U.S. equities and precious metals react to the real possibility of liftoff in March

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Multiple sectors and asset classes in the financial markets came under pressure today as market participants prepare for the real possibility that the Federal Reserve will begin a series of multiple interest rate hikes beginning in March of this year. Testimony by Chairman Powell recently suggested that the Federal Reserve might maintain a slightly more accommodative monetary policy than perceived by the hawkish tone of multiple Fed members including himself last month. However, statements over the last few days by multiple Federal Reserve members suggest that liftoff will most certainly begin in March 2022.

By far the largest percentage declines amongst asset classes was seen in U.S. equities rather than the precious metals. The Standard & Poor’s 500 gave up 1.42%, the Dow Jones Industrial Average, which fared the best today, gave up 0.49%. But it was the NASDAQ composite that showed the largest percentage decline today, losing 2.51% in value.

Precious metals had fractional declines, but all four precious metals traded on the futures markets exhibited slight declines. Concurrently the U.S. dollar had a fractional decline today of 0.06% taking the dollar index to 94.845. This is the lowest value that the dollar index has had since the first week of November 2021. After reaching a high just shy of 97.00 in December of last year the index traded to a low of 94.635 which is approximately a 2% decline from the highs seen just last month.

The precious metal which had the greatest percentage decline today is palladium which lost 1.56%, or $29.80, with the most active futures contract currently fixed at $1886. Platinum came in just behind palladium, declined by 1.30% or $12.70 with the most active futures contract currently fixed at $967.40.

Silver lost 0.37%, losing approximately $0.09 on the day with the most active March 2022 Comex contract currently fixed at $23.12. It was gold that fared the best declining by 0.27% or $4.90 with the most active February 2022 Comex contract currently fixed at $1822.40.

Today the government released the producer price index which showed that wholesale prices rose 0.2% in December. Although this is the smallest increase in wholesale prices in the last 13 months, it came in below the forecast of economists polled by Wall Street Journal than anticipated that the PPI would show an increase of 0.4%.

Many analysts interpreted today’s data as a potential peak in inflationary growth as wholesale prices only had a modest uptick. However, what many analysts are disregarding is that even though wholesale prices only increased by 0.2%, today’s data reveals that inflation continues to grow. While the growth of inflation might be slowing down, it is slowing down at a point when the overall inflation is sitting at a 40 year high. According to yesterday’s release of the December consumer price index current level of inflation across the board is at an astoundingly high 7% and the inflation level has not been seen since 1982. Understandably, U.S. corporations have become addicted to borrowing almost free money. It makes logical sense that once the Federal Reserve begins to raise rates, they would be extremely sensitive to a higher cost of borrowing.

If you look at points in time when the United States had major bouts with high inflation, it was typically a multi-your process to bring inflationary pressures back to an acceptable target. It was also accomplished by extremely high-interest rates. I bring this point up because a rise in the Federal funds rate of 1% will not have a large impact on bringing inflationary pressures down.

To bring in the inflation rate from 7% down to even 3% will require more than just hikes and interest rates. It will require real solutions to the issues that created the high level of inflation in the first place. In the case of our current dilemma, it is the lack of available workers to fulfill the needed roles to alleviate the bottlenecks supply chain issues that are one of the core reasons inflation has run rampant. Higher interest rates will not solve the problem of the United States having maximum employment, and in fact, could easily have the opposite effect.

That being said inflation is here to stay for an extended period. Many analysts including myself, believe that it is highly unlikely that inflation will move to an acceptable target level in 2022, and in a best-case scenario will not move to an acceptable level till the middle or end of 2023. It is for those reasons mentioned above that the long-term forecast for gold could easily continue to have bullish market sentiment as its major undertone.

Wishing you as always good trading and good health,

Gary S. Wagner - Executive Producer