A decline in the price of housing services has been at the center of the long-standing narrative dismissing the significance of this years long stickiness in inflation. Unfortunately, those hopes are less tenable than ever in this cycle. In April, housing experienced its highest month-over-month PCE increase since at least the beginning of 2025. This sticky inflation is unlikely to cool while housing inflation remains elevated.

Thus, the long-awaited rate cuts that new Federal Reserve Chair Kevin Warsh was supposed to deliver for the President seem quite remote. Financial markets do not even have a rate cut among the range of possibilities this year. The CME FedWatch tool shows the odds of a rate cut at less than 1% going all the way out to July, 2027. The odds of a rate HIKE push above 50% starting with the January, 2027 meeting (see the red circle in the upper right corner of the chart below).

Meanwhile, loose financial conditions per the Adjusted National Financial Conditions Index (ANFCI) suggest the case for rate cuts remains quite weak.

Bonds Push Gold to the Sidelines

Typically, this is the point where I celebrate gold as a good buy in the face of increasing inflation risks. However, the bond market woke up to increasing inflation risks after the war started. For example, a day after the iShares 20+ Year Treasury Bond ETF (TLT) broke down from a 4-month high on the first wartime trading day, SPDR Gold Shares (GLD) also broke down.

Both TLT and GLD have been in downtrends ever since the war started (interest rates increase when bond prices decrease). While TLT printed a sharp bottom last week thanks to a sudden drop in oil prices, gold continued to fall.

As long as financial markets expect the Fed’s next move to be a rate hike, I expect GLD to trade poorly. Right now, GLD is precariously perched at an important support formed from the convergence of the 200-day moving average (DMA) (the blue line above) and GLD’s former all-time high from October, 2025. GLD experienced an impressive bounce off the horizontal support line in late March. However, given the definitive failure at resistance at the 50DMA (the red line), I expect the current tepid bounce to give way to continued weakness in GLD.

Thus, I am staying away from buying back into GLD until it can achieve a breakout above 50DMA resistance. In the meantime, I continue to accumulate TLT in anticipation of a day off in the future when yields come down definitively.

Be careful out there!

Full disclosure: long TLT

The post From Sticky to Streaky, Inflation Looms Larger appeared first on Inflation Watch.

“A strategy of repeatedly lowering the fed funds target range toward a more neutral level relies on confidence that the neutral level is materially lower than where rates are now. When I look at the available evidence, though, I see substantial signs that the neutral rate has increased in recent years, and some hints that it could be very close to where the fed funds rate is now…ces. I anticipate the FOMC will most likely need more rate cuts to finish the journey. But it’s difficult to be sure how many cuts may be needed and how soon they may need to happen.” – Navigating in shallow waters: Monetary policy strategy in a better-balanced economy, Dallas Fed President Lorie K. Logan, November 13, 2024

“Shifting from my baseline to alternative scenarios, recent information suggests to me that the risk of inflation ceasing to converge toward 2%, or moving higher, has risen, while the risk of an unwelcome deterioration in the labor market has remained unchanged or possibly fallen.” – Musalem: Remarks on Monetary Policy and the U.S. Economic Outlook, St. Louis Fed President Alberto Musalem, November 13, 2024

“While now is the time to begin dialing back the restrictiveness of monetary policy, it remains to be seen how much further interest rates will decline or where they might eventually settle.” – Longer-term Considerations for Growth and Monetary Policy, Federal Reserve Bank of Kansas City President and Chief Executive Officer Jeff Schmid, November 13, 2024

All three speeches included Fedspeak for caution on the pace of rate cuts while maintaining the flexibility to follow the data. These speeches also came on the same day as the release of the October CPI data. This timely convergence of caution and circumspection is important because core CPI maintained the stabilization trend in place since a low in July (see the green line below). Meanwhile, core PCE, the Fed’s favorite indicator of inflation also looks like it is stabilizing. In other words, it seems the Fed is paying attention to stabilizing inflation patterns.

Sources: U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average [CPILFESL], retrieved from FRED, Federal Reserve Bank of St. Louis, November 13, 2024. U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED, Federal Reserve Bank of St. Louis, November 13, 2024.

