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We expect real yields to be a near-term headwind for gold

We think that real yields in the US will continue to rise and put renewed pressure on the price of gold and most other assets.
  • We expect the Bank of England to hike by 50bp... (12.00 BST)
  • ...while the Czech central bank could raise its policy rate by 25bp (13.30 BST)
  • Sign up for our Drop-In on the big themes in EMs, including US-China tensions, here

Key Market Themes

We think that real yields in the US will continue to rise and put renewed pressure on the price of gold and most other assets.

Having fallen sharply over the past month or so, the 10-year US Treasury yield has risen more than 25bp, to ~2.78%, from yesterday’s lows. And while concerns about the global economic outlook previously pushed down both real yields and inflation expectations, the latest rebound has been driven entirely by real yields. (See Chart 1.) This probably reflects that several Fed officials over the past few days have emphasised that they are unlikely to “pivot” soon despite weak economic data – a view that is broadly in line with our own.

Chart 1: Cumulative Changes in US 10-year Treasury Yield, TIPS Yield, & Breakeven Inflation (bp)

Sources: Refinitiv, Capital Economics

While it appears to have weighed a bit on equity markets and provided a boost to the US dollar yesterday, the rise in real yields seemed to have had little effect on the price of gold. We suspect this is because gold has benefitted from the rising geopolitical risks surrounding US Speaker of the House Nancy Pelosi’s visit to Taiwan. (See here.) Indeed, ETF holdings suggest that elevated “safe-haven” demand has probably buoyed the gold price for much of this year following Russia’s invasion of Ukraine. (See Chart 2.)

Chart 2: Gold Price & Total Gold ETF Holdings

Sources: Refinitiv, Capital Economics

Admittedly, this geopolitical tailwind for gold could continue for some time. Nonetheless, we still think the fundamental backdrop points to renewed weakness in the price of gold through the remainder of this year. (See here for our outlook for gold beyond 2022.) After all, the gap between the gold price and 10-year US TIPS yields – which typically have a strong inverse relationship – is already substantial. (See Chart 3.) And recent Fed speakers’ messaging has reinforced our view that the Fed will continue to tighten financial conditions and push real yields even higher. (Jonathan Petersen)

Chart 3: Gold Price & 10-Year US TIPS Yield

Sources: Refinitiv, Capital Economics

Selected Data & Events




CE Forecast*

Thu 4th


BoE Interest Rate Announcement






Interest Rate Announcement





*m/m(y/y) unless otherwise stated; p = provisional

Key Data & Events


The surprise rebound in the ISM services index to 56.7 in July, from 55.3, provides some further reassurance on the health of the economy. A weighted average of the two ISM activity indices is now consistent with GDP growth of around 2% annualised. The services survey details also add to the evidence that easing supply chain problems will start to feed through to lower inflation soon.

The international trade data due on Thursday are likely to show a further narrowing in the deficit in June, as exports continued to recover, although the deteriorating global backdrop suggests that strong performance won’t last for long. (Andrew Hunter)


The 1.2% m/m decrease in euro-zone retail sales in June was larger than even our below-consensus forecast (-0.5%). Meanwhile, the new export orders component of the euro-zone manufacturing PMI fell further below the 50-mark in July, which lends support to our view that the economy will flatline, at best, in Q3.

Elsewhere, while Switzerland’s inflation remains enviably low by most standards, the core rate rose to its highest level in more than two decades in July to 2.0%. Against this backdrop, the SNB seems set to lift its policy rate into positive territory in September, if not sooner.

And in the UK, we expect the Bank of England to step up its fight against high inflation at its meeting on Thursday by raising interest rates by 50bps, from 1.25% to 1.75%, rather than repeating recent 25bps hikes. What’s more, the MPC may imply that it is willing to raise rates by 50bps at future meetings, if there are no signs that domestic price pressures are easing. That would support our view that interest rates will peak at 3.00% rather than the analyst consensus of 2.00%. (David Oxley & Nicholas Farr)

Other Developed Markets

The first rise in New Zealand’s unemployment rate since mid-2020 in Q2 2020 suggests that the RBNZ’s hiking cycle is nearing its end. However, with private sector labour costs rising at the fastest quarterly pace ever, we don’t think it’s quite over yet; we’ve pencilled in another 50bp hike at the upcoming meeting in two weeks. (Marcel Thieliant)


The Caixin services PMI rose from 54.5 in June to a 15-month high of 55.5 in July, diverging from its official counterpart which fell to 52.8. This presumably reflects the Caixin index’s skew toward SMEs and firms in coastal regions, which were hardest hit by lockdowns and have therefore enjoyed a bigger and more prolonged boost from reopening. The Caixin composite PMI nonetheless pointed to a slowdown in overall growth in July, with the acceleration in services more than offset by weaker manufacturing activity. (Julian Evans-Pritchard)

Other Emerging Markets

We think Brazil's central bank will hike its policy rate by 50bp on Wednesday, to 13.75%, and leave the door open for one final increase in the cycle.

In Emerging Europe, inflation data out of Turkey showed that the headline rate hit almost 80% in July. Inflation is likely to peak in the coming months but it’s becoming entrenched at a high level and we don't expect the central bank to hike interest rates any time soon. Meanwhile, we expect the Czech central bank to hike rates by 25bp, to 7.25%, on Thursday. The decision will be a close call given the more dovish shift at the central bank over the past month. Either way, we think that this will be the last hike in the cycle.

India’s services PMI for July, released on Wednesday, showed a reversal of the recent outperformance of the sector. That said, both PMIs were still strong, and point to growth having been decent at the start of Q3.

And in the Middle East and North Africa, July’s batch of PMIs were mixed, but the readings reinforce our view that activity in non-oil sectors in the Gulf remains strong and there is still a marked divergence in economic performance between the Gulf and non-Gulf economies. (William Jackson, Liam Peach, Adam Hoyes and James Swanston)

Published at 16.52 BST 3rd August 2022.

Editor: John Higgins,
Enquiries: Harry Chambers,

Jonathan Petersen Markets Economist
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