Core Inflation Remains Persistent Which Pressures Fed to Continue Large Rate Hikes

Latest Inflation Data Remains High

The report revealed what Americans already know, that the cost of goods and services remains exceedingly.

According to the BEA, “The PCE price index increased 0.3 percent. Excluding food and energy, the PCE price index increased 0.5 percent. Real DPI increased less than 0.1 percent in September and Real PCE increased 0.3 percent; goods increased 0.4 percent and services increased 0.3 percent.”

The PCE remains elevated at 6.2% year-over-year the same as in the prior month (August). More so, the core PCE which excludes food and energy costs rose from 4.9% in August to 5.1% in September.

In other words, after the Federal Reserve raised their benchmark rates by 25 basis points in March, 50 basis points in May, and 75 basis points in June, July, and September, meanwhile the core PCE which was at 4.9% in May, rose to 5% in June and is now at 5.1% in September. The only months in which the core PCE had any reduction were in July and August, and those reductions in inflation were short-lived as the core PCE was higher in September than any other month since May.

This will be the most recent data that the Federal Reserve will have on inflation and therefore will seal the fate of the Federal Reserve implementing a 75-basis points rate hike at next week’s FOMC meeting. It also increased the likelihood of the Federal Reserve raising rates by 75 basis points in December.

According to the CME’s FedWatch tool, there is a 43.1% % probability that the Federal Reserve will raise its benchmark rate by 75 basis points in December, this is an increase from yesterday’s probability prediction of 34.1%. This would take the Feds benchmark rate to between 450 and 500 basis points by the end of 2022.

However, today’s report came in below expectations predicted by Bloomberg News. Their survey predicted that the PCE Index would come in at a 6.3% rise in September year-over-year.

PCE Impact on US Dollar and Commodities

The PCE report did not have a large impact on the U.S. dollar. As of 5:20 PM EDT, the dollar index is currently trading fractionally higher by 0.09% and fixed at 110.555. The report, however, did have a strong impact on U.S. Treasuries futures with the 30-year bond increasing by 0.90% yielding 4.129%, and the 10-year note gaining 1.85% taking its yield to 4.01%.

The report resulted in strong selloffs in the precious metals across-the-board. As of 5:20 PM EDT gold futures basis, the most active December contract is fixed at $1648.30 after factoring in today’s net decline of $17.30. Today’s strong decline in gold was almost entirely based on selling pressure from market participants. Silver futures basis the most active December 2022 contract lost 1.51% or $0.29 and is currently fixed at $19.20. Palladium futures lost $37 or 1.92%, and platinum futures gave up $17.90 or 1.85%.

Spot gold declined by $18 and is currently fixed at $1645.70. According to the Kitco Gold Index selling pressure by market participants took physical gold $16.50 lower and fractional dollar strength caused physical gold to lose an additional $1.50.

The Good and Bad and the Ugly of This Week’s GDP and Inflation Report

The bad is that today’s report sent a clear message; rate hikes enacted by the Federal Reserve this year have had profoundly little impact on the cost of goods and services and inflation continues to remain persistent at a 40-year high.

The good is that yesterday’s 3^rd Q GDP revealed that our economy is once again growing and has not been severely hindered by the Federal Reserve’s interest rate hikes.

The ugly truth, therefore, become that the Federal Reserve will continue and maybe even increase the size of their rate hikes to a full 1%.

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Wishing you as always good trading and good health,

Gary S. Wagner