Overreaction to Small Up Move in Inflation Pushes Gold Down

The mindless mood swings continue regarding the upcoming FOMC meeting, which concludes on Wednesday. Today many markets once again overreacted to the scantest “hawkish” data release, that of the Consumer Price Index for August.

It’s showed that non-core prices rose 0.2%. In the 12 months through August, the CPI increased 1.1 percent after advancing 0.8 percent in July. Looks to us as if there’s barely a candle burning although some traders are saying the barn is on fire.

What makes matters worse for the doom-saying hawks is that parts of the core inflation rate were up – like health care and rent, but parts of the non-core – like gasoline and food – were down, and fairly drastically. We’ll leave you to puzzle out why gasoline and food are non-core. (Yakety-yak – too volatile.)

The U.S. dollar rose significantly against the euro, moving higher by 0.75% before closing unchanged. It rose even more against the British pound, notching a 1.70% rise, again before closing essentially flat. It was strong against the yen, but on a very modest basis.

The dollar’s rip-roaring strength was predicated upon misguided notions that the Fed could well raise rates on Wednesday.

The more powerful dollar had a sharp impact on gold, which was bid up in regular trading $6.70 but smacked down by the greenback by $10.80, resulting in a net loss of $4.10

Silver fared even worse. Big sister gold was down 0.30% while silver was down 1.05% or 20 cents.

With the FOMC meeting and rates in focus, and this being a Friday, equities traders took a bit of profit heading into the weekend from yesterday’s gains. The urge to skim off the cream was less pronounced on the NASDAQ, which is of between 0.10 and 0.15% as we head into late afternoon in New York.

Europe ended the week on a down note while Asia was mixed with the Nikkei and Hong Kong up very nicely and Shanghai falling about 0.65%.

Not seeming to react too much, the yield on the U.S. 10-year bond remained right around 1.70, a level that seems to be comfortable to traders right now.

The CME FedWatch rate-increase-rise probability index crept up from yesterday’s very low 12% to 15%. Still, that means the likelihood of rates staying put is 85%.

The VIX volatility index also appeared to take today’s CPI data release in stride, even mellowing more. The VIX dropped 4.25% to 15.65, give or take..

Wishing you as always, good trading,