Tag: the fed

The Thanksgiving Rally Should Not Be Trusted

Posted on by Matt Thalman

The market rally during the shortened holiday trading week of November 21st-25th should not be trusted just yet.

The Dow Jones Industrial Average rose 1.78% during the week, the S&P 500 increased by 1.53%, and the technology-heavy NASDAQ grew by 0.72%.

The move higher came for several reasons, but none materially changed the economy's outlook over the coming six to twelve months.

The biggest news was from the Federal Reserve. The Fed's meeting minutes from their November 1st and 2nd meeting pushed prices higher after several Fed members expressed interest in slowing the pace of rate hikes during future meetings.

Just the fact that the Fed is talking about reducing the amount of their rate increases is significant, and many economists applaud this move. Economists are happy with this because the Feds policy changes have a lag, meaning it takes time for rate increases to show in economic data reports.

The concern has been the Fed is raising rates too quickly, and by the time the lag sets in, the economy will be in the dumps. So, slowing the pace today is a possible way the Fed can avoid running the economy into the ground. Not running the economy into the ground is the "soft landing" we often hear about when people refer to the Fed and its current policies.

Another catalyst for the recent move higher was the Consumer Price Index in October, which was up 7.7% from a year ago. This was the lowest CPI reading increase since January of this year. But, let's be honest, a 7.7% increase year-over-year is still ridiculously high inflation.

However, many economists are actually saying they are seeing inflation leveling out. We aren't yet seeing that happen with the CPI numbers because we are still looking at year-over-year comparables before inflation got out of control.

The true sign that inflation has slowed, or is still climbing, will be in 2023 when we see year-over-year comps comparing current inflation measures with the elevated inflation we began seeing in early 2022. Continue reading "The Thanksgiving Rally Should Not Be Trusted" →

Gold Market Sentiment Adjusts To Recent Fed Comments

Posted on by The INO.com Team

The Merriam-Webster dictionary defines sentiment as, “an attitude, thought, or judgment prompted by feeling: predilection.: a specific view or notion: opinion.: emotion.: refined feeling: delicate sensibility especially as expressed in a work of art.: emotional idealism.”

As it pertains to the financial markets, market sentiment is the view or attitude that creates our opinion as to whether an asset class is overvalued or undervalued. It shapes and changes the value of a stock or commodity’s price.

Market sentiment is overly sensitive to statements and comments made by Federal Reserve officials because those individuals have the power and influence to change monetary policy.

There is a dramatic difference between the perception of upcoming Federal Reserve monetary policy changes and the actions of Federal Reserve officials.

The Federal Reserve raised rates at every FOMC meeting this year except in January, from March through November, a total of six rate hikes. Over the last four FOMC meetings (June, July, September, and November) they raised rates by 75 basis points.

The aggressive nature of the Federal Reserve’s monetary policy moved gold dramatically lower from March up until the beginning of November. Gold traded to its highest value this year of $2078 in March. By the beginning of November, gold prices had dropped to approximately $1621, resulting in a price decline of 21.99%.

During the first week of November, market sentiment shifted because inflation rates had declined fractionally, and investors viewed this fractional drop as a signal that the Federal Reserve would begin to loosen its aggressive monetary policy. This caused gold to rise dramatically from $1621 to an intraday high of $1792 by Tuesday, November 15. Continue reading "Gold Market Sentiment Adjusts To Recent Fed Comments" →

Is Inflation Truly Whipped?

Posted on by George Yacik

Last week’s consumer price index report showing inflation — at least by some measures — had slowed in October to its lowest level since the beginning of the year set off a massive rally in stocks and bonds.

But is the market overreacting, and does the report necessarily imply that inflation has finally and truly peaked and that the Federal Reserve is just about done tightening? It may be a little too early to declare victory.

The report was at least encouraging, certainly, but whether we’re home free or not remains to be seen. The headline CPI rose 7.7% compared to a year earlier, down from September’s 8.2% pace and the smallest year-on-year increase since January.

The core index — which excludes food and energy prices — rose by 6.3%, down from the prior month’s 6.6% pace. But the monthly increase in headline inflation was 0.4%, unchanged from September.

Did all that justify a 5% jump in the NASDAQ last Thursday and the sharpest one-day drop in bond yields in more than 10 years, with the yield on the benchmark 10-year Treasury note falling to 3.83% from 4.15%? (The bond market was closed Friday for Veterans Day.)