Shelter costs continue to drive the bulk of inflation. For October, shelter costs constituted 65% of the year-over-year increase in the CPI. Housing costs are in a paradoxical juncture where monetary policy could help maintain elevated housing costs no matter where interest rates go. The National Assocation of Homebuilders (NAHB) laments that high interest rates contribute to contraints on supply thourgh an expensive and difficult financing environment for construction loans. On the other hand, looser monetary policy could reignite a housing demand that strains supply further and drives up prices. For now, a surprise rebound in mortgage rates is tamping down housing demand.

A Friendly Message from Gold?

While inflation is stabilizing, gold may have topped out.

Two months ago I interpreted the strength in gold as indicative of a skepticism about the Fed’s implied victory message on inflation. That trend persisted until last week. The resolution of the U.S. presidential election generated a fresh surge in Bitcoin (BTC/USD) and presumably drained interest in gold. The SPDR Gold Trust (GLD) gapped down and lost 3.0%. I was hopeful that the 50-day moving average (DMA) (the red line below) would hold as support. As a (perma) bull on gold, I added call options to supplement my core GLD position. Today’s 1.0% loss in GLD further confirmed a 50DMA breakdown. This bearish technical signal means that I am unlikely to try new short-term trades for a while.

Source for charts: TradingView.com

The new inverse correlation between gold and Bitcoin indicates a sharp shift in preferences with Bitcoin getting an added advantage from expectations of a pro-crypto regulatory regime starting next year.

The Bond Market Remains Wary

Two months ago I claimed that the bond market acted wary about the Fed’s presumed victory over inflation. Sure enough, long-term yields have steadily risen ever since. The iShares 20+ Year Treasury Bond ETF (TLT), which goes up when long-term interest rates go down, is now trading near the bottom of a presumed horizontal trading range. My strategy to fade TLT has worked all the way down.

After TLT gapped up for some reason on the CPI news, I thought I missed my latest profit opportunity. So when TLT faded back to the previous day’s close, I counted myself fortunate and took profits on my latest round of TLT put options. TLT then went on to lose 1.0% for the day.

The U.S. dollar soars

The U.S. dollar index (DXY) has benefited from one tailwind after another. Now, the presumed tailwind comes from the boost it should get with increased tariffs that also promise to prop up inflationary pressures in the economy. Fewer dollars going overseas to buy goods tips the supply/demand balance in favor of a stronger dollar. Two months ago I decided to bet on continues strength in the British pound versus the U.S. dollar by buying shares of Invesco CurrencyShares® British Pound Sterling Trust (FXB). I took the opportunity to buy when FXB tested its uptrending 50DMA. The currency ETF has continued downward from there with little sign of an imminent rebound.

Conclusion

With the Presidential election behind us, the bets on stabilizing (or even stronger) inflation are clarified for now: long Bitcoin, long gold only after Bitcoin enthusiasm wanes somehow, long U.S. dollar, and short TLT. While I sold all my Bitcoin earlier in the day, I will continue to trade by buying dips. I am conflicted on the U.S. dollar as I stubbornly hold some dollar shorts while trading in and out of dollar longs. At some point, I will commit to a dollar long by shorting EUR/USD. Europe stands to lose in the next administration with a weaker NATO, more contentious relationships, and higher tariffs in a weakening economic backdrop.

The Federal Reserve has ahead as precarious a path as ever while it gets increasingly wary about stabilizing inflation!

Full disclosure: long GLD shares and calls, long PHYS, long FXB

The post The Federal Reserve Is Paying Attention to Stabilizing Core Inflation appeared first on Inflation Watch.

The above graph shows that services inflation is the main culprit keeping core CPIH in an uptrend. Core CPIH dropped from 6.5% in May to 6.4% in June. Since May was a 30-year high, I am particularly unimpressed by the “pullback” in the core inflation rate. The Core CPI (Consumer Prices Index) dropped from 7.1% in May, a 31-year high, to 6.9% in June.

Food and energy inflation is coming off extreme levels. Food inflation is coming off a peak 19.2% in March, 2023. Fuel prices are outright plummeting, falling 13.1% in May and 22.7% in June.

