Market participants are still digesting the financial shockwaves resulting from yesterday’s CPI report. The inflation report revealed that inflationary pressures for goods and services said that inflation is running at a scorching level of 9.1% year on year. Many have never lived through a time in which inflation was this elevated because this is the highest level of inflation since November 1981.
Another ominous sign that the cost of living will remain elevated is today’s release of the PPI (Producer Price Index). Today the US Bureau of Labor Statistics released its producer price index data. The report revealed that the PPI increased 1.1% when compared to last month and increased 11.3% year on year. This is the largest increase recorded since March 2022 when the PPI came in at 11.6% year on year.
The PPI measures the average change over time in the prices domestic producers receive for their output. Simply put, it is a measure of inflation at the wholesale level. Therefore, it means that there is a small-time lag between when the end product reaches the consumer market and therefore impacts purchases in the future.
This level of elevated inflation will most certainly force to hand of the Federal Reserve and take its already aggressive stance to reduce inflation to an ultra-aggressive stance. This changes where interest rates will be by the end of the year considerably. In the last 24 hours, members of the Federal Reserve have made statements suggesting that they will most likely raise rates by a full percentage point during the July FOMC meeting. More so, it is also likely that they will continue this new exceedingly aggressive monetary policy when they convene for the next FOMC meeting in September. It is widely believed that the Fed will follow this month’s 1% rate hike with another rate hike of three-quarters of a percent in September.
The CME’s FedWatch tool paints a slightly different picture. This probability tool is predicting that there is a 57.2% probability that the Fed will raise rates by 75 basis points and a 42.8% probability that they will raise rates by 100 basis points in July. However, when we look at the big picture it is also predicted that there is a 53.3% probability that by the conclusion of the September FOMC meeting interest rates will be between 3% and 3 ¼%.
Regardless of the size of the rate hikes at the remaining four FOMC meetings, it is extremely likely that fed funds rates will have moved from 0 to 25 basis points before the March FOMC meeting to at least 3 ½% to three and three-quarter percent by the end of the year.
Gold and silver pricing will remain under pressure through this period because the dollar will strengthen as interest rates move higher and there is a 100% negative correlation between the value of the dollar and gold prices. This is because the dollar is paired against gold and therefore a direct correlation between dollar strength in gold weakness or dollar weakness in gold strength.
Rising interest rates will also impact real yields on government debt instruments. Higher yields make gold less attractive because it does not have any interest yield and will increase the demand for this fixed-income asset.
As of 6:13 PM EDT gold futures basis, the most active August contract is currently fixed at $1708.80 declining 1.58% or $27.50. Our studies indicate that there is no technical support until $1680 which matches the low of the flash crash that occurred in August 2021.
Silver had a much stronger price decline losing 4.50% of the value with the most active September futures contract currently fixed at $18.33. Lastly, the dollar gained 0.67% or 0.719 points and is fixed at 108.475.
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Wishing you as always good trading,
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