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U.S. inflation still stubbornly high despite August slowdown – The Globe and Mail

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Lower gas costs slowed U.S. inflation for a second straight month in August, but most other prices across the economy kept rising – evidence that inflation remains a heavy burden for American households.

Consumer prices rose 8.3 per cent from a year earlier and 0.1 per cent from July. But the jump in “core” prices, which exclude volatile food and energy costs, was especially worrisome. It outpaced expectations and ignited fear that the Federal Reserve will boost interest rates more aggressively and raise the risk of a recession.

Fuelled by high rents, medical care and new cars, core prices leaped 6.3 per cent for the year ending in August and 0.6 per cent from July to August, the government said Tuesday. Furniture and sports gear, among many other items, also got costlier, suggesting that businesses are still raising prices in response to robust consumer demand.

Inflation slowed to 7.6% in July. Here’s what that means for the cost of living in Canada

The breadth of the price increases dashed hopes, at least for now, that core inflation would moderate. Economists tend to track core prices for a clearer read on where inflation is headed.

Stock prices sank and bond yields jumped on the worse-than-expected core figures, with many investors fearful that the Fed will tighten credit even more vigorously in its drive to curb inflation. The Dow Jones Industrial Average tumbled 900 points in midday trading.

Further Fed rate hikes could weaken growth so much as to push the economy into a recession. Some economists now expect the Fed to raise its benchmark short-term rate, currently in a range of 2.25 per cent to 2.5 per cent, to 4.5 per cent or higher by early next year. That would make it even harder for the central bank to meet its goal of achieving a “soft landing,” whereby it would tame inflation without causing a recession.

“This was a disappointing report,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. “It raises the risk of higher interest rates and a hard landing for the economy.”

Chair Jerome Powell is expected to announce another big increase in the Fed’s key rate next week, which will lead to higher costs for consumer and business loans.

Inflation is higher than many Americans have ever experienced, escalating families’ grocery bills, rents and utility costs, among other expenses. It has deepened gloom about the economy despite strong job growth and low unemployment.

Republicans have sought to make inflation a central issue in the midterm congressional elections. They blame President Joe Biden’s US$1.9-trillion stimulus package passed last year for much of the increase. Many economists generally agree, though they say that snarled supply chains, sharp pay increases and Russia’s invasion of Ukraine have also been key factors in the inflation surge.

At the same time, the drop in gas prices – for consumers, perhaps the most visible barometer of inflation – could bolster Democrats’ prospects in the midterm elections. It may already have contributed to slightly higher public approval ratings for Mr. Biden.

In a statement Tuesday, the President said, “Overall, prices have been essentially flat in our country these last two months. That is welcome news for American families, with more work still to do.”

In his speeches, Mr. Biden has generally stopped referring to the impact of inflation on family budgets. He has instead highlighted his administration’s recent legislative accomplishments, including a law enacted last month that’s intended to reduce pharmaceutical prices and fight climate change.

Nationally, the average cost of a gallon of gas has dropped to US$3.71, down from just above US$5 in mid-June. But grocery prices have continued to rise rapidly, jumping 0.7 per cent from July to August. In the past year, they have soared 13.5 per cent – the biggest 12-month increase since 1979.

Chicken prices have risen nearly 17 per cent in the past year. And egg prices surged 2.9 per cent just in August from July and are up nearly 40 per cent from a year ago.

Worsening food inflation is a particular strain on lower-income families, more of whom have had to turn to food banks and other aid as inflation has worsened. Mary Jane Crouch, executive director of America’s Second Harvest of Coastal Georgia, which works with a network of food banks, said 38 per cent more food was distributed in August compared with July.

Though much of the food is donated, Ms. Crouch said her organization buys some of it and has faced sharp increases in meat and dairy prices in the past few months.

And the prices of many other goods are still rising even as supply chain snarls unravel, said Ms. Rosner-Warburton, the MacroPolicy economist.

“Companies are still putting through large price increases for those goods, and that’s problematic,” she said. It means the Fed will likely have to work harder to slow consumer spending through higher rates.