The British Pound Cools with Inflation

The cooling overall inflation numbers cooled the heels of the British pound which has been on quite a streak since the bond and currency crisis 10 months ago. GBP/USD, also Invesco CurrencyShares British Pound Sterling Trust (FXB), was falling off a near 16-month high coming into the inflation print. The inflation report greased the skids on the way to an important test of the uptrending 20-day moving average (DMA). That line has held as support since the beginning of June and has been important support since early March.

Source: TradingView.com

For now, I am trading for a bounce from the 20DMA and prepared to to accumulate a larger position for a test of 50DMA support. The overall drivers of sterling strength seem intact as long as core inflation is uptrending or even just sticky. The Bank of England will have to remain as hawkish as ever.

Of course, the upcoming meeting of the U.S. Federal Reserve is a major wildcard. If the Fed manages to get hawkish enough to scare some fresh strength into the U.S. dollar, then I will have to drop my current trading strategy.

Regardless, the uptrend in the pound should at some point end in the coming months. This recent weakness in the currency could be the beginning of the end.

Be careful out there!

Full disclosure: long GBP/USD

The post Is the British Pound Topping Despite Lingering Strength in UK Core Inflation? appeared first on Inflation Watch.

USD/CAD looks primed to break through support from the April and May (intraday) low. Source: TradingView.com

The decision to hike rates followed on the heels of a surprise interest rate hike from the Reserve Bank of Australia. The RBA warned that the country’s 7% inflation “is still too high and it will be some time yet before it is back in the target range.” The growing realization across the globe that inflation could remain stubbornly high runs counter to the narrative that the peak in inflation also means the imminent end of inflationary pressures. Central banks will have to keep fighting. The BoC referred to this global realization despite weakening macroeconomic conditions: “While economic growth around the world is softening in the face of higher interest rates, major central banks are signalling that interest rates may have to rise further to restore price stability.”

Still, economic conditions in Canada surprised the BoC to the upside. Q1 GDP growth came in at 3.1%. A tight labor market is combining with increases in spending on “interest-sensitive goods” to generate consumption that is “surprisingly strong and broad-based.” Under these conditions, the BoC has plenty of cover to get off the fence and hike again.

The Trade

The technicals are looking ever so slightly better for the Canadian dollar to deliver a major breakthrough against the U.S. dollar. I thought April’s break of support at the 200-day moving average (DMA) (the bluish line in the above chart) signaled the big breakthrough. Instead, USD/CAD proceeded from there to pivot around its 200DMA. However, the double peak in April and May firmed my preference to go long the Canadian dollar. Now the currency pair is challenging the support from the April and May lows which ended a subtle series of higher lows since August of last year. Perhaps most importantly, if and when the U.S. Federal Reserve finally gives in to the market’s expectations for rate cuts, I expect the Canadian dollar to be a prime beneficiary with the potentially bullish implications for commodities.

Be careful out there!

Full disclosure: short USD/CAD

The post Stubborn Inflation and Excess Demand Spook the Bank of Canada appeared first on Inflation Watch.

Don’t Come Crying to the Fed Anytime Soon

Bostic definitively stated that the Fed is so determined to press against inflation that it will likely turn a deaf ear to those who will ask for easier monetary conditions the moment the labor market delivers bad news. Emphasis mine:

“You know, as we get further into inflation getting, closer to our target, I’m expecting we’re going to see stresses in labor markets. We’ve not really seen that. And when that starts to happen, people are going to be looking to us to try to do something about that as well, and maybe turn away from our focus on inflation. But we can’t do that, because failing in getting the inflation back to the 2% target will be much more problematic for the economy. And so as people start to call out for action to provide relief in labor markets, I think what we’re going to have to do is just stay laser focused on the fact that, you know, our employment mandate goal, we are very, very close to that right now. And we’re not close to that in inflation. So we have to stay focused on inflation.”

The bad news for the labor market has been long anticipated and stubbornly absent for the people who keep expecting a recession at every turn of the calendar. This “lagging indicator” of economic health just keeps chugging along. Even a recent uptick in initial unemployment claims above 240,000 fizzled out before the “I told you so’s” could drape the economic headlines. The 251,000 in weekly initial claims from January, 2022 stands as the latest high. For now, initial claims continues to tell the same message week after week after week: the Fed has room to hike if inflation remains an issue. Rate cuts are certainly nowhere on the horizon from this vantage point.

