Traders have significantly adjusted their outlook on the likelihood of a rate cut by the Federal Reserve, with the CME FedWatch Tool now indicating nearly an 80% probability for a cut in December, a sharp increase from just 30% earlier this month. This dramatic shift has had a positive impact on precious metals, which tend to thrive in environments of declining real yields and a weakening dollar.
Recent economic data has played a critical role in shaping this outlook. Notably, job openings have reached their lowest levels since early 2021, and various payroll indicators suggest that hiring momentum is slowing more quickly than Fed policymakers anticipated. Economists contend that these deteriorating labor market conditions provide less justification for the Federal Reserve to uphold its higher interest rates for an extended period.
As employment slows down, inflation moderates, and wage growth remains subdued, investors are increasingly attracted to safe-haven assets. Gold and silver, traditionally viewed as hedges during times of shifting monetary policy, are witnessing a resurgence in demand as investors position themselves in anticipation of possible easing measures. Analysts highlight that the current market environment bears resemblance to previous cycles leading up to rate cuts, during which precious metals outperformed in the weeks before policy changes. As Bart Melek of TD Securities pointed out, the focus of the markets has shifted away from questioning whether rate cuts are forthcoming to when they might occur.
While the markets are currently buoyed by expectations of easing, attention now turns to a series of pivotal U.S. economic releases scheduled for later in the day. Consensus estimates suggest a 0.3% month-over-month increase in the Producer Price Index and a 0.4% rise in Retail Sales. Additionally, the ADP employment report is anticipated to shed further light on private-sector hiring trends.
Should the economic data come in stronger than expected, it could lead to a temporary boost for the dollar and limit gains in precious metals. Conversely, softer data would likely reinforce the prevailing expectations for a December rate cut, further supporting gold and silver in the market.
