After its recovery from recent lows following weak US data released yesterday, gold prices continued to increase on Friday due to rising global growth concerns following weak data from China showing that manufacturing activity contracted in May after two months of expansion. While expectations of a rate cut rose after weak growth and personal consumption expenditure prices index data in the US, Fed Vice Chairman Richard Clarida said yesterday that expansionary monetary policy could be considered if inflation insisted on staying below 2% target. In the meantime, US President Donald Trump said all Mexican goods would be subject to 5% tariff as of June 10 until Mexican government stopped illegal immigration and the tariffs would go up to 25% if Mexico did not take immediate action.
While global growth worries rose due to weak US and Chinese data, gold prices continued to rise on Friday and headed to its monthly gain in four months amid US opening up a new front in its trade war.
As of 15:05 GMT+3, spot gold was trading at $1,298.12 while dollar index was down to 98.05. US 10-year Treasury yield sharply decreased to 2.159.
Hand Koon How, head of market strategy at United Overseas Bank, said on Reuters that gold would be weighed on by strong dollar in short term but in long term, yellow metal would rise to $1,450 until mid-2020 due to safe haven demand and portfolio diversification.
According to data released in the US yesterday, first quarter growth was down to 3.1% from previously reported 3.2% while core personal consumption expenditure (PCE) price index in the first quarter also declined to 1% from previously reported 1.3%. While the PCE data which is closely watched by Fed in deciding its monetary policy falls to its four-year low, weak inflation could pressure Fed to cut the rates.
Sung Won Sohn, an economics professor at Loyola MaryMount University, said on Reuters that weak inflation would likely persist and Fed would likely cut the rates with both inflation and growth going in the wrong direction.
Fed Vice Chairman Richard Clarida said yesterday that Fed officials could consider adjusting policy if global and economic developments were to pose downside risks to the economy and inflation was to insist on remaining below 2% target.
Rate cut expectations had also risen earlier due to inverted short and long term yield curves in the US which is accepted as a reliable sign of an upcoming recession if it persists to stay in negative territory. However Ian Lyngen, head of US rates strategy at BMO Capital Markets, does not think so. Lyngen said on Reuters that Fed would not cut the rates because of decreasing yields while underlining it would cut the rates in case of weak inflation or seeing global risks on the horizon where an action would be needed.
According to data released in China today, manufacturing activity returned to contraction territory in May after two-month expansion. Manufacturing PMI decreased more than anticipated to 49.4 which increased expectations that Chinese economy, which has been hit by trade war with the US, would need more stimulus from the government. Export orders sharply decreased to 46.5 from 49.2 for the twelfth month in a row while deepening contraction in import orders showed weakening domestic demand despite economic stimulus.
In the meantime, US President Donald Trump opened up a new front in the trade war and said 5% tariff would be imposed to all Mexican goods as of June 10 until Mexican government stopped illegal immigration while adding this would increase monthly up to 25% till October 1 unless there was no immediate action. While this action against the biggest trade partner of the US comes like a cold shower, it was stated that the risk of global economy going into a recession increased due to upcoming deterioration in the global supply chain.