Source: U.S. Employment and Training Administration, Initial Claims [ICSA], retrieved from FRED, Federal Reserve Bank of St. Louis; May 25, 2023.

Given this data and Bostic’s determination to ignore anyone who wants the Fed to cut rates into an inflationary environment, I understand Bostic’s best guess target for rate cuts set a year or more out from now.

“My best case is that we won’t be thinking about a cut until well into 2024. And, you know, inflation is just double what our target is by just about every measure. I don’t see scenarios where the economy is going to evolve in a way such that inflation gets close enough to our target where we might contemplate any kind of cut.”

As of the time of writing, Fed fund futures have acquiesced to the likelihood of another rate hike by July. However, they still eagerly anticipate rate cuts as soon as November. By the time Bostic guesses the Fed will think about cuts, the futures think the Fed will have 6 or 7 rate cuts in the books. The persistently wide gulf between Fed and market expectations on rate policy remains one of the more remarkable features of today’s financial markets.

Fresh Wind for the U.S. Dollar

The market’s push for another rate hike by July has helped the U.S. dollar regain momentum. Strength particularly against the euro and the Japanese yen has the dollar index (DXY) bouncing off its lows for the year. I am riding this momentum as long as it holds up. If the rally continues from here, I expect fresh resistance at the year’s high which should also coincide at the time with critical resistance from the 200-day moving average (DMA) (the bluish line below).

Source: TradingView.com

Be careful out there!

Full disclosure: net long the U.S. dollar

The post Fed’s Bostic: Still Comfortable Leaning Into Tight Labor Markets appeared first on Inflation Watch.

SPDR Gold Shares (GLD) printed a technical topping pattern amid mixed inflation news, but it is trying to hold uptrending support at the 20-day moving average (DMA)

The Conundrum

The current inflationary cycle could be ending, at least in North America. For example, the Bank of Canada (BoC) showed inflation data with a steeply descending trend ending with a near perfect landing at the Bank’s 2% target in late 2024.

Here in the U.S. plenty of pundits have declared inflation a non-threat ever since the Federal Reserve finally got serious about it. Cathie Wood has been one popular critic of the Fed’s inflation concerns. The disbelievers received more confirming evidence when the latest producer price index told a disinflationary story. A slightly weaker than expected inflation reading from the March Producer Price Index (PPI) generated cheer in stocks given the implication for looser monetary policy. Since producer prices sit upstream from final goods prices, PPI can be a leading indicator of future prices.

Gold also celebrated the soft inflation numbers; GLD gained 1.4%. This reaction represents the upside of the golden inflation conundrum. Gold bugs suspect that the seeds of inflationary pressures remain well-grounded in the economy. I agree with them. A relaxed Fed is a potential catalyst for rewatering the garden of growing prices, especially if labor markets remain tight. Thus, the prospect of a relaxed Fed supports higher gold prices.

The downside of the golden inflation conundrum can come on stronger inflation signals because they support an aggressive, inflation-fighting Fed. GLD went into retreat in the wake of a surprising surge in consumer expectations for inflation next year from 3.6% in March to 4.6% in April. This reading from the University of Michigan’s surveys of consumers was last this high in November, 2022. Even if this move coincided with the jump in gas prices, surges in inflation expectations are sure to encourage the Fed to stay on message. As it happened, the market got a timely dose of messaging from Governor Christopher J. Waller the same day.

The Fed Stays On Message

In the wake of the economic data, Governor Christopher J. Waller spoke at the Graybar National Training Conference in San Antonio, Texas. Waller reiterated the all too familiar refrain “inflation remains much too high.” He provided the following cautionary assessment of inflation (emphasis mine):

“Inflation moderated in the second half of 2022, but that progress more or less stalled toward the end of the year…On April 12, we got consumer price index (CPI) inflation data for March, and it was another month of mixed news…Core inflation, which strips out food and energy prices, is a good guide to future inflation, and that measure came in at around 0.4 percent in March, which translates to an annual rate of 4.6 percent if it were to persist. It was the fourth month in a row with core inflation at 0.4 percent or higher. Since December of 2021, core inflation has basically moved sideways with no apparent downward movement. So, despite some encouraging news on a slowing in housing costs, core inflation does not show much improvement and remains far above our 2 percent inflation target.