Elaine Buckberg, chief economist at General Motors, said Friday that the pandemic disruptions to overseas production of semi-conductors, which have slowed auto output, have significantly dissipated and that overall supply chain disruptions have improved about 80 per cent from the worst days of the pandemic.

Yet Americans are still desperate for cars, Dr. Buckberg said, which has allowed dealers to keep their markups much higher than prepandemic levels. New car prices, which rose 0.8 per cent in August, have climbed nearly 11 per cent in the past year.

“Virtually every vehicle that gets to a dealer has already been sold to someone,” she said.

Continuing price increases for raw materials – and labour – have left many small businesses struggling. Some are raising their own prices to keep up, only to then lose customers, according to a survey by Goldman Sachs 10,000 Small Business Voices.

Meaghan Thomas, co-owner of Pinch Spice Market in Louisville, Ky., an online seller, has avoided raising prices for the past two years but worries that that can’t last if inflation worsens.

The price to ship spices from overseas has quadrupled, she said, and she’s seen little relief so far despite reports that such costs are declining. The cost of spices, which Ms. Thomas and her partner grind and blend in a small factory, have jumped by as much as 25 per cent in the past year.

The company’s profit margin has been cut by half, Ms. Thomas said, but she and her partner think it’s important to keep their products affordable. She says larger companies have made inflation worse by raising prices unnecessarily.

“We can hang on for a little bit if all these other companies can stop raising their prices,” she said.

Wages are still rising at a strong pace – before adjusting for inflation – which has elevated demand for apartments as more people move out on their own. A shortage of available houses has also forced more people to keep renting, thereby intensifying competition for apartments.

As a result, rental costs jumped 6.7 per cent in August from a year earlier, the most since 1986. Rents change much more slowly than commodity prices such as gas. That could mean that apartment prices will keep inflation elevated well into 2023.

Other data from companies such as Apartment List, which tracks prices of new apartments and leases, suggest that rental price inflation is starting to decline. But that data takes time to filter into the government’s measure, which tracks all rents.

Ms. Rosner-Warburton said it’s not clear if those declines, when they do start to affect the government’s measure, will slow inflation enough for the Fed.

“At this point, we need to see it to believe it,” she said.

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Oil Falls Below $80 As Powell Warns A Recession May Be Looming – OilPrice.com

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Oil Falls Below $80 As Powell Warns A Recession May Be Looming | OilPrice.com


Charles Kennedy

Charles Kennedy

Charles is a writer for Oilprice.com

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  • WTI crude dipped below $80 on Friday.
  • Fears of slower economic growth and a recession in Europe spooked oil markets.
  • A third consecutive 75bps interest rate hike by the U.S. Fed forced crude prices lower earlier this week.

Trade

Oil prices dipped by 5% early on Friday, with the U.S. benchmark slumping to the lowest level since January, on the back of heightened concerns about slowing economic growth and recessions looming.

As of 10:06 a.m. ET on Friday, WTI Crude had dipped below the $80 a barrel mark, and was trading down by 5.58% at $78.83 per barrel. Brent Crude, the international benchmark, was at $86.11, down by 4.81% on the day.

The front-month WTI contract was headed to a drop of more than 5% this week, in which fears of slowing oil demand amid possible recessions trumped the escalation of the Russian war in Ukraine.

Oil prices jumped earlier this week when Vladimir Putin ordered a “partial mobilization” of 300,000 men to send to fight in Ukraine in the first mass draft in Russia since World War II. Putin also hinted at the possibility of using “any means” to defend Russia, which analysts interpreted as a threat he could use nuclear weapons.

Yet, oil prices fell later in the week on the strong dollar and fears of a recession intensified with major central banks hiking interest rates again to fight inflation. This week, the Fed raised the key rate by another 75 basis points for a third consecutive time. On the following day, the Bank of England raised rates by 50 basis points to 2.25%, the highest rate since the start of the 2008 financial crisis.

