Gold hit by ongoing yield and USD strength

Headlines

* Australia unemployment rises to 3.7% as rate hikes take toll

* Fed saw “significant” inflation risk that may merit more hikes

* Dollar steady on US economic resilience, AUD tumbles on jobs data

* Gold at five-month trough as the US 10-year Treasury yields hits 15-year high

* Asian stocks hit nine-month lows on worries over China, US rates

FX: USD closed higher for a fifth day in a row. The DXY is now trading above its 200-day SMA at 103.21. The June and July highs at 103.54/57 are in view as next resistance. Resilient growth in the US is pushing yields higher. The Atlanta Fed’s Q3 GDPNow index suggests growth is tracking north of 5%. The consensus call is for growth around 0.7% for Q3. The 10-year yield made fresh highs at 4.30% this morning. The October 2022 top is at 4.33%. The 2-year yield is trading around 5%.

EUR is falling for a fifth straight day. Near-term support is 1.0875/80. GDP rose 0.3% in Q2, and industrial production printed a better-than-forecast 0.5% m/m. But underlying industrial trends remain sluggish with China concerns a major drag on exports.

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GBP enjoyed a second day of gains. Slower progress on inflation and high wage growth have renewed expectations of near 6% peak rates.  That means another three possible 25bp increases by February. The 50-day SMA sits above at 1.2784. Decent support is at 1.2630/20.

USD/JPY has made new year-to-date highs above 145. A minor Fib level of the October 2022 drop is at 146.63. There were some signs of verbal intervention yesterday. But yield differentials are stark in the absence of any major BoJ tweaks.

AUD fell to a new nine-month low this morning at 0.6364. This is its eight consecutive days of losses. The jobless rate rose to a three-month high, exceeding estimates by a tenth. The softer print has increased speculation that the RBA might be done hiking rates.

Stocks: US equities made fresh lows as sentiment took a hit with rising yields. The benchmark S&P 500 lost 0.76% to finish at 4404. The tech-dominated Nasdaq fell 1.07% to close at 14,876. The Dow settled lower, down 0.52% at 34,766. Big tech and yield sensitive sectors sold off. The Vix ticked up to 17.

 Asian followed Wall Street declines after the FOMC minutes.  Chinese stocks were pressured from the open. The Hang Seng entered bear market territory after falling more than 20% from its January high. Results from Tencent and JD.com disappointed. But markets recovered after another liquidity injection. The Nikkei 225 fell after soft data releases. Exports printed in contraction territory for the first time in 29 months.

US equity futures are flat to very modestly higher. European equity futures are lower (-0.6%). The Euro Stoxx 50 closed down 0.1% yesterday.

Gold fell below $1900 as yields pushed up to multi-year highs. Better-than-expected data also weighed on safe haven demand.

Day Ahead – Risk sentiment poor after FOMC minutes

Markets extended their sell-off yesterday and look subdued heading into the last two trading days of the week. The Fed minutes were seen as mildly hawkish at the margin. The door is still open to more rate hikes. Inflation concerns keep the hawkish bias but there was no specific guidance around the September FOMC meeting. Ongoing strong activity data is battling with more encouraging core monthly inflation prints.

A pause seems most likely in a month’s time and is priced in by money markets. But the door is still ajar for a hike towards the end of the year. The chances of a 25bp rate hike in November have increased to 40%. This was less than 30% one week ago.

Chart of the Day – Gold sinking on surging yields

Gold is trying to claw back above $1,900 this morning. It broke below this level following stronger-than-expected US retail sales numbers. This data highlights the ongoing resilience in the economy and US consumer. It also casts some doubts over whether the Fed is really done with its tightening cycle.

Any further data suggesting the Fed still has more work to do will add further downside pressures. The recent surge in real yields is hurting gold. Higher rates for longer mean it may be tough to see any significant upside to gold prices in the short term. The 200-day SMA sits above as initial resistance at $1905. Below the June low at $1893 is support at $1865.