US one-year inflation expectations have climbed to 4.8% for May, up from a preliminary 4.5% reading and previous 4.7%, according to Reuters reports. Consumer expectations for inflation over the next five years also increased to 3.9% from 3.5% last month. As reported by Reuters, Joanne Hsu, director of the Surveys of Consumers, noted that 57% of consumers now mention high prices as eroding their personal finances, up from 50% last month. The cost of living continues to be a first-order concern, with independents and Republicans seeing decreases in sentiment, both groups reaching their lowest readings of the current presidential administration. Such rising expectations are a concern for economists because they can drive behavior that creates a vicious cycle that makes inflation worse.
The growing discontent extends beyond economic concerns to political sentiment, with Trump's presidential approval rating falling to nearly its lowest level since returning to the White House. A Reuters/Ipsos survey this week showed the decline hit by a drop in support among Republicans, representing a warning sign for Trump and his Republican Party as they seek to hold their majorities in the November midterm elections. The University of Michigan's Surveys of Consumers showed little change in mood among Democrats, while there were marked declines in sentiment among lower-income consumers and those without college degrees, groups who are disproportionately impacted by higher prices for gasoline and other essentials. The deterioration in sentiment among Republicans mirrors other independent surveys, indicating widespread economic anxiety across political lines.
Gold and silver are managing to hold key near-term support levels ahead of the weekend, but precious metals remain stuck in relatively neutral territory amid significant bond market volatility. The yield on 30-year U.S. Treasuries is holding above 5%, while the yield on 10-year notes is ending the week above 4.5%. According to Kitco News, analysts note that in the short term, higher bond yields represent significant headwinds for gold and silver, as rising bond yields could force the Federal Reserve to raise interest rates by the end of the year, raising the opportunity cost of holding non-yielding assets. However, there is a fine line between higher bond yields caused by rising inflation and a potential bond crisis that would support precious metals as a wealth preservation tool.
Despite deteriorating consumer sentiment, US stocks rose to finish their eighth straight winning week, marking the best such streak since 2023. The S&P 500 added 0.4% and pulled closer to its all-time high, while the Dow Jones Industrial Average rose 294 points to 50,579.70 and the Nasdaq composite gained 0.2% to 26,343.97. The split between Wall Street and most US households continues to grow wider, with the University of Michigan survey showing sentiment fell to a record low of 44.8, piercing below a bottom in 2022 when inflation peaked above 9%. Ross Stores helped drive the market with an 8.1% surge after reporting strong quarterly results, while Estee Lauder jumped 11.9% after announcing it was no longer considering a merger with Puig. The VIX is sitting at 16.59, down 1.01%, which tells you the bid is not anxious and the path being priced is not panicked.
The CME's FedWatch Tool now indicates that there's a greater probability of a 25-basis-point rate hike before year-end (42%) than of rates being kept on hold (30%), with the likelihood of 50 basis points' worth of hikes this year rising to 22% from zero a month ago. According to Trade Nation's David Morrison, this aggressive pricing of rate hikes is likely to put downward pressure on gold prices. However, TD Securities analysts note that the rise in long-end yields is in line with rising inflation expectations, with the repricing of Fed expectations being the primary driver of higher rates. The St Louis Fed five-year breakeven inflation rate has remained above 2.3% into late May, while markets will receive the second print of first-quarter GDP data and April inflation data with the simultaneous release of the monthly Personal Consumption Expenditures (PCE) Index. Fed Governor Christopher Waller said the central bank should "hold rates steady for the near term" and warned that the next move could be a hike if inflation continues to surprise to the upside.
Despite near-term headwinds, some analysts maintain optimistic long-term outlooks for gold. John Murillo from B2BROKER Group sees potential for gold prices to hit $10,000 in the long term, based on growing concern about 'sticky' inflation caused by the long-term consequences and high impact of the Middle East conflict, reinforced by the U.S. dollar's weakening momentum. However, TD Securities commodity analysts warn there is a risk that gold prices could test support around $4,350 an ounce. Naeem Aslam from Zaye Capital Markets noted that the risk of a bond crisis is rising, but the storm hasn't hit yet, with the key risk being the long end of the curve becoming untethered. He suggests that if long yields rise but gold stops falling, that means investors are no longer seeing higher yields as a reason to avoid gold — they are seeing them as a reason to own it. Gold is down 0.81% to $4,505.60 as the risk-on bid pulls money out of the safe-haven corner, while the dollar index is fractionally higher at 99.30, up 0.09%.
