The dollar index also edged higher, as new Bank of Japan Governor Kazuo Ueda signaled that there would be no significant changes to monetary policy.
However, growth concerns resurfaced and with dovish comments from Fed officials, investors are now expecting Fed to pause rates in one or two meetings.
Philadelphia Federal Reserve Bank President Patrick Harker said he feels the US central bank may soon be done raising interest rates, while Minneapolis Federal Reserve Bank President Neel Kashkari said he believes inflation, now at a rate of 5% by the Fed’s preferred measure, will get to “the mid-threes” by the end of this year.
Meanwhile, the IMF revised its global growth forecasts lower to 2.8% from 2.9% for 2023 and to 3% from 3.1% for 2024, citing tight policy stances needed to bring down inflation, the fallout from the recent deterioration in financial conditions, the ongoing war in Ukraine, and growing geo-economic fragmentation.
IMF also urged member countries to keep tightening monetary policy to fight persistently high inflation.
The major decline in the greenback and US treasury yields came after the release of CPI and March FOMC meeting minutes.According to the Bureau of Labor Statistics, the annual inflation rate in the US slowed for a ninth consecutive month to 5% YoY in March, easing from 6% in the previous month and is the lowest since May 2021.
The headline CPI rose 0.1% MoM, as rise in shelter costs (which accounts for over 30% of the total CPI basket) by 0.6% MoM, was offset by a 3.5% MoM fall in energy prices.
This is the decline in energy prices for the first time in over 2 years, while food prices were unchanged. Year on year decline in headline CPI numbers can be attributed to the base effect.
This was followed by dovish FOMC meeting minutes, which said that several members considered it appropriate to hold interest rates steady in March, while others noted that they would have considered a 50 bps increase in the absence of the recent developments in the banking sector.
The minutes also included a presentation from staff members, which noted that the fallout from the US banking crisis is likely to tilt the economy into recession later this year, boosting gold prices which tend to perform well during economic downturn.
On the investment demand front, SPDR gold ETFs have been witnessing continuous inflows over the past few weeks and stood at a seven-month high of 934.08 tonnes as of 12th April, compared with 930.91 tonnes in the previous week.
March saw gold ETFs net inflows of $1.9 billion for the first time in ten months, as prospects of a Fed pivot and a looming recession boosted the appeal for the safe haven asset.
Money managers have also been turning very bullish in the commodity, with speculative net longs rising for the fifth straight week to over a one-year high.
Despite ease in US headline CPI, the core CPI remains sticky, and ticked higher to 5.6% in March 2023, from a 14-month low of 5.5% in February, raising the odds for another quarter point rate hike in May FOMC meeting.
According to CME FedWatch tool, markets are expecting 69.3% chance of a 25 bps hike in May. Retail sales to be released on Friday will be crucial. There are no major events for the coming week, other than Flash PMIs for April month.
Elevated core inflation coupled with prospects of a looming recession raises the odds of stagflation and is the perfect bullish cocktail for gold prices going forward.
(The author is VP-Head Commodity Research, Kotak Securities Ltd)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
