(Kitco News) - Relatively steady economic data is prompting some investors to take profits in gold and silver as the Federal Reserve remains on track to raise interest rates to bring inflationary pressures under control.
The U.S. Bureau of Economic Analysis (BEA) announced on Wednesday that the preliminary reading of second-quarter Gross Domestic Product (GDP) showed that the economy expanded by 1.5%, unchanged from the revised initial reading and still down from first-quarter growth of 2.1%.
The data was in line with economists’ expectations. The initial reading for Q2 growth was revised down from 1.6%.
The report also noted that inflation moved sharply higher in the second quarter. The preliminary GDP Price Index rose 6.4% in Q2, up from the initial reading of 6.2%. Economists were expecting an unchanged reading.
However, the BEA also released Personal Consumption Expenditures (PCE) data for July, including the core PCE index, which excludes volatile food and energy prices and is the Federal Reserve’s preferred inflation gauge.
While economic growth remains sluggish, the monthly inflation data showed that consumer price pressures remained relatively benign last month.
The report said that core PCE increased 0.2% in July, up from June’s increase of 0.1%. The increase was in line with consensus estimates.
For the year, core inflation rose 3.3%.
Headline inflation was also relatively muted, even as energy prices remained elevated. Headline inflation rose 0.2% in July, just slightly hotter than expected.
In the last 12 months, headline inflation rose 3.7%. According to consensus forecasts, economists were expecting a 3.6% increase.
Although there were no big surprises in inflation or economic activity, Adam Button, Chief Currency Analyst and Managing Editor at investingLive.com, said that inflation remains a problem as it remains well above the Federal Reserve’s target of 2%.
“The data has run in a more dovish direction, but Fed officials are worried about persistent inflation; that's why the core reading in today's number matters. Ultimately, the Fed has missed its inflation target of 2% for five years, and that's where new Chairman Kevin Warsh has planted his flag. With headline at 3.6%, data center spending booming and the Iran war continuing, he has work to do,” he said in a note.
The gold market has seen renewed selling pressure in its initial reaction to the data; however, it is still holding initial support above $4,600 per ounce. Spot gold last traded at $4,623.50 an ounce, down 0.75% on the day.
Analysts have said they see the move as expected profit-taking, with the latest economic data continuing to support the Federal Reserve's tightening bias.
While economic activity and inflation pressures remain stable, the PCE report showed that consumers remain relatively healthy, which would help them weather rising prices.
The report said that personal income jumped 0.4% last month, up compared to June’s increase of 0.2%. Economists were forecasting a 0.2% increase.
At the same time, personal spending increased 0.2%, down slightly compared to June’s increase of 0.3%; however, economists were expecting to see a 0.1% increase in spending
Although gold prices have fallen to session lows following the data, some analysts expect that the selling pressure won’t last as the data still support the broader uptrend.
Mariia Menahem, CEO of Clarity Global Inc, said that stagflation risks continue to grow.
“The Fed's preferred inflation gauge came in exactly where it was supposed to, and that non-event is almost beside the point next to what's happening underneath it. Growth held flat at 1.5%, matching last quarter precisely, but the GDP price index jumped to 6.4% against a forecast of 6.2%, the kind of quiet upside surprise that gets buried under two in-line numbers but tells the real story: the economy isn't accelerating, it's getting more expensive to run at the same speed,” she said. “That combination, flat growth with rising price pressure, is the exact setup that keeps a central bank from committing to easing, and it leaves businesses financing operations against a rate environment more likely to hold than loosen.”
Waleed Said, Technical analyst at GivTrade, said that he also sees growing stagflation risks.
“The worry is that inflation remains sticky, which might lead to a stagflation case where both growth and inflation are stagnant,” he said.
