The market’s immediate focus now turns to the latest US inflation data today.
The deterioration in the US labour market is already becoming increasingly difficult to ignore. Following last Friday’s extremely weak employment report, attention now shifts to the July CPI release at 8:30 a.m. ET, today, Wednesday.
Consensus expectations are relatively subdued.
Headline CPI is expected to rise by approximately 0.2% month-on-month in July , following June’s unusual 0.4% decline, which was heavily influenced by lower energy prices. On an annual basis, inflation is expected to moderate slightly to around 3.4% from 3.5%.
Core CPI is also expected to increase by approximately 0.2% month-on-month , following a flat reading in June.
The market reaction will inevitably depend upon where the surprise comes from.
A materially stronger-than-expected core inflation number would initially place upward pressure on bond yields and could revive expectations of further monetary tightening, particularly against the backdrop of recent hawkish Federal Reserve commentary and renewed strength in energy prices.
Conversely, another soft inflation reading, especially following the deterioration we are now seeing in employment, would strengthen the argument that the Federal Reserve has increasingly limited room to maintain restrictive monetary policy.
However, from our perspective, the more important issue is not simply whether one monthly CPI number is slightly hotter or colder than expectations.
The bond market is already telling us something far more important.
Long-dated US sovereign debt has been selling off, pushing yields materially higher. The bond market is effectively imposing tighter financial conditions regardless of what the Federal Reserve says or does at its next meeting.
This is already feeding directly into the real economy.
Typical US 30-year fixed mortgage rates are now approximately 6.7%–6.8% , placing considerable pressure on housing affordability, refinancing activity, household disposable income and ultimately broader economic growth.
That is precisely where the problem becomes increasingly uncomfortable for policymakers.
The US economy is being squeezed simultaneously by:
• high borrowing costs, weakening employment, enormous government debt alongside gigantic unfunded liabilities, rising debt-servicing costs and persistent underlying inflation.
There is no painless policy solution to be seen here.
Raise rates further and the pressure on households, businesses, property markets and government finances intensifies.
Keep rates elevated for too long and the same problem compounds.
The fact is raising rates will not change the underlying negative CAPEX in the commodity complex or reverse the underlying shortages across refined products
What Does This Mean for Precious Metals?
This is precisely the type of macroeconomic environment in which we want to continue accumulating precious metals.
A hotter-than-expected CPI number could certainly create a short-term sell-off in gold, silver and platinum , particularly if algo-trading systems for the banks and institutions immediately push the US dollar and bond yields higher.
We would view any price weakness generated by such a reaction as a buying opportunity, defintely not a change in the underlying trend.
Why?
Because much of the tightening is already embedded within asset prices and, more importantly, within the sovereign bond market itself.
The structural argument for precious metals does not depend upon whether the Federal Reserve raises, pauses or cuts rates at one particular meeting.
It rests upon a much larger problem:
The debt burden has become so enormous that maintaining genuinely restrictive real positive interest rates for any prolonged period creates progressively greater financial and economic damage.
Eventually something has to give, welome to debt monetisation!
Either nominal rates decline, inflation remains elevated, the currency absorbs part of the adjustment, governments increasingly intervene in bond markets, or some combination of all three.
Every one of those outcomes is ultimately supportive for scarce, unencumbered hard assets.
This is why we remain focused on the bigger picture.
Short-term inflation volatility may move prices.
The sovereign debt, corporate and domestic debt loads and unfunded liabilities problem determines the trend.
Therefore, should today’s inflation data trigger a meaningful correction across precious metals, we will continue to view that weakness as an opportunity to increase exposure rather than a reason to retreat.