While global markets are in summer mode, there is a steady stream of events that could pose risks to investors, including renewed tensions in the Persian Gulf and U.S. consumer spending data and inflation concerns that are big enough to push gold back to the fore.
1. FOOD INFLATION CONCERNS
In addition to Super El Niño, high energy costs and fertilizer shortages resulting from the war in the Middle East, as well as developments that disrupted grain shipments from Ukraine again, triggered concerns that food inflation would rise again.
Food inflation is expected to be felt most in Asia and Latin America, where households spend a larger share of their income on food than in other regions. Authorities are cautious about new pressures that may occur on prices. Its effects have already begun to be seen in countries such as India.
The United Nations Food and Agriculture Organization warned that a new wave of food inflation is approaching. A severe El Niño alone could raise global food inflation by about 0.7 percent, JPMorgan said.
Markets will be watching closely to see if this is a temporary effect or a new problem that will increase inflation and require central banks to review their monetary policies.
2. CONSUMER EXPENDITURE
Retailers’ balance sheets will provide data on U.S. consumers’ spending at a crucial time. The balance sheets will show whether there is a weakening in the spending of different income groups and whether the war in Iran has started to affect household budgets.
While attempts to find a solution to the war engulfing the Middle East have made no progress, the bottom lines of Walmart, Home Depot, Target, Lowe’s and Deere will show whether rising energy prices and geopolitical uncertainty are impacting consumer demand. Even though gasoline prices exceed $1 per liter in the US, there are signs that inflation is starting to slow down in all other items.
Walmart and Target may indicate that households are shifting their spending to essentials as fuel and transportation costs remain high. Home Depot and Lowe’s can provide some insight into how inflation and rising borrowing costs are affecting home improvement spending. Deere will demonstrate the impact of high energy and input costs on farmers.
Investors will be closely watching whether company executives describe these pressures as manageable challenges or threats that will affect profit margins and demand.
3. WILL INTEREST RATES BE INCREASED IN JAPAN?
Japan’s gross domestic product (GDP) will be announced on Monday. The data in question will provide insight into whether the Bank of Japan (BOJ) will decide to increase interest rates while the Iran war continues.
Economists estimate that Japan’s second-quarter GDP grew 2 percent year-on-year, the third quarter in a row.
The ongoing conflicts in the Middle East increased Japan’s expenditure on imported oil and caused its currency to lose value.
As the pressure to control inflation and create new protections increases, markets have begun to price that the BOJ will increase the policy rate, which it increased to 1 percent in June, by another 25 basis points to 1.25 percent next month.
4. GOLD IS RECEIVING ATTENTION AGAIN
The strong dollar, rising inflation expectations and the increase in bond yields put pressure on gold prices.
Gold, which was at near record levels at the beginning of the Iran war, lost approximately 25 percent of its value in three months as investors turned to profit making.
But gold has recovered nearly 10 percent since its six-month low in late June. The fact that inflation did not get out of control and the markets priced that the US Federal Reserve (Fed) might not increase interest rates helped investor interest in gold again.
While gold ETFs, which experienced money outflows for four consecutive months, started to attract investment again, central banks also accelerated their purchases. According to World Gold Council data, central banks made their second strongest quarterly purchases ever, purchasing 289 tons of gold in the April-June period.
5. EYES ON INFLATION AND UNEMPLOYMENT DATA IN THE UK
After the UK economy grew above expectations in June thanks to warm weather, the increase in consumer spending and corporate investments supported by the World Cup, the focus of the markets has now turned to inflation and unemployment data.
Inflation figures, in particular, will be monitored closely. Inflation, which fell to 2.6 percent in June due to the decline in energy prices, is expected to accelerate in July as energy costs rise again.
In addition to energy price pressures originating from Iran, the expectation of an increase in food prices also strengthens inflation concerns.
While extreme heat in the UK and Europe negatively affects agricultural production, some large supermarket chains have warned of an increase in food prices.
While the course of prices is important for Prime Minister Andy Burnham, who lists the fight against the high cost of living among his priorities, the Bank of England also follows the data closely.
Although expectations for an interest rate increase this year have weakened in the markets, the possibility is not completely eliminated.
