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Friday’s Consumer Price Index Report sent shockwaves through financial markets. The 8.6% annual reading was yet another new multi-decade high – dealing a body blow to analysts who believed inflation pressures had peaked. Investors now fear the Federal Reserve will have to undertake more aggressive tightening actions. Both bonds and stocks tumbled into the close of trading last week. Precious metals markets, however, perked up. Gold rallied while silver, which has been lagging of late, managed to put together a small advance on Friday. More impressive (and perhaps more telling) was the price action in the mining sector. Leading silver producers First Majestic (AG), Pan American Silver (PAAS), and Hecla Mining (HL) gained 6.6%, 5.9%, and 7.4%, respectively, on Friday. Investors are seeking safe haven in the precious metals sector, including mining stocks as proxies for gold and silver. Of course, no mining company or exchange-traded product tied to precious metals spot prices can substitute for the real thing. Demand for physical bullion has remained strong in recent months and could jump dramatically during the next round of turmoil in financial markets. The risk of a stock market crash is increasing as the Fed hikes into an environment of collapsing… Read More »Inflation goes from bad to worse… to even worse than reported

In the space of a few days, markets have gone from optimism that inflation might be on the cusp of plateauing, to rising apprehension that we could not only see higher prices, but that prices might well remain higher for a lot longer than originally thought. This concern has started to manifest itself into the reaction function of central banks, who appear belatedly to have realised that inflation is starting to run out of control, along with consumer expectations of higher prices. In the last few weeks, we’ve seen the Reserve Bank of New Zealand, Bank of Canada, and the Reserve Bank of Australia hike rate by 50bps, with the Federal Reserve set to follow suit later this week, although after Friday’s hot CPI report there is some speculation that we could see the Fed hike by 75bps. The US CPI report on Friday also put paid to any prospect that there might be a September pause to the Federal Reserve’s rate hiking cycle, as inflation jumped to another 40-year peak at 8.6%, sending stock markets sharply lower, the US dollar surging along with yields, a trend that has continued in Asia markets this morning, with the US dollar hitting… Read More »Equity markets continue to slide, as focus turns to the Fed

For the second time this year, significant portions of the yield curve are inverted (shorter-term treasuries yield more than longer-term treasuries). Treasury yields from the New York Fed, chart by Mish These inversions are strong recession warnings although the spreads are small and the most watched 2-10 spread is still positive. However, the 3-year, 5-year, and 7-year notes all yield more than the 30-year long bond.  Curiously, the 20-year note yield is way out of line with everything else as the following chart shows. Yield Curve to Scale Treasury yields from the New York Fed, chart by Mish The first bar is the Effective Fed Funds rate at 0.83%. Every following bar represents three months. Values between years are extrapolated evenly.  From three years to thirty years the yield curve is flat to inverted except for the 20-year note. I am not aware of anyone with an explanation for curious behavior. Yields at the short end of the curve rose sharply vs the longer-term notes following the consumer price report. That led to the inversions shown above.  Why Did Economists Blow the CPI Forecast So Badly This Month? For discussion of the May CPI report. please see Why Did Economists Blow… Read More »Yield curve inversions return, signaling another recession warning

US CPI rises above estimates as markets take fright. Equities fall across the board with even energy falling. Bond yields rise sharply with Barclays calling for a 75 basis point hike. The fallacy of hope is over and reality is finally beginning to dawn. For much of the past two weeks, we have been told by numerous statisticians and economists that inflation would begin to level off as price pressures abated and comparisons eased. In particular, we were fed the bullish line that the rolling nature of the CPI meant comparisons were due to get easier as lower used car prices from last year rolled out and so the overall CPI would level off. This sharply contrasted with what most of us felt every time we went to the gas station and to the grocery store. For those of us fortunate enough to be able to find a building contractor it was difficult to keep up with the scale of price hikes and raw material costs we had to stump up for on a monthly basis. That reality finally made its way down to the CPI print on Friday and the seemingly unprepared investor cohort reacted with obvious shock. Equities… Read More »Week Ahead on Wall Street (SPX QQQ): Inflation fears fuel more equity losses as sentiment sours further

Gold surges to 1-month high, as U.S. inflation hits 40-year high Gold rose to a one month low on Friday, as U.S. inflation continued to increase to record levels. Data on Friday showed that inflation in the United States rose to 8.6% in May, its highest level in over forty years. Markets had expected CPI to climb to 8.3%, however figures exceeded expectations. Several U.S. indices fell on the news, with the Dow Jones dropping by over 700 points on the news. The S&P 500 was 2.5% down as of writing. FTSE 100 slips, following rise in UK inflation expectations The FTSE 100 also fell during today’s session, as data showed that UK inflation expectations also rose. Following a survey from the Bank of England, expectations for inflation over the year rose to 4.6%. Despite multiple rate hikes, British consumers continue to expect prices to trend upwards in upcoming months.  A rise in the cost of energy is one of the main factors in the increased expectations. The BOE’s Chief economist Hue Pill stated that, “I personally think there is more that needs to be done in this transition from what has been a very supportive monetary policy for the… Read More »Dow Jones plunges, as gold hits one-month high, following rise in US inflation [Video]

