Inflation: The assets that are screaming

The March CPI data, a key indicator of inflation, revealed a persistent issue. The consumer price index surged by 3.5% in March, surpassing expectations and indicating that inflation remains stubbornly above the U.S. Central Bank's 2% target. This significant increase was primarily driven by housing and energy costs, with energy rising by 1.1% and shelter by 0.4%. The core CPI, which excludes volatile food and energy prices, also saw a substantial rise of 0.4%, exceeding consensus estimates. These figures, higher than anticipated, led many market participants to revise their rate cut forecasts from three to two in 2024, underscoring the potential impact of these data on the market.

The March Producer Price Index (PPI), a measure of wholesale inflation, came in cooler than expectations with a 0.2% increase. March PPI data and the CPI figures provided conflicting signals about inflation. The markets are now eagerly awaiting the Fed’s favorite inflation gauge, the Personal Consumption Expenditures (PCE) index, which will be released in late April. The CPI and PPI data will play a crucial role in the Fed's decision-making process regarding interest rates, which will impact the markets. 

Meanwhile, several critical historical inflation barometers are screaming that the economic condition remains a clear and present danger. Government spending and policies have increased the indicator’s prices over the past weeks and months.

The geopolitical landscape has not helped the situation as the Ukraine war continues and the Middle East conflict has escalated.

 Crude Oil- A leading inflation barometer is bullish and could become volatile

• Nearby NYMEX crude oil prices have rallied 29.5% from the December 2023 $67.71 low to a $87.67 high in April 2024.
• Nearby Brent crude oil prices have rallied 27.5% from the December 2023 $72.30 low to a $92.18 high in April 2024.
• The ongoing conflict in the Middle East will likely keep a bid under the energy commodity, which is inflationary.

 The path of gold and silver prices indicates inflation

• Gold continues to rise to new all-term highs, with the latest peak on April 12 at $2,448.80 per ounce on the June COMEX futures contract. June gold was above $2,345 per ounce on April 22.
• May COMEX silver futures rose to the highest price since February 2021, at $29.905 per ounce, on April 12. May silver was at above the $27 level on April 22.
• Gold and silver prices are inflation barometers.

 Base metals- Sanctions on Russian metals lit a bullish inflationary fuse

• The United States and the United Kingdom rolled out new sanctions on Russian base metals in April 2024.
• May COMEX copper, the base metals leader, rose to $4.5505 per pound on April 22, the highest price since June 2022.
• LME copper, aluminum, nickel, lead, zinc, and tin prices were mostly higher than the Q1 2024 closing prices on April 22.

 Other commodities at or near record highs

• Cocoa futures on the Intercontinental Exchange rose to a record $12,261 per ton high in April and were near the $11,000 level on April 22.
• Nearby ICE Arabica coffee futures rose to a $2.5370 per pound high in April, the highest price since February 2022.
• Cattle and hog prices remain in medium-term bullish trends, with live cattle reaching record highs in 2024.

 The 2% target is unrealistic- Rates may need to increase

• The recent inflation data presents a roadblock for the Fed to ease monetary policy.
• Government spending in an election year will likely continue. Geopolitical turmoil translates to a growing military budget.
• Economic growth, a strong jobs market, and elevated inflation could mean the next monetary policy surprise will be a rate hike.

The Fed’s 2% inflation target has become challenging as prices remain high, economic growth is robust, and the employment picture is strong. If the Fed plans to lower rates, it must adjust its target or ignore the benchmark it has touted for years.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!