It never rains, but it pours, the saying goes, and the more than disappointing Powell speech at the Jackson Hole symposium I wrote about last week was followed by a far weaker than anticipated Consumer Price Index (CPI) data release this past week. Not only was the headline year-on-year inflation rise higher than anticipated at 8.3% but perhaps even more worrying was that the core inflation rate, which strips out the volatile food and energy elements, was up significantly too.
I have commented here before that it is well worth keeping a close eye on the Fedwatch Tool which shows market expectations of the likely Fed interest rate moves at the next Federal Open Market Committee (FOMC) Meeting – in this case taking place during the week ahead. This is now pointing to an 82% likelihood of a 75 basis point (3/4%) Federal Funds rate increase being implemented at the meeting, and an 18% chance of a full 100 basis point rise - up from zero only a week ago when a 50 basis point rise was still one of the favored options - but seemingly no longer.
The market response to the CPI release was, as we had warned, for the markets to mark equity and bitcoin prices down sharply. Even ethereum fell back considerably despite the completion of the ‘merge’ which was presumed to be so beneficial to the second largest crypto. However, the likely interest rate advance was also seen by the markets as disadvantageous for gold and the yellow metal dropped in price too, although did see a good pickup in US trade on Friday bringing it back up to the high $1,670s.
I do anticipate some further price recovery unless, of course, the dollar index strengthens strongly further, in which case the gold price could come under renewed pressure.
Silver, perhaps somewhat surprisingly given its recent price performance, did rather better than gold, managing a 66 cent gain over the week. Platinum rose week-on-week too.
The likely Fed moves prompted well-followed successful investor, Stanley Druckenmiller, to predict at best a flat equity market for some time to come with central banks globally seeming to have switched their approach from accommodative to aggressive in their attempts, so far unsuccessful, to try and exert some kind of control over global inflation. I think he may have been even too generous in his assessment of the markets in his analysis – at least in the short term. Continuing inflation and central bank tightening and a more aggressive interest rate approach will likely bring on a recessionary trend which could run deep in the short term at least, and from which markets may take some time to recover. Businesses, which had become used to the availability of easy money and low interest rates will struggle to stay afloat, while continuing elevated levels of inflation will at the same time cut into the general public’s disposable income and propensity to spend. In combination this would likely be a recipe for bankruptcies, business closures and an uptick in unemployment levels.
As for gold and silver, the longer term outlook to this observer still remains positive, and the latter’s recent performance in the light of almost across-the-board downturns in other asset classes has to be encouraging in particular. There has been talk of a shortage of metal supply which, if accurate, could enhance the metal’s performance. But, be warned, silver does have a tendency to disappoint.
We have suggested also for some time now that the US is indeed headed for recession and the imposition of higher Federal Funds interest rate impositions by the Fed may well be designed to bring this on as an inflation-fighting tool, despite the Fed’s likely protestations to the contrary. The year-end Federal Funds rate now looks to be heading for around 4.5% or even greater, the highest level since November 2007.
Ray Dalio, the billionaire founder of the massive Bridgewater hedge fund, predicts that such an increase will see equities plunge 20%, and we doubt cryptos will fare any better in such a meltdown. Safe haven assets like gold may also be affected short term as investors struggle for liquidity and may need to sell some strong assets to achieve this but, as in 2008, these stronger assets will recover rapidly and likely quickly move on to scale new heights.
Once the R word comes into general acceptance amidst the financial markets – investors are being fobbed off with recession denials for now – equities and crypto markets will likely start to turn down sharply. The outcome of this week’s FOMC meeting, and the ensuing statements, may just provide the trigger to set this process moving.