US Economy Shows Signs of Growth Amid Inflation

US Economy Shows Signs of Growth Amid Inflation and Interest Rate Concerns as S&P 500 Drops 2% in the Last Week

The S&P 500 index dropped 2% from 4052 to 3970 last week, with the index down 1.05% on Friday. The Dow Jones and Nasdaq also saw declines of 1.02% and 1.69%, respectively on Friday. Investors' concerns over rising interest rates and inflation fears were partly responsible for the drop. Inflation numbers unexpectedly jumped last week, raising concerns about a prolonged inflationary period and the possibility of the Federal Reserve raising interest rates sooner than expected.

Despite these concerns, the latest economic indicators suggest that the US economy is performing better than anticipated. Consumer spending, labor market, and business activity data all point towards growth, indicating that the economy is in a much better state than previously thought. The surprise came in the form of unexpectedly strong inflation figures, which have added to the already positive outlook on the US economy.

The projected maximum Federal Reserve rate is now nearing 5.50%, raising the question of whether a 6% rate is still considered unrealistic. As a result, bond yields in the US and other countries are rapidly increasing, putting pressure on equities.

Investors are anticipating selling pressure in Asian markets on Monday following a disappointing end to the week on Wall Street. This drop is due to investors recognizing that US interest rates will remain higher for an extended period.

The US 10-year Treasury note's yield, which serves as an indicator of worldwide borrowing expenses, surged to over 3.94%, marking its peak level in three months. The rise was fueled by a series of robust economic data that reinforced the anticipation of the Federal Reserve implementing higher interest rates and maintaining them at a restrictive level for an extended duration.

XAU/USD – Gold Prices Sink to Year-to-Date Low as Economic Data Sparks Monetary Tightening Fears

Gold prices sank below $1,815 per ounce on Friday, marking a 1.5% decline on the week and hitting their lowest level so far this year. The fall was driven by hotter-than-expected economic data that added to worries of aggressive monetary tightening.

The Federal Reserve's inflation gauge, Core PCE prices, accelerated above expectations, highlighting the FOMC's fear of upside risks to inflation, as revealed in the latest minutes' release. The news added to the already rising concerns among investors about inflation, which has been steadily increasing in recent months.

Furthermore, personal spending in the US rose by 1.8% from the previous month, which added leeway for the US central bank to raise rates to a more restrictive level. The US labour market remains stubbornly tight, with initial jobless claims unexpectedly dropping in mid-February, adding to the inflationary pressures.

The prospect of higher borrowing costs for a longer period of time increases the opportunity cost of holding non-interest-bearing assets such as bullion, putting pressure on gold prices. As interest rates rise, it becomes more expensive to borrow money, making it less attractive to invest in assets such as gold.

Gold has traditionally been seen as a safe haven asset, but as the economy continues to recover from the pandemic, investors are starting to look for higher returns in riskier assets. This has led to a decrease in demand for gold, contributing to the downward pressure on prices.