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Disinflation Runs Down Fed Rate Raise Possibility As If In A Game Of Frogster

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Editors note: We have opened up today's Trending Market video report for all Gold Forecast members to view.

Frogster is an early video game where a cute little amphibian valiantly tries to cross a heavily trafficked street. The player’s job is to get Froggy across without letting him get squished.

Today, CPI data pretty much ran down the rate rise frog.

That’s today’s big news, regardless of what the FOMC minutes say. But traders and investors threw those tumbling dice as prices get closer to stagnant and again threaten to tip over into disinflation.

We heard a commentator prattle on today about how he has been worried about the Fed missing underlying inflation pressures in the American economy. He must have run down to the local 7-11 only to find the cost of a pack of gum was up and extrapolated that therefore, so on, and etc…

Though not the Fed's very favorite gauge, the widely followed inflation marker showed that outside of rising rents, there was practically no price pressure in the marketplace in July.

The consumer price index rose just 0.1% in July. Even excluding “volatile” food and energy prices, the CPI was up the same meager 0.1%.

On an annualized basis, the index rose just 1.8 percent for the last 12 months, which is below the Fed's current 2 percent inflation target and well below the healthier target of 2.5%.

Tumbling – there’s that word again – energy prices are the prime cause of the CPI's weak showing, with the entire energy sector down 14.8% over the 12-month period, though up 0.1% for the month.

One of the steepest price jumps came in the rent component, which rose 0.3% in July and 3.6% for the year. Airfares, however, plunged 5.6% (on lower aviation fuel costs), the most in 20 years. Fuel oil for heating and manufacturing fell 3.4% in July.

The minutes to the FOMC July meeting were released prematurely when they accidentally came out over Bloomberg news. The minutes showed a rousing debate between doves (who favor low rates) and hawks (who favor higher rates).

It was the middle course that won the day, though and, given what we have written above coupled with the thinking of the middle grounders and doves, we can’t see a September rate hike coming.

In part, the minutes said: "Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point. Participants observed that the labor market had improved notably since early this year, but many saw scope for some further improvement.”

Approaching that point, but not at that point. That is why today’s fundamentals letter opens with the low, low inflation news.

After the release of the FOMC minutes, equities in New York began to rally, pushing back but failing to close at even on the day. The Dow is off almost 0.70% as 4 o’clock draws near in New York. The S&P 500 and NASDAQ fared a bit but not much better, each index off around 0.60%.

Gold traders inexplicably pushed prices up, piggybacking their own sentiment on a falling U.S. dollar. Gold has fallen slightly from its highs for the day, though as we head into late afternoon trading it is maintaining about a $15 per ounce gain. (The U.S. dollar is down nearly 1.00% on the day.)

The big shocker of the day came in U.S. crude oil. It fell drastically after an unexpected inventory build caught everyone by surprise from Louisiana to Texas to Oklahoma. In mid to late afternoon trading West Texas Intermediate is trading down 4.65% and is threatening to break below the $40 per barrel mark.

Crude stocks zoomed up 2.6 million barrels at 456.21 million barrels last week, the U.S. Energy Information Association said. Stockpiles at Cushing, Oklahoma, the delivery point for U.S. crude futures, jumped by 326,000 barrels to 57.44 million.

This was in sharp contrast to all predictive polls, which forecast a decrease between 600,000 and 780,000 barrels.

Raise a glass to misinterpretation and roll those spotted bones again tomorrow. The markets feel more like casinos than ever. We leave you with this quote:

You got to roll me and call me the tumblin', roll me and call me the tumblin' dice.
– The Rolling Stones

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer