Wall Street Rally and Gold Rebound as Fed Rate-Hike Fears Ease

U.S. stocks and gold are both pushing higher in August as investors increasingly bet that the Federal Reserve will hold interest rates steady rather than tighten monetary policy again.

The S&P 500 has gained roughly 6% since the end of July, shrugging off elevated oil prices, uncertainty over interest rates and the economic fallout from the war with Iran. At the same time, December gold futures have staged a sharp comeback, rising more than 11% from their July 13 level.

Inflation Data Calms Rate-Hike Fears

July's U.S. Consumer Price Index rose 0.1% from the previous month, while core inflation increased 0.2%, matching market expectations. Consumer prices were up 3.4% from a year earlier, continuing a slowdown from 4.2% in May and 3.5% in June.

The numbers were not strong enough to force an immediate change in Federal Reserve policy, easing fears that another rate increase is imminent.

Market expectations for a September rate hike fell from around 50% to roughly 38%-40% following the latest inflation and employment reports.

The labor market has also weakened. U.S. nonfarm payrolls fell by 23,000 in the latest report, far below market expectations for an increase of 80,000 jobs. The combination of softer inflation and weaker employment is strengthening the case for the Federal Reserve to leave rates unchanged.

S&P 500 Gains About 6% Since Late July

Wall Street has so far focused more heavily on strong second-quarter corporate earnings and continued enthusiasm surrounding artificial intelligence investment than on geopolitical and inflation risks.

The S&P 500 has risen about 6% since the end of July, with investors continuing to put money into companies positioned to benefit from the expansion of AI infrastructure and spending.

Bond markets remain more cautious. Uncertainty over the future direction of monetary policy under Federal Reserve Chairman Kevin Warsh continues to contribute to volatility, while the enormous capital requirements associated with expanding AI infrastructure are also being watched as a possible source of longer-term inflationary pressure.

Oil Above $85 Remains a Major Threat

The biggest risk facing markets remains energy prices. Crude oil has climbed above $85 a barrel amid the closure of the Strait of Hormuz and concerns about disruptions caused by the Iran war.

A prolonged interruption to global energy supplies could push inflation higher again, potentially forcing the Federal Reserve to reconsider its current stance.

Higher oil prices had previously weighed heavily on gold. Rising energy costs increased inflation expectations and long-term Treasury yields, pushing real interest rates higher and reducing the appeal of the precious metal despite heightened geopolitical uncertainty.

Gold Rebounds More Than 11%

Gold has now reversed much of its recent weakness. December gold futures closed at $4,465.42 an ounce on August 12, up 0.55% for the session and 11.35% from $4,005 on July 13.

The rebound follows a major correction earlier in the year. Gold futures reached a record closing high of $5,318 in late January before falling to $3,990 on June 24, a decline of roughly 25% from the peak.

Prices then traded near the $4,000 level until expectations for additional U.S. rate increases began to fade.

Weak employment data has now created a more favorable environment for gold. A slowing economy combined with easing inflation could keep the Federal Reserve on hold and eventually remove some of the rate-hike expectations still priced into financial markets.

Central Banks Continue Buying Gold

Demand from global central banks is providing another source of support. Central-bank net gold purchases recovered to 289 metric tons in the second quarter after falling to 57 tons during the first quarter.

China's central bank has remained one of the most persistent buyers, extending its net purchasing streak to 20 consecutive months. Investment flows into gold exchange-traded funds are also adding support.

For now, investors are balancing two competing forces: the threat of renewed inflation from high oil prices and the Iran war against weakening U.S. employment, moderating inflation and expectations that the Federal Reserve can keep rates unchanged.

Wall Street has so far chosen the bullish side of that equation. Stocks remain near the center of an August rally, while gold has regained momentum as investors seek protection against both economic uncertainty and geopolitical risk.