Financial market slump continues after last week’s CPI shock
All financial markets continue to react to last week’s CPI inflation report. The CPI rose 1% in May, leading to a year-over-year inflation increase of 8.6%, the largest gain since December 1981. The main drivers of inflation 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 starting tomorrow. Although a minority of economists are predicting an interest rate hike of 75 basis points, most analysts, myself included, believe that the Federal Reserve will continue to implement interest rate hikes of 50 basis points at the FOMC meetings in June, July and possibly September.
Concerns about rising inflation led to bearish market sentiment and selling pressure. The net result was a sharp drop in US stocks, precious metals and cryptocurrencies. This selloff is occurring in conjunction with sharp increases in US Treasury yields and the US dollar. Crude oil continues to trade at high levels above $100 a barrel, with crude oil futures currently pegged at $120.95 a barrel.
US equities sold off sharply today, with the NASDAQ composite posting the biggest drop of 4.68% or 530.79 points. The Standard & Poor’s 500 lost 3.88% or 151.23 points. The Dow Jones fell 2.79% and is currently pegged 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 past three consecutive days, creating two large price gaps between Thursday and Friday’s trading session and Friday’s session per compared to that of today. This index has lost nearly 10% since the close on Tuesday, June 7.
The selling pressure was not limited to equities, as concerns over more aggressive interest rate hikes by the Federal Reserve drove gold and silver prices down dramatically. As of 4:46 p.m. EDT based on gold futures, the most active August contract is set at $1822.60 after factoring in today’s decline of $52.90 or 2.82%. This drop caused gold prices to fall below their 200-day moving average and its 78% Fibonacci retracement level.
Silver futures basis, the most active contract in September 2022, lost nearly 4% (-3.93%) and is currently pegged at $21.075 per ounce. Platinum futures lost 4.57% and finally, palladium futures saw the biggest drop, losing 6.95% or $132.50.
The Dollar and US Treasuries yields soared today in anticipation of the Federal Reserve aggressively changing monetary policy in an attempt to stabilize the level of spiraling inflation. The Dollar Index gained 1% in trading today and is currently pegged at 105.055. Yields on two-year Treasury bills rose 23 basis points on Friday and another 14 basis points today to bring the current yield to 3.20%. This is the highest level for two-year Treasury bills since November 2007.
Undoubtedly, last week’s CPI inflation report shook all investors as they prepare for Wednesday’s announcement by the Federal Reserve and Chairman Powell’s press conference. This concern can be seen with the CME’s FedWatch tool with the probability of the Fed raising rates by half a percent to 74.6% and a 25.4% probability of the Fed raising rates by 75 basis points. base. A week ago, the FedWatch tool predicted the likelihood of a 75 basis point rate hike to just 3.1% and a 50 basis point rate hike to 96.9%.
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