Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain?

Commodities / Gold & Silver 2019 Jul 17, 2019 - 08:34 AM GMT

By: Arkadiusz_Sieron

Commodities

The combination doesn’t feel right. Actually, something stinks – just what is it exactly? Payrolls were strong, while core inflation rose. Nevertheless, the Fed signaled it’s going to cut interest rate. Our shiny yellow friend, can you help us make sense of it all?

Is Really Inflation Muted? Core CPI Rises

The CPI rose 0.1 percent in June, by the same amount as in May, the government said on Thursday. However, the core CPI, which excludes food and energy prices, jumped 0.3 percent following a previous increase of 0.1 percent. So, the core rate scored the biggest gain in a year and a half, which suggests that the Fed’s fears about tame inflation might be exaggerated.


More importantly, over the last 12 months, consumer prices increased 1.6 percent, compared to 1.8 percent jump in May. It means that annualized inflation has softened further. But, again, the index for all items less food and energy edged up from 2 to 2.1 percent. It shows that the muted overall inflation resulted from the falling gasoline and oil prices, not from a weakness in the aggregate demand or something else. As the chart below shows, the core CPI is now again above the Fed’s target.

Chart 1: CPI (green line, annual change in %) and core CPI (red line, annual change in %) over the last five years.

Maybe this is because we are not working at the central bank, but we struggle to see why lower energy prices should be negative for the economy and the reason for the Fed to adopt a more accommodative monetary policy. Shouldn’t the central bank focus on core inflation, which strips out volatile food and energy prices? After all, this is what the FOMC does when the prices go up, but apparently it does not work the same way both ways.

Something Is Not Quite Right, Mr. Powell

Wait a minute. The recent nonfarm payrolls were strong, so the labor market remains healthy. The overall inflation is 1.6 percent, while the core index is 2.1 percent, and the Fed is signaling a cut in the federal funds rate at the end of this month? Just how does it all go together? We are not the only ones who ask this question. On Thursday, Senator Toomey asked Chairman Powell what the heck is he doing, given the fundamental strength of the economy.

Powell said that the U.S. economy was hit by a severe “confidence shock” in May from which it has only partly recovered, but only after the Fed “stepped forward”, announcing that it is ready to act if needed. Our heroes!

It might be the case, of course. However, we see a few other possible explanations why the Fed is likely to cut interest rates despite the fundamental strength of the economy. The first is the simplest: they are just a bunch of doves, especially after Richard Clarida joined the Board of Governors. So they want the Fed to be always accommodative and muted inflation readings are a great excuse. If true, that would be great for gold. The more dovish the U.S. central bank, the better the prospects of the yellow metal.

Second explanation is that the U.S. central bank got joined at the hip with the Wall Street. So it must do whatever the markets tell them to do. It is plausible explanation, but the markets expected higher interest rates for years during the ZIRP period, and the Fed did not do anything about it.

The third potential reason is the poor economic outlook outside the U.S. America’s economy might be great, but – given the international role of the greenback – the Fed is the central bank for the whole globe. Remember taper tantrum? Maybe the cost of dollar liquidity got too high and the Fed had to react, to avoid global turmoil. Powell admitted in his testimony before the Senate that his main concern was the poor outlook for manufacturing “around the globe.”

Last but not least, the U.S. central bank might know something us, mere mortals, are not aware of. Maybe the Fed officials saw the recessionary signals, so they decided that a preventive cut in interest rates is in place? We informed our Readers about the inversion of yield curve immediately when this happened. And now it turns out that the Fed has also acknowledged it. This is at least something the recent FOMC minutes suggest:

Many participants noted that the spread between the 10-year and 3-month Treasury yields was now negative, and several noted that their assessment of the risk of a slowing in the economic expansion had increased based on either the shape of the yield curve or other financial and economic indicators.

Implications for Gold

What does it all mean for the gold market? Whatever the reason, the Fed became more dovish despite core inflation being still around the target, which is a fundamentally bullish factor for gold. Of course, the expectations of the interest rate cut are already priced in, but the new climate sounds supportive for the gold market. We mean here the inverted yield curve and the resulting expectations of the upcoming recession. Remember the pre-Great Recession period? In 2006, the yield curve inverted and the Fed cut interest rates in 2007. It did not prevent the financial crisis from unfolding, and gold shined. In the upcoming edition of the Gold Market Overview, we will write more about the inversion of the yield curve and the 2007 Fed cut – stay tuned!

If you enjoyed the above analysis, we invite you to check out our other services. We provide detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in