Whether you measure inflation using the CPI or the Fed’s preferred measure of personal consumption expenditures, it is still much too high and so my job is not done. I interpret these data as indicating that we haven’t made much progress on our inflation goal, which leaves me at about the same place on the economic outlook that I was at the last FOMC meeting, and on the same path for monetary policy. Because financial conditions have not significantly tightened, the labor market continues to be strong and quite tight, and inflation is far above target, so monetary policy needs to be tightened further. How much further will depend on incoming data on inflation, the real economy, and the extent of tightening credit conditions.”

With the Fed’s next decision on monetary policy just two weeks away, Waller’s words suggest that the Fed could raise rates yet again. The odds are low of getting a disinflationary signal strong enough to counter Waller’s observations. Thus, I think GLD will struggle to invalidate the technical topping pattern for the time-being.

The Trade

The golden inflation conundrum leaves GLD in a contrary place. In the short-term, GLD’s best chances lie with soft inflation numbers. Indeed, GLD bottomed shortly after the market bottomed in October when market participants concluded that inflation had finally peaked. Inflation’s peak does not equal the Fed’s inflation target; the Fed has gone to great lengths to issue these reminders. Yet, beyond day-to-day volatility, the market has overall chosen to fight the Fed’s hawkishness ever since October. Volatility is even back to levels last seen at the start of trading in 2022 despite the linger crisis in regional banking.

Where volatility is poorly positioned, GLD is well-positioned. From the looming battle over the U.S. debt ceiling to the prospect of the Fed standing down later this year to geo-political risks, there are enough reasons to stay bullish on GLD. I am back to trading around my core position. I took profits on half my call spreads last week. My remaining half is set to expire in September. I want plenty of runway for the gold-positive catalysts to work their way through the golden inflation conundrum.

Be careful out there!

Full disclosure: long GLD shares and call spread

The post A Golden Inflation Conundrum appeared first on Inflation Watch.

Source: U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED, Federal Reserve Bank of St. Louis; February 24, 2023.

The chart above shows how the pandemic disrupted a serene post financial crisis range for monthly core PCE largely between 0.0% to 0.2%. Since PCE’s breakout two years ago (which the Fed ignored as transitory), core PCE has effectively settled into a higher range from 0.2% to 0.6%. Inflation may have indeed peaked, but it remains stubbornly high in the aggregate. The eagerly anticipated pre-pandemic serenity remains as elusive as ever.

Higher for longer inflation aligns with the Federal Reserve’s insistence on maintaining restrictive monetary policy higher for longer. The stock market may finally be catching on to the notion of higher for longer for inflation. When the core Consumer Price Index (CPI) came in hotter than expected in the previous week, the S&P 500 (SPY) wavered from intraday highs to lows and even increased the next day. Sellers took over the next 5 of 6 trading days with today’s 1.0% loss seemingly confirming a change in sentiment.

The S&P 500’s loss would have been worse except traders decided to defend support at the 200-day moving average (DMA) (the blue line above). This important trend line separates the index from more churn and a continuation of selling back down to the bear market line (20% down from the all-time high).

The bond market sniffed out the hotter inflation environment ahead of the stock market. Bond yields have steadily risen all month. For example, the iShares 20+ Year Treasury Bond ETF (TLT) is down 5.8% month-to-date (lower TLT means higher yields). The hot PCE brought an abrupt end to a 2-day relief rally in TLT.

Of course, the inflation story does not end here. The recent experience with inflation surprises suggests inflation will continue to confound the over-confident. A humbled Federal Reserve seems validated in taking a “risk management” approach to monetary policy in this haze of uncertainty. Still, if monthly core PCE takes a fresh drop next month, I am guessing a chorus will resume the inflation dismissals. If monthly core PCE continues higher from here, I will ring fresh alarm bells. I am watching the bond market’s next moves for potential clues. Moreover, I cannot wait to hear what the Federal Reserve and Chair Jerome Powell have to say about these developments in next month’s meeting!

Be careful out there!

The post An Inflation Downtrend Quickly Evaporates appeared first on Inflation Watch.