Gold price up, bulls knocking on $2,000 door

4.19.22 - Why Peak Inflation is More Bad News

Gold last traded at $1,951 an ounce. Silver at $25.16 an ounce.

NEWS SUMMARY: Precious metal prices fell Tuesday on profit-taking and a firmer dollar. U.S. stocks rose as traders navigated one of the busiest weeks of corporate earnings season.

KITCO--"Gold and silver prices are solidly higher and hit five-week highs in early U.S. trading Monday. Save-haven demand and chart-based buying are featured.

Global stocks markets were mixed overnight. The U.S. stock indexes are pointed toward weaker openings when the New York day session begins. Markets in Hong Kong, Australia and much of Europe were closed for the Easter holiday Monday.

Risk aversion remains elevated amid the Russia-Ukraine war that shows no signs of ending any time soon and the Covid surge in China that has locked down major cities in the world's second-largest economy. Stock traders are also focused on corporate earnings reports.

A feature in the marketplace to start the trading week is rising U.S. Treasury yields. The yield on the benchmark 10-year U.S. Treasury note is presently fetching 2.884%. which is a more-than-three-year high. A Dow Jones Newswires headline today reads, "Sell off in Treasuries, worst in decades, rattles investors."

Inflation worries and an aggressively hawkish Federal Reserve have pushed bond yields up (prices down). However, the closely watched yield curve does not see the 2-year and 10-year yields inverted as the 10-year yield remains above the 2-year.

Nymex crude oil futures prices are near steady today and trading around $107.00 a barrel. The U.S. dollar index is higher early today and near last week's two-year high.U.S. economic data due for release Monday is light and includes the NAHB housing market index."

The Big Picture: Peak inflation is more bad news than good news -Briefing

"The peak inflation narrative is in full swing following the release of the March Consumer Price Index (CPI) and Producer Price Index (PPI) reports. Each was awful from an inflation reading standpoint, which is part and parcel why there is such an earnest desire to believe that they are as bad as it is going to get.

Briefly, CPI was up 8.5% year-over-year and core CPI was up 6.5% year-over-year. PPI was up 11.2% year-over-year and core PPI was up 9.2% year-over-year.

We can't say for certain that we are at peak inflation, not with Russia continuing to wage its war in Ukraine and China continuing to wage its war on COVID with a zero-tolerance approach. What we can say, however, is that the market should be careful about cheering peak inflation, because cheering peak inflation is also unwittingly cheering a peak in the recovery.

Supply constraints have played a huge role in driving the outsized inflation prints, yet there are other factors on the demand side that have contributed to the worst inflation readings in 40 years.

That would be roughly $10 trillion combined of fiscal and monetary stimulus that led to huge increases in the money supply, huge upticks in personal savings, and huge increases in asset prices that were catalyzed by the artificial suppression of interest rates driven by quantitative easing.

So, here we are. The stimulus pivot is on. Fiscal support, outside of the infrastructure bill, is fading fast. Monetary support is being pulled, but arguably not nearly fast enough....

The Fed has been running behind inflation for too long. It will now be playing catch up with aggressive policy normalization efforts. As it does, the inflation rate is apt to take a step down but so will the economy.

That is the knock-on effect of rising interest rates, which are necessary to get inflation under control.

Cheering peak inflation, then, is tantamount to cheering the arrival of slower economic growth and slower earnings growth that should translate into lower earnings multiples.

To that end, peak inflation is more bad news than good news right now."