpected drop in inflation data, the market's expectations for a September interest rate cut have significantly increased, which has formed a significant boost to the gold price.
According to the latest US inflation data released on July 11th, the year-on-year growth rate of US CPI in June slowed down from 3.3% to 3%, and the core CPI dropped from 3.4% to 3.3%, both of which were lower than expected, hitting the lowest in 39 and 38 months respectively. Jerry Chen, a senior analyst at Jiasheng Group, analyzed that, combined with previously lower than expected non farm and other economic data, market concerns about the slowdown of the US economy have become increasingly apparent, and the economic situation is getting closer to the threshold of the Federal Reserve's interest rate cut. A precautionary interest rate cut may be imminent.
From the perspective of inflation sub items, the growth rates of energy, housing, healthcare, and transportation services in the United States have all slowed down. Among them, the month on month growth rate of housing prices in June fell from 0.4% to 0.2%, and the growth rate of housing costs has significantly slowed down. This suggests that the downward trend of CPI rental prices will continue, and the stickiness of core service inflation is expected to continue to fall. "Li Yi, a senior researcher at Changjiang Futures Nonferrous Metals, said that the Federal Reserve has repeatedly stated that it tends to keep the benchmark interest rate high because it is concerned that premature interest rate cuts will breed secondary inflation. After the release of the US June inflation data this week, US inflation has basically met the conditions for interest rate cuts. Federal funds rate futures show that the market expects the Fed to cut interest rates in September, and there is a high probability that it will cut interest rates twice this year.
In the current market trend of interest rate cuts, Jerry Chen believes that gold naturally has a good opportunity to rise, which is both a response to the downward trend of real interest rates and a need to hedge against potential economic risks.
Li Mei also stated that the upcoming interest rate cut cycle will leave room for gold prices to rise, and the market will fully price the weakening trend and recession expectations of the US economy.
In Li Mingyu's view, a new round of global liquidity release has begun and will continue to support gold prices in the future. Gold is fighting against the proliferation of global liquidity, not just the United States. The European Central Bank has already started cutting interest rates in June. In fact, it is not just Europe, China has been in a loose cycle, and some countries in South America have already started cutting interest rates. Although the short-term game of the Federal Reserve cutting interest rates is still ongoing, from the current perspective, the certainty of the Federal Reserve being in a rate cut cycle in the next few years is high. Although there is uncertainty in time and space, the issuance of more and more credit currencies will inevitably increase the demand for gold, which constitutes the most important catalyst for the long-term upward trend of gold prices
From an upward perspective, Jerry Chen believes that $2417 per ounce is the last key resistance before hitting the historical high of $2450 per ounce, but whether this momentum can continue depends on whether the US dollar index can continue to explore the 104 level. Overall, short-term corrections are difficult to change the bullish sentiment in the market.
Continue to pay attention to the pressure of phased adjustments in the medium and long term
In addition to the confirmation of the interest rate cut cycle, which will provide support for gold prices, market analysis believes that there are still many factors that can boost gold prices in the future.
Li Mingyu told reporters that firstly, against the backdrop of global currency overabundance and the continuous weakening of US dollar credit, central bank gold purchases have become an important driving force for the improvement of the gold hub. Due to the special position of gold in the history of currency development, its monetary attributes have provided support for its own value in the context of global central bank releases. Since the Russia-Ukraine conflict in 2022, the US dollar has been weaponized for many times. In consideration of the safety of national reserve assets and diversified reserves, central banks of all countries have increased their gold reserves, making gold prices rise.
Recently, the World Gold Council released the "2024 Central Bank Gold Reserve Survey", which showed that among the 70 global central banks surveyed from February 19 to April 30 this year, 81% of the surveyed central banks stated that their gold holdings would increase in the next twelve months, reaching the highest level since the survey was conducted in 2019.
From 2023, global central banks will increase their holdings of gold by 1037 tons, setting the second highest annual purchase volume in history. According to the survey, the reason why central banks around the world are willing to hold gold is that gold is seen as a long-term preservation and inflation hedge tool, which performs well during times of crisis and is an effective investment portfolio diversification tool. The key reason for obtaining the highest vote is that gold has no default risk.
From the perspective of China's situation, its gold reserves only account for about 5% of its foreign exchange reserves. Compared with the average ratio of 15% in developed countries, there is still significant room for increasing holdings. Besides China, the central banks of other emerging market countries also have a large purchasing power, and for the sake of current trade settlement and payment security, countries with low gold reserves will increase their holdings of gold, "said Li Mingyu.
In addition, geopolitical risks will also support gold prices. Li Mingyu told reporters that the uncertainty surrounding both the Middle East and Russia Ukraine issues has always existed, and even continues to ferment to some extent. Coupled with the fact that this year is an election year in the United States, trade frictions and the game between the two parties will largely be reflected in the gold price. Especially, Trump's return to power may bring greater uncertainty to the global economy, trade, and geopolitics.
However, the risk of a setback in gold prices is also worth noting. Li Yi told reporters that the acceleration of the replenishment process after the subsequent interest rate cuts may provide strong support for the US economy. The expected difference between the degree of decline in the US economy, the pace of subsequent interest rate cuts, and market expectations will put temporary adjustment pressure on gold prices.
Looking back at the gold price rally in 2019, global economic growth is highly uncertain. During the process of trading recession expectations and interest rate cut expectations, gold prices were in an upward range. However, after the Federal Reserve's precautionary interest rate cuts were implemented, the US economy showed a recovery state, and gold prices were adjusted accordingly. The macro environment for the rise in gold prices this time is similar to that of 2019. Gold still has upward momentum in trading interest rate cut expectations, but after the interest rate cuts were implemented, the US inventory replenishment process accelerated or formed strong support for the economy. The PMI index may return to the expansion range, and inflation resilience will hinder the Federal Reserve's continued interest rate cuts Li Mei stated that the current market has priced two interest rate cuts within the year, and the fundamentals of the Eurozone economy continue to be weaker than those of the United States. If the US economy recovers more than expected, the possibility of the Federal Reserve cutting interest rates more than twice is very low. It is necessary to pay attention to the risk of the yellow gold market being "completely positive" if the pace of subsequent interest rate cuts falls short of market expectations.
Li Mingyu believes that firstly, it is necessary to be vigilant about the market's premature overdraft of the Federal Reserve's interest rate cut expectations and the lower than expected rate cuts. Secondly, the impact of the short-term stagnation of central bank gold purchases on gold prices, such as the fact that China's central bank has stopped increasing its gold reserves for two consecutive months. Overall, the central bank's increase in gold reserves is the general direction, but there may be a certain timing for the central bank's gold purchases, that is, suspending purchases when the gold price is too high, which may cause short-term disturbances to the gold price. Finally, there is the risk of geopolitical easing.
From the second half of the year, the market is mostly optimistic about the future trend of gold. Citibank stated in a recent report that the growth trend of gold consumption in 2024 is positive, which may drive spot trading to reach a record high of $2400-2600 per ounce in the second half of 2024; The target price for gold in mid-2025 under benchmark conditions is $2800 to $3000 per ounce.
Li Mei stated that against the backdrop of deepening geopolitical conflicts, significantly increased risks of anti globalization, and accelerated purchases of gold by global central banks, it is expected that there is still room for gold to rise in the medium and long term.