The biggest economic data point of the week has now come and gone. The latest reading on the Consumer Price Index was not a good one, either, and took with it any hopes for the Fed to take it easy this month when it meets to hike rates again. The Fed will now almost certainly look to raise rates aggressively again, which could mean the third 75-point hike in a row.
The CPI data today showed inflation remaining red hot. Year-over-year, inflation jumped by a whopping 8.3%. Estimates were looking for a rise of 8%. Despite some recent signs that inflation had perhaps cooled off a bit already, today’s CPI data shows the opposite. Inflation not only remains smoking hot, but could get hotter before finally cooling down. This pits the Fed into a poor position. The central bank will now likely see itself having no choice but to continue raising rates aggressively. That means a large hike later this month and possibly more large hikes before the end of the year.
Stocks are taking it on the chin today. The Dow Jones Industrial Average is down by 700 points in early action. Today’s equity declines could be a foreshadowing of what may lie ahead for stock investors. Stocks do not like inflation nor do they like higher interest rates. Both of these may weigh on equity markets for the foreseeable future and could drive capital from stocks into alternative assets such as gold.
The fight against inflation could rage on further for some time. The question may become whether the Fed is willing to take rates where they may need to go to get inflation to manageable levels. That remains to be seen, but for the time being the central bank still has plenty of room to take rates higher from recent levels. A series of additional hikes by the Fed may really start to get the markets’ attention. This could not only fuel a massive spike in volatility but could also drive a shift of investment capital into alternative asset classes.
Inflation may not be the only major market driver in the months ahead. The current state of geopolitics is very messy and could also weigh on investor sentiment and risk appetite. As the war in Ukraine continues, concerns are now growing that China could invade Taiwan. A Chinese invasion would be bad on several levels, and could be the starting point for the Third World War. The U.S. and the west would likely see no alternative but to get involved. The involvement of the west could lead to other eastern or Asian players also getting involved, and that could lead to quite a geopolitical mess. Markets could potentially tank under such a scenario, and gold could possibly see much investment capital finding its way into the metal under such circumstances.
As the globe’s second-largest economy, any issues affecting China will not be taken lightly. The Chinese economy has already slowed and could slow further. A period of war or aggressive saber-rattling is not what the global economy needs right now. Such issues could put the economy into recession and keep it there for some time.