LAWRIE WILLIAMS: Above expectation CPI raises prospects of 1% FOMC rate rise
Well the August Consumer Price Index (CPI) inflation figure has come in at an above expectation 8.3% increase year-on-year but the Producer Price index (PPI) came in marginally lower year-on-year at 8.7% - lower than expected. But in both cases month –on-month core inflation rates rose sharply prompting prior expectations of a Fed 75 basis point rate rise over a 50 basis point one to switch to a likelihood of a 75 basis point increase over a 100 basis point one to 72:28 in the CME group’s Fedwatch Tool.
As a consequence markets all fell sharply as the likelihood of a looming U.S. recession, as we have been warning all along, grew ever closer. Indeed as we have expressed beforehand we may already be in one as the technical parameters for a recession of two successive quarters of negative GDP growth have already occurred.
The Dow has fallen around 1,400 points over the past couple of days and still appears to be falling. Bitcoin is down well over $2,000 over a similar period and the gold price is off around $35 – a much smaller fall in percentage terms than equities or bitcoin, demonstrating that precious metals tend to be a far safer investment in such times of economic meltdown.
Where does this leave the Fed? Fed chair Powell, and some of his colleagues, have reiterated in recent speeches that the Fed ‘will do what it takes’ to bring inflation down, even if it impinges negatively on some of the Fed’s other priorities of keeping employment levels as high as possible. This could well involve raising interest rates higher and faster than the markets had previously been expecting, and one thus can’t rule out a year-end rate of 4.5% or thereabouts which is definitely higher than had previously been anticipated and certainly, if implemented, could easily tip the U.S. economy into recession, if it were not there already,
One should expect the threat of higher U.S. interest rates to raise the dollar index on the international currency markets which would be a continuing negative factor for gold. However, the ever increasing likelihood that the U.S. economy is heading for recession may be acting as a counter to this and so far dollar strength seems to have been muted.
Ukraine’s recent apparent successes in recapturing some ground from the seemingly impregnable Russian advance has been leading some to suggest that the conflict there is entering a new phase which could lead to a Ukraine victory and a defeat for Putin. In our view this is an extremely dangerous assumption and could lead to Putin employing ever more dangerous weaponry and tactics to regain the military advantage. He is not known for backing down. If this should happen and Russia, for example, starts to use tactical nuclear weapons, who knows where that could lead, It could lead to a huge surge in safe haven assets prices, but equities and bitcoin could be left out in the cold. Hopefully such an eventuality is beyond the pale even for President Putin, but who knows what a wounded bear is capable of?