Inflation not ready to peak, Record low for Consumer Sentiment, Oil a tad lower, Gold pares losses, Bitcoin crash risk – OANDA
US stocks tumbled after a hot inflation report removed any chance for the Fed to pause tightening in September. Inflation hit a fresh 40-year high at 8.6%, much hotter than the highest estimate, and probably still not the peak. CPI readings are skyrocketing and unfortunately that may continue for another report or two as shelter, gasoline, and food prices are the biggest drivers.
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This was a very bad inflation report for both the White House and Fed. The White House will watch how democrats fare with next week’s primaries. The Fed’s latest mistake is that they did not act strongly to cool inflation, and they will now be forced to deliver more rate hikes as inflation is clearly not transitory and not ready to peak.
Stocks extended declines after consumer sentiment plunged to a record low and inflation expectations surged. Sentiment plunged 41.3% Y/Y, and consumer expectations fell 44% y/y. Stagflation is becoming the base case for many traders. Consumer financial situations worsened about 20% and that does not bode well for consumer spending.
CPI
A Labor Department inflation report proved many traders were wrong with identifying peak inflation. Everything came in hot today with today’s CPI data, the monthly core reading, the headline number, and a much stronger dollar will further fuel inflation here.
A new peak for year-over-year inflation of 8.6% helped invert the 5- to 30- year spread. Money markets are now pricing in a half-point rate increase for the September meeting, which makes the Jackson Hole Symposium very unlikely to be an opportunity for the Fed to change their tightening course.
The inflation report shows that pricing pressures are also impacting services, which comes as no surprise as Americans begin taking vacations. Used-vehicle prices also snapped a 4-month streak of declines with a 1.8% gain in May.
Oil
Crude prices are holding up despite new COVID lockdowns in China and after both a hot inflation report and abysmal consumer sentiment survey suggests the US consumer is weakening. Oil was boosted earlier after the Saudis delivered less crude than what was asked for by the Chinese. The oil market is still very tight and the eventual weaker US consumer won’t really take effect until closer to the end of the year.
Despite a sharply strong dollar, WTI crude is only down a tenth of a percentage point. Some traders are entering de-risking mode as prospects for the economy continue to dim, but no one really wants to abandon the best trade of the year, which is oil and energy stocks.
Gold
Gold’s reaction to the inflation report was a rollercoaster ride as traders tried to assess the near-term and long-term shifts with expectations for Fed policy. The initial shock of a scorching hot inflation report sent gold prices to fresh session lows as traders quickly bumped up Fed rate hike expectations for the September meeting. Then the 5-year and 30-year Treasury yields inverted and growth concerns triggered some safe-haven flows for gold.
Gold traders knew that a hot inflation report would be troubling and technical selling might remain strong. King dollar is back and with more rate hikes getting priced in for the Fed, gold could be vulnerable to retest the May lows.
Gold pared losses after consumer sentiment fell off a cliff, prompting some traders to believe that aggressive tightening calls at the end of year may have been overdone.
Bitcoin
Considering all the selling happening on Wall Street, Bitcoin is doing ok. A very hot inflation report has sent Treasury yields at the short-end of the curve sharply higher and that killed risk appetite for equities and that dragged crypto lower.
Bitcoin is below the $30,000 level and further selling could send prices towards the $28,000 level. The $28,000 level is critical support for Bitcoin and if that breaks over the next few days, that could provide the catalyst for a weekend crypto crash.
A Bitcoin weekend collapse could see prices plunge towards the $25,500 area, with $22,500 being the most extreme scenario. Weekend crypto crashes sometimes are followed by a quick recovery, but the current environment and soft interest might make for a slow recovery.
Article By Edward Moya, OANDA
