【TMGM Financial Recap】Waller Suddenly Shifts To A Dovish Stance, Expectations For A Rate Hike In September Sharply Decline, Gold Prices Surges 2% To A One-Week High!
On Thursday, spot gold briefly surged above $4,500, reaching its highest level since August 28. This strong rally was the result of dovish remarks from Federal Reserve Governor Waller, the simultaneous weakening of the dollar and U.S. Treasury yields, and geopolitical turmoil in the Middle East.
On the eve of the Federal Reserve's September policy meeting, the market was generally filled with hawkish expectations. Federal Reserve Chair Walsh's hawkish speech at the Jackson Hole annual meeting once pushed the probability of a rate hike in September above 65%. However, Fed Governor Waller, known as a swinging hawk, sent a strong dovish signal at his September 3 event that exceeded market expectations.
In his speech, Waller made it clear that if the upcoming August inflation data confirms inflationary pressures are easing, he is inclined to support keeping rates unchanged at the policy meeting on September 15-16. He even quoted John Lennon, calling for an opportunity to cool inflation and advocating against premature rate hikes to allow the cooling process to fully develop. However, Waller did not completely close the door to rate hikes; he emphasized that if inflation data is hot, he will consider supporting rate hikes, and a slight acceleration in inflation could lead him to support tighter policies.
This statement quickly triggered a chain reaction in financial markets. According to CME Group's FedWatch tool, the market's probability of a Fed rate hike in September plummeted from about 62% before Waller's speech to about 50%. The yield on 10-year U.S. Treasuries fell 3.8 basis points to 4.756%, marking the largest single-day drop since August 25, while the US dollar index weakened in tandem.
More and more investors are beginning to agree with the view that the Fed might raise rates once, but the room for further rate adjustments afterward may be limited. Waller's dovish remarks have driven gold prices so dramatically because of the highly sensitive negative correlation between gold and Fed interest rate expectations. When rate hike expectations heat up, the opportunity cost of holding non-yielding gold increases, and funds tend to flow into higher-yield dollar assets; Conversely, when rate hike expectations cool, valuation pressure on gold eases.
Just two days before Waller's speech, tensions in the Middle East suddenly escalated. On Tuesday, the U.S. launched large-scale airstrikes against Iran's Islamic Revolutionary Guard Corps targets along the coast of the Strait of Hormuz, followed by retaliatory strikes against U.S. military bases in Kuwait, Iraq, Jordan, Qatar, and Bahrain. Iran said that a U.S. airstrike on a residential home where a wedding was being held resulted in 5 deaths and nearly 70 injuries. This presents a complex situation facing gold; On one hand, escalating Middle East conflicts should have triggered gold's safe-haven nature; But on the other hand, rising oil prices have pushed up inflation expectations, which has reinforced the Fed's logic for rate hikes.
Market Insight:
The door to a rate hike in September is not completely closed; the upcoming nonfarm payroll and CPI data will be key variables determining gold's short-term trajectory. Every swing in rate hike expectations could trigger sharp fluctuations in gold prices. The probability of at least a 25 basis point hike this year remains above 80%, which could limit gold's upside potential.
