Higher Oil and Gasoline Prices May Reignite Inflation
To no surprise, the June PPI reading also came in below expectations. The problem with both the CPI and PPI reports is that gasoline prices are rising, so the June CPI and PPI readings may not matter much if that trend continues. With RBOB gasoline back around $3.30, I believe inflation is likely to turn higher again in July.
Still, rates fell, and the dollar weakened, as markets tend to respond. One month of data will not determine whether there has been a material shift in policy-rate expectations. In his Senate testimony today, Kevin Warsh sounded no less hawkish than he has in the past and remained consistent in expressing his views. I do not see how inflation can be brought down without maintaining a restrictive monetary policy. Cutting rates certainly would not accomplish that at this point.
Oil, on the other hand, has found support at the gap created in early March. It has moved above its 20-day moving average and broken its RSI downtrend. Oil prices could therefore move higher from current levels, break through resistance at $80, and begin moving toward the $87 region.
If oil moves higher, interest rates and the dollar may follow. The three have historically exhibited a strong relationship, with higher oil prices adding to inflationary pressures and, in turn, supporting tighter monetary policy.
In the meantime, the 5-year real yield rose to 2% today, marking the first time in quite a while it has reached that level. Looking closely, gold and silver peaked around the same time the 5-year real yield bottomed. The further real yields rise, the more likely it is that both metals will fall.
-Mike
Glossary by ChatGPT
20-day Moving Average: A technical indicator showing the average price over the past 20 trading days, often used to identify short-term trends.
5-year Real Yield: The inflation-adjusted yield on a five-year U.S. Treasury security, reflecting the real return investors receive after inflation.
CPI (Consumer Price Index): A measure of changes in the prices consumers pay for a basket of goods and services, commonly used to gauge inflation.
Gap: A price area on a chart where trading skipped between sessions, often serving as a support or resistance level.
Hawkish: A monetary policy stance favoring higher interest rates to combat inflation.
Monetary Policy: Actions taken by a central bank to influence interest rates, money supply, and overall economic conditions.
PPI (Producer Price Index): A measure of changes in the prices producers receive for their goods and services, often viewed as an indicator of future consumer inflation.
RBOB Gasoline: Reformulated Blendstock for Oxygenate Blending, the benchmark gasoline futures contract used to track U.S. gasoline prices.
Real Yield: A bond yield adjusted for inflation expectations, representing the actual purchasing power earned by investors.
Restrictive Monetary Policy: A policy approach that keeps interest rates elevated to slow economic activity and reduce inflation.
RSI (Relative Strength Index): A momentum indicator used to assess whether an asset is overbought, oversold, or experiencing a shift in price momentum.
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