“Crude oil meanwhile headed lower after spending most of the week confined to a relative tight range with the Powell versus Putin battle (demand versus supply) not having a clear winner until Friday when both Brent and WTI dropped as the FOMC driven slump in risk appetite and growth angst was dialed up a notch as the dollar and yields continued to surge higher,” Ole Hansen, Head of Commodity Strategy at Saxo Bank said in a weekly commodities note on Friday.

“A difficult and potentially volatile quarter awaits with multiple and contradictory uncertainties having their say in the direction. While the risk to growth is being priced in, the market has left it to another day to worry about the supply-reducing impact of an EU embargo on Russian oil and fuel as well as a part reversal of the US selling 180 million barrels from its Strategic Reserves,” Hansen added.

By Charles Kennedy for Oilprice.com

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Why selloff in gold is not over: $1600 danger zone for gold price – Kitco NEWS

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Editor’s Note: With so much market volatility, stay on top of daily news! Get caught up in minutes with our speedy summary of today’s must-read news and expert opinions. Sign up here!

(Kitco News)Gold is trading near 2.5-year lows after a hawkish Federal Reserve sent the U.S. dollar and Treasury yields higher. This macro environment is likely to push more people away from gold, creating a great buying opportunity, according to analysts.

Volatility in the markets and dramatic FX plays did not leave gold untouched as the precious metal fell another 1.7% this week. After raising rates by 75 basis points for the third time in a row, the Fed upped its funds rate to 4.4% by the end of 2022 and to 4.6% in 2023.

For markets, this could translate into another 75-basis-point hike in November and an additional 50-basis-point increase in December.

“We’ve seen significant increases in the markets’ estimates of what the federal funds rate will do over the next year. It is quite a big difference from a month ago, and it is in line with the Fed being more aggressive,” TD Securities global head of commodity markets strategy Bart Melek told Kitco News. “The real rates are rising. That’s negative for gold. High cost of carry and high opportunity cost will probably drive capital away.”

Also, this type of hawkishness means that the peak in the U.S. dollar rally is still some time away, which is bad news for gold.

“Looks like this dollar rally is not peaking. The current market environment will likely remain unsettling. Fed rate hike expectations are widely swinging. We are not going to see that ease up until we see inflation come down,” OANDA senior market analyst Edward Moya told Kitco News. “The problem is that we do not see the economy weaken quickly. When we do, that’s when you’ll see a peak in the dollar. For gold, it is all about when we see that.”

With the Dow touching the lowest level of the year Friday and more volatility ahead, gold is unlikely to see a strong rally in the short term. “We will not get a strong rush to buy gold just yet. There are low volatility instruments out there that are now giving you some yield. That is taking away from gold,” Moya added.

Eventually, gold will become a safe haven again as the appetite for equities wanes. But before that happens, the economy needs to slow, and inflation needs to decelerate. “Once we start seeing inflation moving into a more benign type level, the Fed can quickly turn. As they went from dovish to hawkish, they can go the other way. But it is unlikely any time soon,” Melek pointed out.



The big risk for the precious metal is a drop below $1,600 an ounce. “If we break $1,600, then $1,540 would be the line in the sand where we start to see buyers emerge. Gold will benefit from safe-haven flows abroad,” said Moya.

Melek also sees gold falling below $1,600 an ounce as likely. “Volatility will be higher going forward. As volatility increases, margin calls increase. Long positions can’t be extended. We are not going to see a big reentrance of positions. Nasty environment for gold,” he described.

Gold is watching the upcoming employment and inflation data from September. “The market is still looking at very tight labor conditions in the U.S. and implication that wage pressures will continue to be an issue,” Melek said.

Market consensus calls are looking for the U.S. economy to have created 300,000 positions in September, with the unemployment rate at 3.5%, which is near 50-year lows.

On a positive note, gold at these levels is a great entry point for buyers.

“This makes physical gold cheaper. It’s a buying opportunity. The Fed has been stressing that they have a dual mandate. And as inflation gets under control, the Fed could be quick to reverse in 2023. Real rates will be much more friendly to gold. I do expect gold to do well in the long-term,” Melek said.

However, for now, resistance is at $1,678-80, and support is around the $1,580 an ounce level, he added.

