Commodities Week Ahead: CPI Awaited As Inflation Has Oil, Gold By The Jugular

Gold Futures on New York’s COMEX was under $1,740 an ounce, dipping a quarter percent to add to the nearly 4% drop since the start of July. 

Markets are preparing for the odds of the Federal Reserve imposing non-stop rate hikes of 75 basis points this month and the next three if the CPI does not retreat as quickly as the central bank expects by the year-end.  

That has led the dollar to consistently hit 20-year peaks, alienating traders of oil and gold from using other currencies when buying the two commodities.

The Fed first resorted to a 75 bps hike in June as it applied its highest rate increase in 28 years to battle inflation, expanding at its fastest in 40 years. Then, it appeared to be a one or two-time thing. 

However, after the Labor Department’s nonfarm payrolls last week showed US employers added 372,000 jobs in June—some 100,000 more than economists expected—while keeping the unemployment rate unchanged at 3.6% for a third straight month, all bets for a Fed softening toward rates evaporated.

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Some think the central bank will use the 75 bps cudgel as often as necessary—the Fed has four rate revision opportunities between this month and December — to get ahead of price pressures. 

US inflation has been persistently running at four-decade highs since late last year, with the closely watched CPI growing at an annualized rate of 8.6% as of May. The June update, due on Wednesday, is expected to show an 8.8% increase. Record growth in jobs and wages is one of the reasons for the runaway inflation, as employment security and higher disposable income allowed Americans to pay more for everything.  

Aside from the CPI, the US Producer Price Index—another key inflation indication—is also expected to give a high reading of 10.7% year-over-year. Outside of the United States, the French, German, and Spanish readings for CPI are all expected to stay at or near record levels. 

The Fed’s tolerance for inflation is a mere 2% a year, and it has vowed to raise interest rates as much as necessary to achieve that. Chris Waller, one of the central bank’s governors, said last week the Fed probably needs to front-load rate hikes, raising them early and heavily if necessary, to fight inflation effectively. 

The Fed left interest rates at between zero and 0.25% for two years during the pandemic and only raised them in March this year. It began with a hike of 25 basis points, or a quarter-percentage point, then raised it by 50 basis points, or a half percentage point, in May. In June, it imposed an increase of 75 basis points, or three-quarters of a percentage point, bringing current rates to between 1.5% and 1.75%.  

Analysts note that the Fed isn’t just resorting to rate hikes but will eventually be stepping up the sale of its bond holdings via a process called quantitative tightening to lighten its balance sheet. The combined action could have a multiplier effect, stalling not just price growth but also the economy, resulting in a recession. The economy already contracted 1.6% in the first quarter, and another declining quarter is all needed for it to be in recession officially.

John Kilduff, partner at New York energy hedge fund Again Capital, said: 

“The problem with inflation data is that it’s reactionary. The Fed is probably going to hit rates hard until December to see the effect it wants. By then, we’ll probably be in a recession. The question is whether it’ll be a brief or prolonged one.”

 Some analysts say US crude futures could break below $90 a barrel before the end of July if the dollar’s rise doesn’t stop.

Despite its positive close for the week, WTI crude needs a sustained break above $111.50 a barrel, failing which it will likely resume a second bearish wave targeting $100-$95-$92, said Sunil Kumar Dixit, chief technical strategist at skcharting.com. The US crude benchmark settled at $104.80 last week, down 4% on the week. Dixit commented: 

“A reliable affirmation of short-term price reversal is needed, [...] and WTI should really avoid breaking below $92, as that will trigger immediate tests of $88 and $85.”

In the case of gold, Dixit said that its failure to break and sustain above the $1,780-$1,810 areas last week could result in a new push lower to $1,720-$1,697. He added that:

 “If selling extends, expect a further drop towards the 50-Month Exponential Moving Average of $1,668 and the 200-week Simple Moving Average of $1,650.” 

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.