All of the financial markets are continuing to react to last week’s CPI inflation report. The CPI increased by 1% in May taking year-over-year inflation higher by 8.6% which is the largest gain since December 1981. The largest inflationary drivers continue to be food, energy, and housing.
Last week’s CPI report will most certainly have a profound impact on the Federal Reserve’s FOMC meeting which will begin tomorrow. While there is a minority of economists that are predicting a 75-basis point interest rate hike, most analysts including myself believe that the Federal Reserve will continue to implement 50-basis point interest rate hikes in June, July, and possibly September FOMC meetings.
Concerns about rising inflation led to bearish market sentiment and selling pressure. The net result was sharp declines in U.S. equities, precious metals, and cryptocurrencies. This major selloff occurs in conjunction with sharp rises in the U.S. Treasury yields and the U.S. dollar. Crude oil continues to trade at elevated levels above $100 per barrel with crude oil futures currently fixed at $120.95 per barrel.
U.S. equities sold off sharply today with the NASDAQ composite scoring the largest decline of 4.68% or 530.79 points. The Standard & Poor’s 500 lost 3.88% or 151.23 points. The Dow Jones declined 2.79% and is currently fixed at 30,516.74. The chart above is a daily chart of the S&P 500. The Standard & Poor’s has closed lower for the last three consecutive days creating two large price gaps between Thursday’s and Friday’s trading session and in Friday’s session versus today’s. This index has lost almost 10% since the close on Tuesday, June 7.
The selling pressure was not contained to equities as concerns about more aggressive interest rate hikes by the Federal Reserve resulted in dramatically lower prices for both gold and silver. As of 4:46 PM EDT gold futures basis, the most active August contract is fixed at $1822.60 after factoring in today’s decline of $52.90 or 2.82%. This decline resulted in gold prices breaking below their 200-day moving average and its 78% Fibonacci retracement level.
Silver futures basis the most active September 2022 contract lost almost 4% (-3.93%) and is currently fixed at $21.075 per ounce. Platinum futures lost 4.57%, and lastly, Palladium futures had the largest decline losing 6.95% or $132.50.
Both the dollar and yields on U.S. Treasuries spiked sharply higher today in anticipation of the Federal Reserve aggressively modifying its monetary policy to try and stabilize the spiraling level of inflation. The dollar index gained 1% in trading today and is currently fixed at 105.055. Two-year Treasuries yields gained 23 basis points on Friday and another 14 basis points today to take the current yield to 3.20%. This is the highest level for the two-year Treasury notes since November 2007.
Unquestionably, last week’s CPI inflation report has shaken up investors across-the-board as they brace themselves for Wednesday’s announcement by the Federal Reserve and press conference by Chairman Powell. This concern can be seen with the CME’s FedWatch Tool with the probability that the Fed will raise rates by half a percent at 74.6% and a 25.4% probability that the Fed will raise rates by 75 basis points. One week ago, the FedWatch Tool forecasted the probability of a 75 basis point rate hike at only 3.1% and a 50 basis point rate hike at 96.9%.
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