Next week’s data

Tuesday: Fed Chair Powell speaks, U.S. durable goods orders, CB consumer confidence, new home sales
Wednesday: U.S. pending home sales
Thursday: U.S. jobless claims, GDP Q2
Friday: U.S. persoanl income and PCE price index, Michigan consumer sentiment

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Risk assets crushed with few signs drama is over – BNN Bloomberg

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A selloff in the riskier corners of the market deepened as the U.K.’s plan to lift its economy fuelled concerns about heightened inflation that could lead to higher rates, adding to fears of a global recession.

It was a sea of red across equity trading desks, with the S&P 500 briefly breaching its June closing trough — and failing to pierce its intraday low for the year. Chartists looking for signs of where the rout might ease had identified that as a potential area for support. Yet the lack of full-blown capitulation may be an indication the drawdown isn’t over. Goldman Sachs Group Inc. slashed its target for U.S. stocks, warning that a dramatic upward shift in the outlook for rates will weigh on valuations.

As risk-off sentiment took hold, Wall Street’s “fear gauge” soared to a three-month high, with the Cboe Volatility Index momentarily topping 30. Throughout the year, the U.S. equity benchmark has hit near-term lows when the VIX was above that level, according to DataTrek Research.

A surge in the greenback to a fresh record swept aside global currencies. The euro slid to its weakest since 2002, while sterling hit a 37-year low — with former U.S. Treasury Secretary Lawrence Summers saying that “naive” U.K. policies may create the circumstances for the pound to sink past parity with the dollar. 

Treasury 10-year yields fell after earlier topping 3.8 per cent. Meanwhile, two-year US rates climbed for 12 straight days — an up streak not seen since at least 1976. 

“It appears that traders and investors are going to throw in the towel on this week in what feels like ‘the sky is falling’ type of event,” said Kenny Polcari, chief strategist at SlateStone Wealth. “Once everyone stops saying that they ‘think a recession is coming’ and accepts the fact that it is here already – then the psyche will change.”

Liz Truss’s new U.K. government delivered the most sweeping tax cuts since 1972 at a time when the Bank of England is struggling to rein in inflation, which is running at almost five times its target. The plunge in gilts means that investors are now betting the central bank boosts its benchmark lending rate by a full point to 3.25 per cent in November, which would be the sharpest increase since 1989.

Amid heightened fears over a hard economic landing, commodities got hammered across the board. West Texas Intermediate settled below $79 a barrel for the first time since January, posting its longest stretch of weekly losses this year. Not even gold — a haven asset — was able to gain due to a surging dollar, and sank to the lowest level in two years.

The greenback’s strength has been unrelenting and will also exert a “meaningful drag” on corporate earnings — serving as a key headwind for stocks, said David Rosenberg, founder of his namesake research firm.

KKR & Co. sees potential trouble ahead, including a mild recession next year, with the Fed narrowly focused on driving up unemployment to tame inflation. The US labor shortage is so severe that it’s possible the Fed’s tightening doesn’t work, wrote Henry McVey, chief investment officer of the firm’s balance sheet.

“This is a more draconian outcome than corporate profits falling,” he noted, “because it will encourage the Fed to tighten even further.”

Investors are flocking to cash and shunning almost every other asset class as they turn the most pessimistic since the global financial crisis, according to Bank of America Corp. Investor sentiment is “unquestionably” the worst it’s been since the turmoil of 2008, strategists led by Michael Hartnett wrote in a note.

“It’s a realization that interest rates are going to continue to rise here and that that’s going to put pressure on earnings,” said Chris Gaffney, president of world markets at TIAA Bank. “Valuations are still a little high even though they’ve come down, interest rates still have a lot further to go up and what impact that will have on the global economy — are we headed for a sharper recession than the recession everybody expected? I think it’s a combination of all of that, it’s not good news.”

‘MEANINGFUL DRAG’

Amid heightened fears over a hard economic landing, commodities got hammered across the board. West Texas Intermediate tumbled below $79 a barrel for the first time since January, posting its longest stretch of weekly losses this year. Not even gold — a haven asset — was able to gain due to a surging dollar, and sank to the lowest level in two years.

