High-Pressure US Treasury Yields versus Inflation Data Tug-of-War
The minutes from the September FOMC meeting published last week showed that a majority of officials believe further rate hikes may still be needed within the year to guide inflation back toward the 2% target. Meanwhile, the 10-year US Treasury yield briefly touched 5.3% mid-week, marking its highest level since April 2002. The surge in real interest rates directly raised the opportunity cost of holding non-yielding gold, becoming the primary drag on gold prices early in the week. Simultaneously, the US Dollar Index maintained its strength, closing near 102.2, which further suppressed US dollar-denominated gold.
However, a turning point for gold prices emerged following Thursday's 30-year US Treasury auction and Friday's release of the preliminary October University of Michigan Consumer Sentiment Index. Although the winning yield for the 30-year Treasury bond reached as high as 5.618%, the bid-to-cover ratio reached 2.54x, with indirect bidders receiving 72.3% and primary dealers taking only 6.8%. This indicated that demand for long-duration bonds was not as weak as price action had suggested. After the auction concluded, long-term yields pulled back slightly, providing a temporary window of positive support for gold. Furthermore, the preliminary US University of Michigan Consumer Sentiment Index for October dropped to 46.3, a noticeable deterioration from the final reading of 48.1 in September, while one-year inflation expectations rose to 4.7%. This combination of simultaneous growth and inflation concerns offered short-term support to gold.
The upcoming US CPI and PPI data releases this week are drawing significant market focus as vital inflation indicators ahead of the Fed's October meeting. Given the sharp spike in energy prices during September, overall September inflation metrics may overshoot expectations. On the technical front, daily RSI charts displayed a "divergence" pattern last Thursday, indicating a short-term bottoming out and bounce in gold prices (for details, please follow the KCM Trade WeChat Chinese official account). Nevertheless, upside momentum in gold remains constrained by the potential risk of yields climbing higher, keeping the broader downward trend intact. Resistance can be referenced at $4,260 – $4,350, while support lies at $4,120 – $4,000.
Turning to crude oil, prices declined primarily due to market expectations of increased Russian energy supply. US President Trump announced a deal with Russia, under which Russia will immediately supply over 300,000 metric tons of diesel to the US and global markets, with plans to expand supply further in November and beyond. This directly alleviated recent global supply tightness. Trump claimed that Russia and Ukraine have agreed to halt attacks on each other's energy infrastructure, effective immediately. Markets expect this move to reduce disruptions to Russian refineries and export facilities, thereby boosting global crude supply. However, neither Russian nor Ukrainian officials have confirmed this, leaving the validity of the statement uncertain. Despite the drop in oil prices, escalation in Middle Eastern geopolitical tensions continues to provide a price floor and limit losses, notably due to intensified military actions by Yemen's Houthi forces against Saudi Arabia and recent tanker attack incidents in the Strait of Hormuz.
Looking ahead, the "high pressure" of long-term US Treasury yields will dictate valuations across risk assets, while geopolitics and supply shocks will define the baseline stickiness of inflation. This week's US September CPI and PPI data will serve as a crucial benchmark for testing inflation persistence and projecting the path of interest rates. Whether gold can hold its consolidation range and whether crude oil's risk premium can endure will hinge on the outcome of this key variable.
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