Gold Prices Aim Higher as Fed Rate Cut Bets Weigh on the Dollar
By:Ilya Spivak
Stock markets steadied as US producer price index (PPI) data showed a smaller-than-expected rise in wholesale inflation, breathing new life into Federal Reserve interest rate cut speculation. Treasury bonds rose as rates fell across the yield curve, gold prices rallied, and the US dollar slumped against major currencies.
The report showed that PPI rose 0.1% in May, falling short of median forecasts calling for a rise of 0.2%. The core wholesale inflation rate excluding food and energy prices fell to 3% year-on-year, the lowest since August 2024. The headline rate edged up to 2.6% from 2.5% in April, in line with economists’ expectations.
Perhaps most critically, the monthly rise was primarily driven by a rebound in trade services prices, showing that wholesalers rebuilt margins as they passed on higher input costs to consumers. This helped bolster confidence in May’s seemingly benign consumer prices (CPI) data published yesterday.
In April, wholesalers shielded consumers from input price inflation linked to higher tariffs, shouldering the rise via lower margins. This made that month’s “normal”-looking CPI data appear somewhat like a mirage. In May, both CPI and PPI appear to be relatively staid despite renewed pass-through, hinting the Fed may have room to cut rates sooner.
The policy outlook implied in benchmark Fed Funds futures shifted back alignment with the US central bank’s baseline projection of 50 basis points (bps) in rate cuts this year and in 2026. At the start of the week, the markets were about 10bps more hawkish than officials’ estimates, with more cuts skewed to next year after a late start in 2025.
The spotlight now turns to US consumer confidence data from the University of Michigan (UofM). It is expected to show a slight improvement after sentiment dropped to a three-year low in April and held there in May. The anchoring on display last month came as deepening pessimism about current conditions was offset by a modest uplift in expectations.
If continued moderation in May’s figures comes alongside easing one-year inflation expectations – which have moved inversely of the headline sentiment index since the COVID-19 outbreak – that may give the Fed a bit more encouragement to get on with easing. The dollar may keep falling as gold and Treasury bonds rise against this backdrop.
As for stocks, their read-through may depend on what the numbers stay about consumption, the biggest driver of US gross domestic product (GDP) growth. It was worryingly soft in the first quarter, adding the least in nearly two years to overall output. Leading data like jobless claims, where the four-week average is at a two-year high, hint at more weakness.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts #Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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