It’s Pedal to the Metal as Easy Money Defies Surging Inflation

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US Federal Reserve chief Jay Powell made it clear in his commentary after last week’s FOMC rate decision that the Fed is nowhere near considering a rate hike any time soon. Powell said, “We have not reached substantial further progress yet,” indicating that interest rate suppression and asset purchases will continue as planned despite the CPI and PPI figures earlier this month coming in red-hot.

Consumer prices are skyrocketing…

So are input costs…

And the market doesn’t seem to mind…yet

Yet, the S&P 500 and Nasdaq continue blasting to all-time high territory, with the Dow Jones flirting with seemingly thin resistance toward a new record. What’s going on? As the Fed constantly reiterates, its eyes are on the labour market. There’s plenty of job openings in the US to accommodate unemployment. As long as the labour market shows slack, the risk of wage inflation, at least in their eyes, is very slim.

Plus, investors may be sensing that companies have plenty of pricing power. They can raise prices to sustain profitability despite inflation. It’s only when companies can no longer hike prices that their profitability prospects fall, and with it, so too does the entire stock market. Apparently, we’re not there yet.

Economic News Watch

Next week, Q2 earnings season continues. As of last week, 72% of the companies that have reported have topped analyst expectations. In the US, keep an eye on the ISM Manufacturing PMI, the Non-farm employment and payroll figures, and the unemployment rate. In Australia, the RBA interest rate decision and retail sales are slated for release.

 

Is There Glitter in Gold’s Glide?

Gold bounced from its 6-month slide in March 2021 at the 61.8% Fibonacci retracement line [1]. It rose to $1,919 an ounce [2] before pulling back at [3]. A higher swing low is the first step toward this pullback reversal. Gold must clear $1,919 in the near term at [4] to establish the next step: a swing high that breaks above the previous near-term high. This would lend a stronger case for a recovery. Ultimately, gold would have to break above $2,089 to confirm the potential resumption of its uptrend. That would also take gold into the all-time high territory. Considering fears of surging global inflation, US deficit spending, and the ballooning US national debt, which is currently 128% of its GDP, all of this may look like clear skies ahead for the yellow metal. The coming weeks will show whether this thesis is correct or whether monetary intervention plunges economic reality toward “artificialized” ground.

Ryan Schofield

Ryan Schofield

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