(Kitco News) - The gold market continues to hold solid gains ahead of the weekend as consumer optimism drops and inflation expectations tick higher.
The University of Michigan said Friday that its Consumer Sentiment survey fell to 68.9, down from September’s revised reading of 70.1. The data was weaker than expected, as economists had anticipated a more modest rise to 70.9.
The report noted that this was the first decline in consumer sentiment in three months.
The gold market is seeing little reaction to the economic data. Analysts note that the precious metal continues to experience solid technical buying momentum as investors bought the dip following a sharp correction earlier in the week. December gold futures last traded at $1,666.70 an ounce, up 1% on the day.
Gold continues to attract investor attention even as market expectations around the Federal Reserve’s monetary policy start to shift. Last week’s robust employment report, followed by slightly hotter-than-expected consumer prices, forced markets to pare back expectations for aggressive rate cuts next month.
However, economists also note that a slowing economy will continue to pressure the U.S. central bank to cut rates, albeit at a slightly slower pace.
Although consumer sentiment dropped in October, Joanne Hsu, UofM Director of the Survey of Consumers, said consumer optimism remains resilient.
“Sentiment is currently 8% stronger than a year ago and almost 40% above the trough reached in June 2022. While inflation expectations have eased substantially since then, consumers continue to express frustration over high prices,” she said. “Despite widespread news coverage about the Middle East and Ukraine, few consumers connected these developments to the economy. Concerns over these conflicts climbed this month but were relatively rare, mentioned spontaneously by less than 5% of consumers. With the upcoming election on the horizon, some consumers appear to be withholding judgment about the longer-term trajectory of the economy.”
In line with the drop in consumer sentiment, consumers also increased their inflation estimates. According to the report, one year from now, consumers expect inflation to rise to 2.9%, up from the 2.7% reported in September.
Although inflation pressures remain stubbornly elevated, economists have said this will have little impact on the Federal Reserve’s easing cycle as the central bank is now focused on potential weakness in the labor market and the economy.
“The Fed will be disheartened to see year-ahead inflation expectations rose for the first time in five months to 2.9%, from 2.7%. With the release of September’s CPI and PPI data this week indicating that the Fed’s preferred core PCE deflator price measure was running at 2.9% annualised last month, we are sure in our view that the Fed’s next move will be a smaller 25bp rate cut,” said Bradley Saunders, North America Economist at Capital Economics, in a note.
Market analysts note that a stagflationary environment—where inflation remains elevated but the economy slows—is the perfect environment for gold as real interest rates fall and weaken the U.S. dollar’s purchasing power.