If you believe Wharton professor Jeremy Siegel, who has been saying for months that the Fed is seriously overcounting inflation, then last Thursday’s massive rally was justified.

Not only did he tell CNBC that "inflation is basically over,” but that "we're in negative inflation mode if the Fed uses the right statistics, not the faulty statistics that they've been using."

Siegel specifically cited the cost of housing and rent, which he says are overinflated in the data the Fed uses to set interest rate policy. Once the Fed sees the light, he says, the markets are poised for a “good year-end rally," but if it doesn’t, we could be headed for a rate-driven recession.

There’s certainly reason to doubt the Fed’s competence to measure and assess home price inflation, which it has failed to accomplish the past several years and other times before that.

Despite blatant evidence that the housing market was overheating during and after the pandemic, the Fed continued to suppress interest rates, allowing home prices to skyrocket — and keep homeownership out of reach for more people. Continue reading "Is Inflation Truly Whipped?" →

Gold Update: The Breakdown

Posted on by Aibek Burabayev

It’s all about persisting inflation at the end of the day. All markets watch how the Fed tries to fight it as aftershocks of rate decisions are observed in bonds, stock market, foreign exchange, precious metals and even crypto.

US Inflation vs Fed Rate vs Real IR

Source: TradingView

The graph above visualizes that “fight of the night”. Indeed, we witness some progress of the Fed’s efforts in the falling U.S. inflation (red line) numbers from the peak of 9.1% in the summer down to the latest data of September at 8.2%, which was still above the expected 8.1%.

The 3% increase of the Fed rate (blue line) brought inflation down only by 0.9%. It is way too slow, as the inflation target of 2% is still way too far, hence the Fed could keep their aggressive tightening mode.

Surely, there is a time lag between the Fed action and the inflation reaction. However, the time is ticking away as inflation is like a fire - the earlier it's extinguished the better.

The real interest rate (black line, down pane) crossed over the August top above the -5.1%. The next resistance is at -3.7% (valley of 2011) and it is highly likely to be hit soon as it is only 1.2% away. The valley of 2017 in -2% is almost 3% away, which means a huge Fed rate hike or a big drop of inflation. We can’t rule it out anyway.

Where do you see the yearly U.S. inflation by the end of the year?

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Indeed, these interest rate projections above could make precious metals life tough. Let's check the gold futures chart below. Continue reading "Gold Update: The Breakdown" →

Poised for the Fed Pivot

Posted on by George Yacik

Given its past history, both over the long term and especially more recently, it’s inevitable, if not a given, that the Federal Reserve will screw up. This time should be no different. When exactly this will manifest itself is hard to say, but it may be soon—possibly before the end of this year or in early 2023.

The Fed, as we know well, grossly inflated prices and asset values post-pandemic by sticking too long to an overly accommodative monetary policy, holding its benchmark federal funds level at zero percent as recently as March and continuing to buy Treasury bonds, long after inflation was shown to be a lot more “transitory” than the Fed thought.

Now we are all paying the price for the Fed’s belated realization that it was wrong about inflation, as it has raised interest rates five times in the past six months, to 3.00%-to-3.25%, including 75 basis points at each of its past three meetings, and shows few signs of intending to sit and wait and see how those rate hikes will affect the economy.

In the process, the Fed has basically chucked the second piece of its dual mandate, namely maximizing employment, in order to slay the inflation beast.

The American consumer and investor are thus no better than pawns in the Fed’s game of trying to fix a situation it largely created by itself, yet there is no reason to believe that its current policies are any better or smarter than its previous prescriptions, which involved flooding the financial markets with buckets of cheap money it didn’t need.

Now it’s trying to undo all that in a few short months, all while trying not to steer the economy into the ditch, although perfectly happy to throw people out of work and gut their retirement portfolios.

(Question: If the Fed’s actions will force some people to keep working or rejoin the labor force—and there are still plenty of job openings—doesn’t that work against its plan to reduce employment?)

At some point — sooner rather than later, we hope, but no doubt later than everyone else — the Fed will suddenly come to the conclusion that it’s gone too far with tightening and will start to take its foot off the monetary brakes. It may not start to lower interest rates, necessarily, but at least take a breather and see what effect its recent new-found hawkishness has had on inflation and economic growth. Continue reading "Poised for the Fed Pivot" →