LAWRIE WILLIAMS: June U.S. CPI high again. Gold falls and then makes strong recovery
The U. S. June Consumer Price Index (CPI) figure has been released and once again it has come in showing the inflation level to be higher than the market had anticipated at 9.1% year-on-year. There was an immediate knee-jerk negative reaction in the gold price, taking it down to around $1,709 – its lowest level since early July 2020 – but from which it made a rapid and strong recovery and had regained all its lost ground, and some more, within a few hours. Silver also picked up strongly, regaining the $19 level, which it had fallen below yesterday, quite comfortably.
U.S. equities and bitcoin expectedly opened sharply lower. It will probably take some time for the markets to digest the likely impact of the latest CPI figures on the likely Fed reaction on interest rates and the markets at the FOMC meeting due to take place at the end of the month and their likely impact on the markets, but they are unlikely to be positive. Any consequent reduction in the flow of funds into the markets is unlikely to have anything but a negative impact,.
Suffice it to say that with inflation remaining elevated, and still rising despite the Fed’s attempts to bring it down, there looks to be no likelihood of any short-term easing of the Fed’s tightening, or interest rate raising programme, in sight. Indeed the odds are increasing already of even bigger rate hikes ahead. The CME Fedwatch Tool has raised the odds of a 100 basis point Federal Funds rate increase at the end-July FOMC meeting to over 40% from around 7% yesterday, although a 75 basis point rise is still seen as the most likely option at 59.6%. The higher level would put the target rate going into August at 2.5-2.75% - an unheard of level only a few months ago, and suggesting a year-end rate of perhaps above 4%.
Given that talk of even a 50 basis point monthly rate rise – a seemingly paltry level now – sent the equity markets into virtual meltdown only a few short months ago, heaven knows what impact a 100 basis point interest rate rise will have should it come about. But maybe the markets have become so inured to the thoughts of higher rate increases and ever-rising inflation that the impression that somehow we will muddle through has taken charge. We have commented all along that Fed interest rate rises were likely to be insufficient to counter seemingly ever-rising inflation, fuelled primarily by rising energy and food prices resulting from the Russia/Ukraine war and the Russian sanctions. However there are signs now that energy prices may be falling so perhaps there will be some respite ahead.
Maybe it will take the reality of actual wealth destruction to bring the potential seriousness of the current situation home to the world in general. The dollar may be strong against other currencies, but its purchasing power will be diminishing daily through inflation, as will that of virtually all other fiat currencies all around the world. The problem has to be how can one protect oneself from this.
Gold has been the traditional safe haven wealth protector, but its performance to date has not been that supportive, although it has fallen far less than equities so in that respect it is serving a positive purpose. It does have some strong and well-thought-of proponents though who foresee a strong recovery in H2 this year, so don’t write it off. Over time it should still serve you well.