Gold & The Dollar Soar As CPI Surge Sparks Fed Faux-Pas Fears

Republished By Plato

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On top of yesterday’s US PPI and last night’s Chinese inflation data, this morning’s soaring US CPI (at 40 year highs) appeared to be the straw that broke the back of the ‘transitory’ narrative, no matter how many times establishment types repeat it…

Source: Bloomberg

That immediately sparked a dramatic hawkish adjustment in STIRs, erasing all of Powell’s dovish jawboning efforts, now fully pricing-in a rate-hike for July 2022…

Source: Bloomberg

This is far more hawkish than The Fed (but note that the market is also more dovish longer-term as anxiety over The Fed making a policy-error continues to build…

Source: Bloomberg

Today was a ‘game of two halves’.

The ugly CPI print prompted a serious reaction across all asset classes in the pre-market:

All of which generally extended for a few hours (except stocks which did their usual BTFD ramp into the cash market open before reverting to the downward push).

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But, things changed at around 1300ET.

A really ugly 30Y auction (with the biggest tail we can ever remember) sparked a dramatic surge in yields…

Source: Bloomberg

The entire curve repriced higher in yield (with the belly hardest hit on the day: 2Y +8bps, 5Y +12bps, 30Y +9bps)

Source: Bloomberg

The yield curve flattened dramatically on the CPI print then steepened it all back on the ugly 30Y auction. However, the curve (5s30s) did end up flatter overall on the day – its flattest since before COVID (early March 2020)…

Source: Bloomberg

Stocks accelerated their losses with Nasdaq and Small Caps clubbed like a baby seal…

Source: Bloomberg

VIX accelerated higher to almost 20…

Rivian went public today and was well bid into the open, but it closed below its open

Robinhood was clubbed like a baby seal back to a record low close after hacking headlines…

Crypto rapidly retraced its spike gains with Bitcoin reversing from almost $69,000 (record high). Bitcoin legged lower again towards the cash equity close…

Source: Bloomberg

The Dollar extended its earlier gains…

Source: Bloomberg

…soaring to 2021 highs…

Source: Bloomberg

…closing at its highest since Nov 2020…

Source: Bloomberg

Gold spiked above $1870 on the CPI print, faded lower, jolted down on the 30Y auction and stabilized…

…, closing at 5 month highs…

Oil prices ripped on the CPI print but faded after DOE reported a surprise crude build….

Finally, in case you were wondering why the 30Y auction was so ugly today – aside that is from it being a ‘taper tantrum’ – here is one potential answer. As Bloomberg’s Sebastian Boyd notes, the long-end of the curve (30Y) had become extremely expensive (low in yield) relative to the belly of the curve (5Y for example) as indicated by the fact that the 2s5s30s butterfly went positive ahead of the auction today. As is clear from the chart, that has been a very strong region of resistance for the ‘shape’ of the curve… which may have prompted some buyers to shy away from buying at the auction.

Source: Bloomberg

The weak auction sent 30Y spiking and sent the butterfly back down notably negative (and ‘cheapening’ the 30Y).

And as a reminder, inflation by itself isn’t the problem, it’s the failure of wages to keep pace that is troubling for the economy and the equity markets. Wednesday’s spike in inflation has eroded consumer spending power for the seventh consecutive month, putting growth and earnings forecasts in jeopardy.