Next week, the US Fed will set the next interest rate step and increase the range for the key interest rate by 50 basis points (bp) to 1.25-1.5%. The guidance for the markets should not bring anything new. The FOMC, the body that decides on monetary policy, should continue to assume a series of rate hikes and Fed Chairman Powell will confirm that 50bp rate hikes are on the table at the upcoming meetings. This continues the course of the last meeting in May, as the economic data has not brought any serious changes since then. The labor market has been essentially consistently strong and inflation has remained high. There will also be new estimates from meeting participants on the development of the main macro variables, including the key interest rate. Compared with the last forecasts in March, expectations for the federal funds rate should be raised. At that time, the median estimate was 1.9% at year-end 2022, which would imply rate hikes of 100 bp, including next week's rate hike. By comparison, the market is currently pricing in double that. FOMC members will likely revise their expectations upward; the question will be whether to the same extent as market… Read More »How will US Fed decide?

The war in Ukraine brings multiple negative consequences, not only to the world economy. Russia's invasion also has a wide impact on the gold market. The Consequences Are Vast The war in Ukraine has been ongoing for more than three months. After the withdrawal from the north of Ukraine, Russia has focused on the east and south of the country, aiming to take full control of Donbas and to create a land corridor between it and Crimea. The consequences of a Russian invasion into Ukraine are far-reaching in many areas. The war is a humanitarian crisis. Thousands of people died, while millions fled the country. Ukraine was also severely hit economically. The GDP is forecasted to fall this year by 35% or even more on top of the vast destruction of the country’s infrastructure (the total amount of direct infrastructure damage has surpassed $100 billion), reduced labor supply, and halted investments. The Russian economy is projected to decline by 8.5% or even more due to the sanctions, financial crisis, and the closure of economic ties with the West, including the withdrawal of many companies from Russia. There is a global food crisis. Russia and Ukraine are significant producers of many… Read More »Gold’s shine vs. the long shadow of war in Ukraine

EUR/USD fail in sustains the upside trend momentum. The major pair broke a two-week trading range on Thursday. The momentum oscillator, like the Relative Strength Index, holds onto the oversold zone with no signs of corrections in the near term. The EUR/USD edged lower today in the initial New York session. The major pair broke a two-week trading range after hitting the June high at 1.0773 yesterday. At the time of writing, EUR/USD was trading at 1.0532, down (-0.7607%) for the intraday. Having said that, in a previous analysis, the downside potential had the upper hand for the European currency pair. However, the pair started its downside journey after it was able to break the support level of 1.0678, which was able to guard the price against falling too far. On the 4-hour chart, the major currency pair edges lower, back to levels last seen on May 20. Furthermore, the 21-period sustained trading below the 50-period on the Moving Average (MA) indicates more downside in the not-so-distant future. On the other hand, the Relative Strength Index (RSI) holds onto the oversold zone, recording 28 on the value line as the decrease in momentum still has a vacancy. The aforementioned formation… Read More »EUR/USD outlook: EUR/USD is in a free-fall after poking the June high

If history is to repeat itself to some extent, junior miners have a chance to make minor corrections. However, is it worth leaving short positions now? Let’s take a look at what happened in junior mining stocks. In last Friday’s (June 3) Gold & Silver Trading Alert, I commented on Thursday’s rally in the following way: The price of the GDXJ ETF – a proxy for junior miners – moved sharply higher yesterday, and this got many people excited. High volume confirms that. It’s natural for most investors and traders to view rallies as bullish, but let’s keep in mind that most traders tend to lose money… It’s not that simple. After all, the best shorting opportunities are at the tops, which – by definition – can only be formed after a rally. The particularly interesting thing about high volume readings in the GDXJ ETF is that they quite often mark local tops. Remember the late-April – early-May consolidation? It ended when GDXJ finally rallied on high volume. That was the perfect shorting opportunity, not a moment to panic and exit the short position. The GDXJ-based RSI indicator is also quite informative right now. It moved well above 50, but… Read More »GDXJ: While focusing on details, don’t miss the great downturn

Key highlights The British public's expectations for the rate of inflation in a year's time have risen to their highest in records going back to 1999, a quarterly survey by the Bank of England showed. The public's median inflation expectation for 12 months' time rose to 4.6% in May, up from 4.3% in February's survey. Expectations for two- and five years' time rose to 3.4% and 3.5%, the highest since 2013 and 2019 respectively. Credit growth in China picked up in May, after the central bank leaned on the country's commercial banks to do more to support an economy suffering from COVID-19 lockdowns and a grinding real estate crisis. The People's Bank of China said Total Social Financing, grew by 2.79 trillion yuan after slumping to only 910 billion yuan a month earlier, when the key financial hub of Shanghai joined the list of regions and cities under COVID-19 lockdown measures. Japanese imports likely jumped in May at the fastest pace in six months, buoyed by surging raw material prices and the yen's decline to two-decade lows, a Reuters poll showed on Friday. Rising import costs are inflicting increasing pain on Japanese households and domestic-oriented firms, raising questions about the… Read More »The annual pace of inflation in the US rises to 8.6% in May