Today’s CPI report revealed that inflation continues to be troublesome and elevated in some sectors, with a fractional decline overall from 0.5% in January to 0.4% last month. Headline inflation continues to slowly dissipate from 6.4% year-over-year in January to 6% in February. Core inflation also remains elevated coming in at 5.5% year-over-year compared to 5.6% in January. Housing which includes mortgages and rentals composed the largest category and accounted for more than 70% of last month’s increase in the CPI.
The repercussions of today’s CPI report are that the Federal Reserve is likely to raise their terminal rate by ¼% at the next FOMC meeting (March 21 – 22). According to the CME’s FedWatch tool, the probability of a 25-bps rate hike is 81.9% and the probability that the Fed will not raise rates is 18.1%. It is noteworthy that according to the FedWatch tool, the probability that the Fed will not raise rates at its next meeting was 35% yesterday versus 0% one week and one month ago.
The Federal Reserve has been caught between a rock and a hard place attempting to raise rates enough (which intrinsically results in a contracting economy) to lessen the current level of inflation but not too much to result in a recession. It seems more and more unlikely that the Federal Reserve will be able to pull off a “soft landing”. The banking crisis that was reported this weekend further exacerbates the ability of the Fed to reduce inflation and not lead the country into a recession.
Continued rate hikes by the Federal Reserve create bearish market sentiment for gold prices because gold does not yield interest. However, higher inflation has the opposite effect creating bullish market sentiment for gold. Collectively these two forces work against each other with elevated inflation pushing prices higher and rising interest rates pulling prices lower. That being said, gold futures were able to hold above the key psychological level of $1900 per ounce.
Today gold futures opened at $1919.40 which was also the high, and traded to a low of $1899.80. As of 5:15 PM EST, the most active April contract is currently fixed at $1908.30. Concurrently, the US dollar is trading fractionally higher up 0.08% with the dollar index currently fixed at 103.265.
Although there are a couple of economic reports that will come out before the next FOMC meeting, the Federal Reserve now has the most important data it will use to make its final decision regarding the level of the next rate hike.
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Wishing you as always good trading,
Gary S. Wagner
