Today's lower-than-expected CPI readings may seem like good news, but could we be headed for earlier interest rate cuts or deeper economic troubles?
The lower-than-expected CPI readings released today provide an interesting twist to yesterday’s historical market comparison. Let me explain how these numbers intersect with the analysis I shared earlier.
Today's Inflation Data
As we can see (table courtesy of investing.com), all three inflation metrics came in below expectations:
- Core CPI (MoM): 0.2% actual vs 0.3% forecast
- CPI (MoM): 0.2% actual vs 0.3% forecast
- CPI (YoY): 2.8% actual vs 2.9% forecast
Two-Sided Implications
These numbers create a fascinating dichotomy when viewed through our historical lens:
The Optimistic Interpretation
The cooling inflation suggests the Fed's restrictive monetary policy (which I identified as paralleling pre-1929 conditions) is working. This could lead to earlier interest rate cuts, potentially creating a "soft landing" scenario that would diverge from the 1929 parallel.
Lower inflation readings might allow the Fed to pivot sooner than markets expected, which could extend the current bull market cycle and delay or mute any significant correction. This would represent a meaningful departure from the 1929 scenario.
The Concerning Interpretation
However, there's another way to read this data that actually reinforces our historical comparison. In the late 1920s, deflationary pressures began emerging before the crash - a sign of underlying economic weakness despite market euphoria.
Today's lower inflation readings could similarly signal weakening demand and economic deceleration. The Fed may be forced to cut rates not because inflation is conquered but because economic conditions are deteriorating more rapidly than expected.
The Yield Curve Factor
The unprecedented 793-day yield curve inversion I mentioned previously remains intact despite today's numbers. Historically, once such deep inversions begin to normalize, recessions often follow. The inflation data may accelerate this normalization process as the Fed considers rate cuts.
Market Concentration Risk Remains
Regardless of inflation trends, the extreme market concentration issues, valuation concerns, and deteriorating market breadth I highlighted continue to mirror pre-1929 conditions. The "Magnificent Seven" stocks still dominate market capitalization in a manner reminiscent of the narrow leadership before the 1929 crash.
Implications for Precious Metals
For gold and mining stocks, the inflation data creates an interesting setup. Lower inflation readings typically allow the Fed more flexibility to cut rates, which is generally supportive for precious metals. This suggests that gold could find support earlier in any market correction scenario.
The lower inflation numbers might accelerate a Fed pivot, potentially triggering both:
- An initial sell-off across all assets (including gold) as markets reprice risk
- A potentially stronger and earlier recovery in precious metals than in broader equities (what I’m describing here is likely many weeks, likely months away)
Conclusion
Rather than contradicting our historical comparison, today's inflation data adds nuance to the timing and potential triggers for a significant market decline. While it may alter the exact pathway, the structural similarities to 1929 remain intact.
The key takeaway is that market vulnerabilities often reveal themselves first through unexpected economic data points like today's inflation numbers. As always, these historical comparisons serve not as predictions but as frameworks for understanding potential market behaviors during periods of unusual economic conditions (and if you’ve got your gold as your insurance capital – for example, in a gold IRA - it seems that you should be fine).
Now, as fundamentals drive prices on the long run and provide context for price moves, it is the technical analysis that provides us with insights regarding the short- and medium-term price moves.
While the long-term, medium-term, and even short-term technical didn’t change, there are a few very interesting immediate-term developments that I’d like to share with you today.
The USD Index just moved back above its 61.8% Fibonacci retracement level.
The jury is still out as to where it closes the day (I’m writing this before the opening bell), but on an intraday basis, there was a tiny comeback above this level. As invalidations don’t require confirmations, this is a somewhat bullish sign. It will be much more bullish once we see a daily close back above the 61.8% retracement.
Another thing is that copper is up, and so is silver – especially relative to gold (chart courtesy of GoldPriceForecast.com).
As far as copper’s performance is concerned, I’d connect it with tariff-based turmoil, and I’d still view it as something very temporary.
And as far as silver’s immediate term outperformance of gold is concerned – you already know what it means. It’s a sell signal that we often see before bigger declines. Consequently, the technicals continue to support the bearish narrative and suggest that the bearish interpretation of today’s inflation data is more likely to be correct.
All in all, just as I wrote yesterday, it seems that we are on a verge of a major decline in many markets, including stocks, copper, and precious metals, and – in my view – mining stocks and FCX will be among the assets that will fall the most. This is a massive opportunity that almost everyone is likely to miss.
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Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief