Volatility Spikes, Deflationary Event Pending?

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Today, we got the latest CPI numbers, and they were explosive.

Headline expectations were for a 7.3% increase year-over-year. It came in higher at 7.5%. It may not sound like much, but that’s the highest CPI since 1982. The core number rose 6.0% relative to expectations of 5.9%. Yet again, the highest level since 1982, 40 years ago!

Rate hike expectations soared. The 10-Year yield jumped to 2%. Real yields also rose to -0.47%. The dollar loved it and snapped back to 96. Stocks came under pressure again, as did Gold and Silver.

The silver lining to all of this is that the Yield Curve is flattening rapidly. This signals that the almighty bond market doesn’t buy the rate hikes. Either they don’t happen or we get one or two hikes and then the resultant stock market dump forces the Fed to throw in the towel, cut rates, and start printing again.

However, the yield curve is extreme oversold and positively divergent. Either of two things could happen next:

• the 10-Year Yield rises faster than the 2-Year; or

• the 10-Year yield falls slower than the 2-Year.

The former would be driven by a rebounding economy, where inflation remains more persistent, but rate hike expectations have already been priced in. In other words, long bonds no longer believe rate hikes will be almost immediately reversed as stocks dump. Meanwhile, inflation remains rampant.

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The latter—which is more likely, imho—involves the 10-Year yield falling but rate hike expectations falling even faster, driven by a significant and deflationary shock, such as a stock market correction, possibly accompanied by a drop in oil prices. The trigger could be anything, such as global cyber attack.

In both cases, rate hike expectations fall as stocks dump.

At the risk of sounding like a broken record, I’ll repeat my expectation that the Fed will ride to the rescue again when that happens. Then it’s game on for Gold and Silver as the real yields and the dollar plummet. The same story as March 2020, December 2018, and March 2009.

As I write this, it seems that the market is already pricing in rate cuts:

"Market Starts Pricing-In Rate-Cuts As Hot CPI Confirms Fed Policy Error Imminent"

The dollar has completely erased its gains and then some. Stocks have erased their losses.

When you get such volatility, it’s best to take a step back and look at the bigger picture. Higher volatility is typically a signal of major disruptions ahead too: Peak yields, stocks, oil, dollar?

GOLD

We’re still in no man’s land. 1837 remains resistance with the prior high of 1854 just above there. Support is at 1785. Until one or the other of these is broken, which should be soon, this could go either way. The risk of a test of 1720, 1675, and possibly a lower low remains. But the move up to new record highs is also inevitable, imho.

SILVER

Silver is holding the line at 22 so far, but it is also having difficulty getting above that thin downward trendline in red, now at ~24. There’s likely a lot of stops below 22 that the Banks would want to take out, and then we head higher. But a break of 24 would signal a test of 28 next.

GDX

It’s no surprise that GDX looks just like Silver. Resistance is at 33 with support at the double bottom of 28.33.

SILJ

SILJ continues to struggle with its 50-day moving average around 12. Above there is downtrend resistance at 13 and the 200-day moving average at 13.70. Support is at 11 on a closing basis.

I want to summarize here by saying that each of the patterns in the metals and miners are bullish flags, which means the probability of higher prices is greater rather than lower, unless of course we break those support levels.

Despite the volatility today, the risk of a deflationary event is rising, which would see peak everything. This is clear from the yield curve. But the Fed will have no choice but to turn on the printing presses again if and when that happens. The alternative is systemic collapse. When the Fed pulls another 180, then Gold and Silver soar—if not sooner, imho.