Falling CPI and plunging crude prices almost guarantee at least a 25-basis-point rate cut at next week’s FOMC meeting. Stocks rallied, led by mega-cap technology stocks, but the advance was narrow, with large caps failing to join the party.
Gold is bullish, boosted by falling long-term Treasury yields and a weak Dollar, but silver remains more bearish.
Stocks
Mega-cap technology stocks led the rally, with Nvidia (NVDA) posting solid gains.
The move lifted the S&P 500 above resistance at 5500, signaling another test of the all-time high at 5670.
Large caps lagged, with the equal-weighted index ($IQX) failing to show much progress.
Financial Markets
The Chicago Fed National Financial Conditions Index eased to -0.57, reflecting easy monetary policy.
Bitcoin respected support at $54K [red line], but the bearish declining triangle still warns of tighter financial market liquidity ahead.
Treasury Markets
Ten-year Treasury yields plunged to almost 3.6% before retracing to test new resistance at 3.7%. The steep fall from the 5.0% peak in October last year indicates market expectations of significant rate cuts ahead.
Dollar & Gold
Falling long-term interest rates are driving long-term Dollar weakness. Respect of resistance at 102 on the Dollar Index would confirm another decline, while breach of support at 100 would offer a long-term target of 93.
A stronger Japanese Yen warns of a more hawkish monetary policy from the Bank of Japan. Rising Japanese interest rates will likely withdraw liquidity from US financial markets and weaken the Dollar.
Gold is expected to benefit from falling long-term interest rates and a weaker Dollar. The narrow bullish consolidation below $2,525 per ounce suggests another advance. Breakout above resistance would offer a target of $2,600.
Silver lags behind gold, struggling to break resistance at $30 per ounce. Breach of support at $28 would warn of another test of long-term support at $26.50.
CPI Inflation
Headline CPI fell sharply to 2.6% for the 12 months to August, but core CPI lifted to 3.3%.
Monthly CPI shows that the sharp drop in the headline rate is caused by the base effects of a spike in July of last year [red circle]. Rising core CPI over the past two months, with August growing at an annualized rate of 3.7%, warns of underlying inflationary pressures.
Sticky prices inflation also increased, to an annualized rate of 3.5% in August, warning that underlying inflationary pressures persist.
Shelter
Shelter CPI also increased to an annual rate of 5.2% in August, reflecting a trough in home prices in mid-2023. The Case-Shiller 20-City Composite Index [gray below] tends to lead Shelter by roughly 12 months.
Energy
However, the recent sharp fall in crude oil prices warns that inflationary pressures will likely ease in the months ahead.
Energy CPI grew by -4.0% over the 12 months to August and is likely to fall further in September. The chart below shows how energy CPI [ocher below] plunged from a peak of 41.5% in June ’22, leading to a fall in headline CPI.
Food
Food CPI also declined to an annual rate of 2.1% in August, close to the Fed’s target of 2.0%.
Conclusion
Mega-cap technology stocks lifted the S&P 500 above resistance at 5500, indicating another test of the previous high at 5670. Breakout would offer a target of 6000, but the advance is narrow. Large caps in the index show little in the way of net gains, with the equal-weighted index ($IQX) failing to make much progress.
The Chicago Fed National Financial Conditions Index continues to reflect easy monetary policy, but a bearish triangle on Bitcoin and a stronger Japanese Yen warn of tighter liquidity ahead.
The decline in headline CPI is primarily due to base effects from August last year, while core CPI and the sticky price index warn of persistent underlying inflationary pressures. However, a sharp fall in crude oil prices will likely drag overall CPI lower in September.
Falling 10-year Treasury yields reflect market expectations of significant rate cuts commencing on September 18. The Dollar rallied over the week, but the long-term downtrend is likely to persist as rates decline.
Low long-term interest rates and a weak Dollar are expected to be bullish for gold. A Dollar Index breach of support at 100 would confirm our $3,000 per ounce target for gold.
Acknowledgments
- CoinDesk: Bitcoin Prices