The gold market erased solid early session losses today to reverse course and shoot higher. Spot gold prices are now sitting around a four-week high as risk aversion again takes hold and investors look for assets to hedge against the hottest inflation in over 40 years. The bulls have now scored a technically bullish “outside day” on the charts as well as a bullish weekly high close. Today’s stronger performance may lead to more buying in the sessions ahead as technical traders and momentum players look to get long and ride the wave.
Today’s release of the latest Consumer Price Index data has been a market mover. Inflation for the month of may registered a rise of 8.6% year-over-year. The rise beat expectations sharply, which were looking for a rise of 8.2%. Some analysts had thought today’s CPI figures may reinforce the notion that inflation has peaked. The data, however, suggests that inflation is far from peaking as of yet and could have more room to run. The core rate of inflation, stripping out volatile food and energy prices, rose by 6%.
The CPI data may be viewed as a mixed bag by investors. On one hand, the higher rate of inflation may keep real interest rates low, a gold positive. On the other hand, however, is the fact that the high inflation rate may keep the Fed hiking aggressively in the year ahead. The data would seemingly add some upside risk to the Fed Funds Rate at the end of the year. The central bank has already suggested it will raise rates by 50-basis points at its next two consecutive meetings. The markets are pricing in a third such hike after that, and with today’s hot inflation figures the Fed could hike even more than that. A 75-point rate hike is not off the table, for example, and the Fed could look to get a handle on price pressures quicker by hiking more at each meeting.
Whatever the Fed does or does not do, it will likely be met with considerable criticism and anxiety. If the Fed does in fact keep hiking and rates are at or above the 3.5% level at the end of the year, it is difficult to imagine stocks recovering and getting near previous highs again. On the other hand, if the Fed does not follow through or even reverses course, it could put the economy into an extended period of stagflation. Whatever the case may be, markets could be in store for rising volatility and a lot of selling in the months ahead.
The months ahead may be filled with anxious investors and wobbly markets. The Fed will either drive the economy to a soft landing or a hard landing. The hard landing scenario seems more likely at this point and the Fed could find itself wanting to lower rates again by the end of the year as equities go into crash mode.