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The Fed didn‘t play ostrich on inflation, but didn‘t take action either. While acknowledging that 2021 inflation would come at 3.4%, it hinted at 2 rate hikes before 2023 is over – and didn‘t mention taper at all.
It‘s though by no means guaranteed that 2021 inflation would come in at this or lower level. Far from it, but Fed‘s yesterday posturing might be a self fulfilling prophecy in one aspect, and that is commodity prices fanning the inflation flames – thus far though, $CRB doesn‘t confirm that, which has bullish implications for oil and beyond. Stock bulls too can look forward for extending gains without a meaningful correction. As for the labor market pressures, I look for these not to be going away soon.
Treasuries were the market that got it wrong with their sudden appreciation, as I wrote on Monday. The perceived hawkish turn through the dot plot games though means that the bond market lull I looked for to last through the summer (while inflation keeps biting powerfully), is getting shortened, and inflation expectations are suffering through the taken for granted (how wrong that would have been – look how long it took to make one hike finally in 2016) 2 rate hikes in 2 years.
The prospects of no Treasury appreciation or snuffed out sideways trading while (current) inflation keeps biting, means upward pressure on real rates, which is the reason gold was hardest hit of all. Broadly speaking, the yellow metal can be expected to consolidate within a larger bullish trend throughout this hawkish Fed scare, and having to defend against the bears supported by rising dolar (greenback is still rangebound though, and not in a bull market) and sudden, strong selling pressure in the metals.
The second key takeaway is that new money creation runs unimpeded while financing costs aren‘t rising (by themselves, unless the bond market sells off and investors pile into the dollar, which seems to be the case less than 24hrs after the Fed act). So, no taper. No need to rely on commercial banks in picking up the slack in credit creation. Sounds like, heck, why risk it, to me.
Bottom line is that stocks can return to gains, commodities wouldn‘t get crushed, but lean times for precious metals loom. Should yields and the dollar rise steeply, the pressure to invalidate the prior sentence, would grow, with bearish outcomes next.
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Related: Inflation Tipping Point
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