Take Five: The heat is on

A rising dollar and a surge in inflation expectations and bond yields were always going to knock gold. With the price sitting near record highs at the start of the conflict, the opportunity to cash in on a parabolic rally was too good to miss. In three months, gold fell 25% and its reputation as a safe haven lay in tatters. However, from late June's six-month low around $3,965, it has risen nearly 10%. Inflation has not rampaged out of control and markets are assuming the Federal Reserve may not raise rates. Investors are starting to buy gold. After four months of outflows, gold ETFs are starting to draw in capital HLDTOTALL=XAU. More importantly, central banks, which slowed buying sharply in the first quarter, just bought more gold between April and June than in any second quarter on record, with 289 metric tons, according to the World Gold Council. A super El Niño combined with higher energy costs, fertiliser shortages linked to the Middle East conflict and new disruptions to grain shipments from the war in Ukraine are fuelling fears of another bout of food inflation. The impact is likely to be felt most acutely across Asia and Latin America, where households spend a larger share of their income on food and policymakers remain wary of any renewed price pressures. Economies such as India have already felt it. The United Nations Food and Agriculture Organization has warned the world is verging on another wave of food inflation. JPMorgan has estimated a strong El Niño on its own and at its peak could raise global food inflation by about 0.7%. Markets will be watching closely to see if this is temporary or a new inflation headache, forcing central banks to rethink monetary policy. After the latest reading of UK GDP, which beat expectations in June thanks to hot weather, World Cup football and stronger business investment, unemployment and inflation figures are up next. Both are of course important, but the latter especially will be closely watched. Inflation eased to 2.6% in June, helped by a fall in energy prices after the U.S.-Iran ceasefire. But the pause in fighting didn't last and energy prices accelerated again, which points to a potentially higher July print. Adding to Iran-fuelled inflation concerns are growing worries about higher food prices. Extreme heat in the UK and Europe is impacting food production, and several UK supermarket groups have already warned of a food price shock. Considering the cost of living is a priority for new Prime Minister Andy Burnham, price pressures are bound to be a concern as he works out his spending and policy plans. The Bank of England will also be watching: The chances of a rate hike later this year are falling, but not zero. A wave of retail earnings will provide a timely check on the health of the U.S. consumer, showing whether spending remains resilient across income groups and whether the Iran conflict is beginning to weigh on household budgets. With a resolution stalled, Walmart, Home Depot, Target, Lowe’s and Deere could offer the clearest read yet on how higher energy prices and geopolitical uncertainty are affecting demand. Gas is more than $4 a gallon, but inflation elsewhere shows signs of cooling. Walmart and Target may reveal whether households are shifting spending towards essentials as fuel and transportation costs remain high. Home Depot and Lowe’s could show whether inflation and borrowing costs are curbing home-improvement spending, while Deere may signal how rising energy and input costs are affecting farmers. Whether executives view these pressures as manageable headwinds or a growing threat to margins and demand will be the real focus for investors. The latest print of Japanese gross domestic product will offer a glimpse into how Asia's second-biggest economy is weathering the Iran war and its tolerance for a central bank interest rate hike. GDP likely expanded an annualised 2% in the three months through June, according to the median forecast of 15 economists, marking a third straight quarterly advance. The prolonged Middle East crisis has weighed heavily on Japan, delivering a double whammy of higher costs for imported oil and depreciation in its currency. With mounting pressures to contain inflation and protect the yen, markets are growing more certain that the Bank of Japan will lift its policy rate by 25 basis points to 1.25% next month, following its June hike to 1%.

Take Five: The heat is on

Gold regains shine

Food inflation fears

UK inflation outlook

Consumer and Japan checkups

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