Opening Night on Broadway or Executioner’s Chamber

Fed jitters, or maybe it’s just a prelude to a quiet holiday season that will give analysts and investors lots of time to ponder what a small rate hike means? It will also give us lots of leisure time to ask how we (meaning the Fed) arrived at the decision to press the button on a rate liftoff.

The CPI figures were released today and gave some added encouragement to Fed hawks.

Yes, energy prices dropped 1.3% last month — gasoline price fell dramatically again — and food costs slipped 0.1% to mark their first decline since March.

Lower food prices partly reflect falling costs of farm crops and some commodities. Prices for beef, eggs, fish, chicken, and dairy and some processed foods all tracked lower.

But, but, but…

Stripping out food and energy, “core prices” went up 0.2% for the third straight month. The cost of housing, health care, new vehicles and airline tickets all rose. (We think airline travel is an anomaly given lower fuel prices.)

Housing is an inflation trouble spot. Shelter jumped 3.2% in the past 12 months, led specifically by rent increases, which hit the young and old disproportionately hard, not a social good as far as we can see.

No matter the reasons for a rise, such action will strengthen the dollar, which coincidentally will lower prices. Commodities, which are generally traded through dollar-denominated accounts, will be particularly depressed.

There is another factor to be taken into consideration now, one that will become more important after tomorrow’s Fed move and end-of-year influences cease – let’s say on January first.

That will be the pace of further rate increases. We think that probably we won’t see another increase for almost a full fiscal quarter. Experts are calling this a “dovish hike,” one whose future is based on expectations.

That behind-the-scenes thinking boosted the precious metals complex today as of 3:30 EST, silver and palladium coming out the biggest winners. Gold fought off dollar strength to find very modest gains via regular trading.

Crude oil rebounded heartily today, on short covering and some (flase) hopes that a bottom had been found. This cannot last.

"We are seeing nothing unusual about this week's price bounce given the fact that the entire complex had become much oversold based on virtually all of our technical indicators," Jim Ritterbusch of Chicago-based oil consultancy Ritterbusch & Associates said in a note.

"Focus during the next two sessions across much of the commodity/financial space will be on tomorrow’s Fed announcement where we feel that a rate hike has been largely priced in."

Since oil prices did not crash through the seven-year trough of low, low prices, traders bid up crude. Some short-term gains will be cashed soon, perhaps immediately.

In U.S. equities, the financial sector perked up a bit on news of better overall performance, but also on the hopes for a Federal Reserve rate increase. Energy recovery also helped stocks.

Again, clearer trends await the post-Fed analysis and perhaps the beginning of 2016.

Wishing you as always, good trading,