Gold finding its footing as US producer prices fall in June

The headline Producer Price Index (PPI) fell 0.3% in June, following May's downwardly revised 0.6% increase, the U.S. Labor Department announced Wednesday. The latest inflation data came in weaker than expected, as economists had forecast an unchanged reading.

Over the past 12 months, headline wholesale inflation increased 5.5%, the report said, below consensus estimates of 6.2%.

Meanwhile, core producer prices, which strip out volatile food and energy prices, rose 0.2% last month, following May's downwardly revised 0.1% increase. Over the past 12 months, core PPI increased 5.1%.

The gold market caught an initial bid in response to the cooler-than-expected inflation data. Spot gold last traded at $4,064.90 an ounce, up 0.33% on the day. Sentiment toward gold is beginning to improve as softer inflation data prompts markets to scale back their aggressive expectations for U.S. monetary policy.

PPI is viewed as a leading inflation indicator because producers typically pass higher input costs on to consumers.

Naeem Aslam, CIO at Zaye Capital Markets, said gold could see further gains as the PPI data helps cool momentum in the U.S. dollar and pushes bond yields lower.

“This takes heat out of the inflation pipeline and gives the Federal Reserve more breathing room,” he said. “The message is colourful and clear: inflation is cooling without the economy collapsing. That is a near-perfect “Goldilocks” cocktail for equities—although the strong growth number could stop traders from pricing overly aggressive Fed rate.”

Although market expectations have shifted, traders are still pricing in at least one rate hike before the end of the year. Expectations for an immediate hike have been taken off the table, and a September rate increase is now seen as a 50/50 proposition.

At the same time, the gold market still has to contend with a relatively hawkish Federal Reserve. The PPI data comes a day after the U.S. Consumer Price Index showed a sharp cooling in consumer prices. However, on the same day, Federal Reserve Chairman Kevin Warsh said during his first day of testimony on Capitol Hill that the U.S. central bank remains committed to achieving price stability.

“The members of our Committee have no tolerance for persistently elevated inflation. And we share a resolute commitment to restoring price stability,” Warsh said in his opening comments.

Warsh also downplayed the latest CPI data.

“There might be some that look at this morning’s data and say, ‘mission accomplished,’” he said. “That is not my view.”