US Inflation Continues to Matter

The next couple of sessions will be crucial for directionality for financial markets overall and the Americans are releasing inflation numbers that will have a major influence on what a lot of traders will be looking at owning. After all, inflation will have a major effect on Federal Reserve policy, which is one of the most important things to pay attention to in financial markets. 

On Wednesday, the Consumer Price Index is released from the United States, which will give us an idea of what inflation is for the average American consumer. It measures a “basket of goods” that people will buy on a day-to-day basis. On Thursday, we get the Producers Price Index, which is a read on what manufacturers and other companies can charge the general public. In other words, we are going to get an idea as to whether or not inflation is going to pick up in the United States, or if it is going to drift a bit lower. 

Currently, it is anticipated that the CPI number will be 0.3% month over month, while the PPI number will be the same. As things stand right now, the Federal Reserve is expected to cut interest rates by 25 basis points at the December meeting, as the markets have an 87% probability of that priced in. However, it’s interesting that the January meeting has an almost opposite read, with traders believing that there is a roughly 81% chance that the Federal Reserve will sit still. Why is this? I believe it is because traders are finally keeping up with the economic reality that the Federal Reserve isn’t going to be able to slash rates as deeply as they have in the past. 

You see, the biggest problem that we face is that Wall Street is asking for more cutting, and there becomes a bit of an echo chamber where traders believe that they will eventually get those rate cuts. This does make sense, because the average trader on Wall Street and at most of the large trading desks around the world has only known life after the Great Financial Crisis. The dynamics after shutting down the world’s economy for 18 months have been something that has been a huge learning curve for all of us.

Gold and the US Dollar.

I am very interested in gold, and I do think that there are a whole litany of reasons why it could go higher. However, if the CPI number in the United States comes out hotter than the anticipated 0.3%, we may have a little bit of a pullback for gold, and most certainly the US dollar will strengthen. On the other hand, if the market were to see the CPI numbers come in cooler than anticipated, gold could really start to take off from that point. 

Recently, we have seen the US dollar and gold rally at the same time. Over the longer term, I think that very well could be the case going forward. The next couple of days we may see a little bit of bifurcation between you, but over the longer term I suspect that geopolitical issues alone will probably drive the US dollar higher, as we are now starting to see monetary controls in the various countries around the world, with South Korea being the latest. 

Gold still has the benefit of being a safe haven asset, as geopolitics have gotten extraordinarily dangerous. Furthermore, it’s probably worth noting that with so many currencies around the world being devalued, it does make a certain amount of sense the gold continues to rise against other currencies. For example, you should be looking at the XAU/JPY pair overall, as the Japanese yen is about to get ran over again from what I see. However, you can also look at gold against the Australian dollar, euro, etc.

Bitcoin

Let me start off by saying that I am not a believer in Bitcoin long-term. However, I recognize that there is still value to be found here from a trading standpoint, and perhaps even from an investment standpoint. The economic landscape is rapidly changing, in the idea of a digital currency isn’t as far-fetched as it once was. However, there are plenty of people out there that believe that Bitcoin will become the world’s reserve currency, which I believe is absolutely ridiculous. The amount of change that would be needed for that actually happen would be outrageous. However, I think the truth probably lies somewhere in the middle of those two competing ideals. 

That being said, I do think there is plenty of money to be made in Bitcoin now that Wall Street has got into the game, and now is looking to make money off of people wanting to own It going. It’s their shiny new toy, and they are going to let it go. That being said, it doesn’t mean that you jump in with a ton of your money in getting crazy with your allocation. 

One thing that I have recently seen mentioned more than once is the fact that Blackrock has bought 6100 bitcoin. That ends up being about $610 million, give or take some. While that sounds exciting and extraordinarily bullish. You have to keep in mind that they control $12 trillion! This works out to 0.005% of their portfolio. In other words, this is something that they want exposure to just in case it works out. 

At things stand right now, the $100,000 area seems to be like a brick wall, and I do think that we are in the midst of massive consolidation. If we can break above the $104,123 level, then my calculation suggests that we would enter the next “FOMO phase”, allowing It going to really start to take off. On pullbacks, I believe that there is significant support near the $93,500 level, and then again at the crucial $90,000 level below there. I believe that Bitcoin is still something that people were buying on dips, and simply accumulating more in anticipation of the next move higher. 

However, it will be interesting to see how the CPI numbers influence Bitcoin, mainly due to the fact that the idea of printing money is one of the biggest drivers of Bitcoin should at least have the opposite effect if it looks like the Federal Reserve is going to have to remain tight. Either way, I have those levels to tell me when I should be buying on dips, and of course hanging on for a bigger move to the upside. 

Trade well,

Chris