The greenback’s strength has been unrelenting and will also exert a “meaningful drag” on corporate earnings — serving as a key headwind for stocks, said David Rosenberg, founder of his namesake research firm.

KKR & Co. sees potential trouble ahead, including a mild recession next year, with the Fed narrowly focused on driving up unemployment to tame inflation. The US labor shortage is so severe that it’s possible the Fed’s tightening doesn’t work, wrote Henry McVey, chief investment officer of the firm’s balance sheet.

“This is a more draconian outcome than corporate profits falling,” he noted, “because it will encourage the Fed to tighten even further.”

Investors are flocking to cash and shunning almost every other asset class as they turn the most pessimistic since the global financial crisis, according to Bank of America Corp. Investor sentiment is “unquestionably” the worst it’s been since the crisis of 2008, strategists led by Michael Hartnett wrote in a note.

“It’s a realization that interest rates are going to continue to rise here and that that’s going to put pressure on earnings,” said Chris Gaffney, president of world markets at TIAA Bank. “Valuations are still a little high even though they’ve come down, interest rates still have a lot further to go up and what impact that will have on the global economy — are we headed for a sharper recession than the recession everybody expected? I think it’s a combination of all of that, it’s not good news.”

EXTREME PESSIMISM

Stocks are indeed still far from being obvious bargains. At the low in June, the S&P 500 was trading at 18 times earnings, a multiple that surpassed trough valuations seen in all previous 11 bear cycles, data compiled by Bloomberg show. In other words, should equities recover from here, this bear-market bottom will have been the most expensive since the 1950s. 

Bleak sentiment is often considered a contrarian indicator for the US stock market, under the belief that extreme pessimism may signal brighter times ahead. But history suggests that equity losses may accelerate even further from here before the current bear market ends, according to Ned Davis Research.

In another threat to stocks, different iterations of the so-called Fed model, which compares bond yields to stock earnings’ yields, show equities are least appealing relative to corporate bonds and Treasuries since 2009 and early 2010, respectively. This signal is getting attention among investors, who can now know look to other markets for similar or better returns.

“The next question is when and how far do earnings estimates decline for 2023,” said Ellen Hazen, chief market strategist and portfolio manager at F.L. Putnam Investment Management. “Earnings estimates for next year are too high, they really have not come down, and as that happens you’re going to have further equity pain because in addition to the multiple coming down via the yield mechanism, the earnings you’re applying that multiple to are going to come down as well.”

As slower growth and tighter financial conditions start catching up to companies, a wave of downgrades will come for the US investment-grade corporate bond market.

That’s according to strategists at Barclays Plc, who say companies are facing margin pressure thanks to high inventories, supply chain issues, and a strong dollar. The firm expects the average monthly volume of downgrades to increase to $180 billion of bonds over the next half year. The current monthly average is closer to $40 billion.

Some of the main moves in markets:

Stocks

  • The S&P 500 fell 1.7 per cent as of 4 p.m. New York time
  • The Nasdaq 100 fell 1.7 per cent
  • The Dow Jones Industrial Average fell 1.6 per cent
  • The MSCI World index fell 2.1 per cent

Currencies

  • The Bloomberg Dollar Spot Index rose 1.3 per cent
  • The euro fell 1.5 per cent to $0.9693
  • The British pound fell 3.5 per cent to $1.0868
  • The Japanese yen fell 0.6 per cent to 143.30 per dollar

Cryptocurrencies

  • Bitcoin fell 2.2 per cent to $18,823.63
  • Ether fell 2.4 per cent to $1,292.77

Bonds

  • The yield on 10-year Treasuries declined four basis points to 3.68 per cent
  • Germany’s 10-year yield advanced six basis points to 2.02 per cent
  • Britain’s 10-year yield advanced 33 basis points to 3.83 per cent

Commodities

  • West Texas Intermediate crude fell 5.3 per cent to $79.06 a barrel
  • Gold futures fell 1.7 per cent to $1,651.80 an ounce

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