Stagflation Pressures May Be Returning, Affecting Stocks and Gold
Recent data suggests that stagflationary pressures may be returning. This is due to hotter than expected Consumer Price Index (CPI) and disappointing jobless claims data, which was somewhat affected by Hurricane Helene.
Asset Classes Experience Initial Chaos
This news sparked some initial chaos across asset classes, pushing rate-cut expectations lower for 2024 but higher for 2025.
Stocks End Lower Despite Late-Day Panic-Bid
Despite a late-day panic-bid into the close, stocks ended lower with Small Caps being the biggest loser. However, NVDA managed to hold it all together. The Volatility Index (VIX) increased significantly, decoupling from stocks, ahead of tonight's Tesla robotaxi event and tomorrow's Producer Price Index (PPI) and the beginning of earnings season.
Mixed Performance for Treasuries
Treasuries showed a mixed performance with the short-end outperforming. This steepened the yield curve significantly, erasing all the post-payrolls flattening.
Dollar Rallies for the Eighth Consecutive Day
The dollar rallied for the eighth day in a row. The last time this happened was when the Federal Reserve started hiking rates in April 2022.
Gold Rallies Despite Dollar's Gains
Despite the dollar's gains, gold also rallied. Bitcoin, however, dropped significantly, falling back below the $60,000 mark. This was after an SEC lawsuit against digital asset market maker Cumberland DRW sparked more regulatory fear, uncertainty, and doubt (FUD).
Oil Prices Experience Solid Gains
Oil prices also managed solid gains after two disappointing days, with West Texas Intermediate (WTI) back above $76.
Rising Inflation Expectations Despite Lower Two-Year Yields
The fundamental contradiction at the heart of today’s price moves is most evident in market measures of longer inflation expectations, which are rising even as two-year yields hit session lows.
As noted by Bloomberg's Sebastian Boyd, the mixed nature of today’s data means that traders are trying to express the view that inflation is still a problem, but that the labor market might be weakening too, which would mean The Fed goes ahead with rate cuts anyway.
Bottom Line
The return of stagflationary pressures could have significant implications for the economy and financial markets. With mixed signals coming from different sectors, it's clear that traders and investors will need to navigate carefully in the coming days and weeks. What are your thoughts on this development? Do you think the Fed will go ahead with rate cuts? Share your thoughts and this article with your friends. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
