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If you're interested in gold trading or silver trading and would like to see how we apply our gold trading tips in practice, you've come to the right place. The Gold & Silver Trading Alerts are the daily alert service provided by Przemyslaw Radomski, CFA that deals directly with the latest developments on the precious metals market. The situation is analyzed from long-, medium-, and short-term perspectives and topics covered go well beyond the world of precious metals themselves, ranging from the analysis of currencies, stocks, ratios, as well as using proprietary trading tools. Subscribers also receive intra-day follow-ups in case the market situation requires it. 1-2 alerts per week are posted also in our Articles section, so you can review these real-time samples before you subscribe.

Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

  • Brace, Gold Bulls - The Fed Is Going to Keep Its Hawkish Word

    May 4, 2022, 9:21 AM

    With the US economy still on fire and inflation galloping, the Fed has to react firmly. What will happen to gold after the dovish stance changes?

    It’s a decision day for the Fed, as a 50 basis point rate hike is likely a done deal. Moreover, while the PMs may record a short-term relief rally, their medium-term fundamentals continue to deteriorate.

    For example, I’ve been warning for some time that higher interest rates would manifest amid rampant inflation, and – surprise, surprise – the U.S. 10-Year Treasury yield has continued its ascent. Furthermore, while the Treasury benchmark eclipsed 3% intraday on May 3, a close above the key psychological level should occur sooner rather than later.

    Please see below:

    To explain why, I wrote on Apr. 20:

    The red line above tracks the U.S. federal funds rate, while the green and gray lines above track the U.S. 10-Year and 30-Year Treasury yields. If you analyze the connection, you can see that the latter two often take their orders from the former. In a nutshell: when the Fed raises interest rates, it takes several hikes of 0.25% before long-term yields rollover. For example:

    • In 2018, the U.S. 10-Year Treasury yield peaked after ~9 rate hikes.
    • In 2006, the U.S. 10-Year Treasury yield peaked after ~17 rate hikes.
    • In 2000, the U.S. 10-Year Treasury yield peaked after ~7 rate hikes.
    • In 1994, the U.S. 10-Year Treasury yield peaked after ~12 rate hikes.

    Thus, with modern history showcasing that the U.S. 10-Year Treasury yield doesn't peak until the Fed is well within its rate hike cycle, please remember that the Fed has only hiked once. Therefore, with seven rate hikes as the minimum to elicit a peak over the last ~28 years, the U.S. 10-Year Treasury yield should have room to run, and this is bullish for real yields and bearish for gold.

    Speaking of real yields, with nominal interest rates rising and breakeven inflation rates falling, the U.S. 10-Year real yield closed at 0.18% on May 2 and 0.15% on May 3. As a result, the PMs confront a fundamental time bomb that should blow up their performance over the next few months.

    Please see below:

    To explain, the gold line above tracks the price tallied by the World Gold Council, while the red line above tracks the inverted U.S. 10-Year real yield. For context, inverted means that the latter's scale is flipped upside down and that a rising red line represents a falling U.S. 10-Year real yield, while a falling red line represents a rising U.S. 10-Year real yield. 

    For more context, I wrote on Apr. 11:

    If you analyze the left side of the chart, you can see that the U.S. 10-Year real yield soared and gold plunged during the global financial crisis (GFC). However, when the Fed launched QE and the U.S. 10-Year real yield sank to an all-time low, gold hit a new all-time high along the way. 

    Furthermore, the current situation is a spitting image. When Fed Chairman Jerome Powell performed a dovish pivot in late 2018, the U.S. 10-Year real yield suffered. Then, when the Fed fired its liquidity bazooka in March 2020, it pushed the metric to another all-time low. And surprise, surprise, gold hit another all-time high.

    However, with the Fed normalizing policy, the U.S. 10-Year real yield has surged in recent weeks. Moreover, the Fed needs to push the metric above 0% to curb inflation. 

    Thus, it's likely only a matter of time until the milestone is achieved. In addition, a U.S. 10-Year real yield of 0% implies a gold price of $1,500, and while the current narrative suggests otherwise, is this time really different?

    To that point, while gold has suffered in recent days, the current price is still well above its medium-trend-based value. Likewise, since the GDXJ ETF is much more volatile than the yellow metal, and therefore, should decline even more, epic drawdowns should materialize if (once) the two lines reconnect (not necessarily in the immediate aftermath of the rate hike, as PMs could rally based on the move-on-the-rumor-reverse-on-the-fact tendency).

    For example, while these events take time to unfold, history shows that the “this time is different” crowd ends up losing more than just their pride. I first highlighted the epic divergence between the U.S. 10-Year Treasury yield and the U.S. 10-Year breakeven inflation rate on May 11, 2021. I wrote:

    To explain, the green line above tracks the U.S. 10-Year Treasury yield, while the red line above tracks the U.S. 10-Year breakeven inflation rate. If you analyze the left side of the chart, you can see that when the bond market finally snapped in 2013, the U.S. 10-Year Treasury yield’s surge was fast and furious. More importantly, though, if you analyze the right side of the chart, you can see that today’s gap makes 2013 look like an appetizer. As a result, with material divergences often reversing in violent fashion, it’s only a matter of time until the next earthquake erupts.

    Therefore, while the fundamental thesis didn’t materialize overnight, the two lines eventually reconnected; the U.S. 10-Year Treasury yield surpassed the U.S. 10-Year breakeven inflation rate, and the U.S. 10-Year real yield turned positive. 

    However, now it’s the gap between gold and the U.S. 10-Year real yield that makes 2011 look like an appetizer, and the same outcome should occur. As a result, the prospect is profoundly bearish for the PMs.

    From Negative to Positive

    Conversely, with bonds oversold and the stock market nearing a breaking point, investors continue to ask: “Where is the Fed put?” For context, put options are like insurance contracts, and they protect investors when drawdowns occur. In a nutshell: investors expect the Fed to step in, turn dovish, and save stock market investors from their poor valuation decisions.

    However, the prospect is far-fetched, and here is why. Following the global financial crisis (GFC), the Fed ran to the rescue whenever the stock market threw a tantrum. As such, investors with short memories assume that the post-GFC script is the right analog. Yet, they fail to realize that the year-over-year (YoY) percentage change in the headline Consumer Price Index (CPI) peaked at 3.81% in September 2011. Thus, the Fed could ease without worrying about stoking inflation.

    Conversely, with the headline CPI at ~8.6% YoY now, the game has completely changed.

    Please see below:

    Second, the other half of the Fed’s dual mandate is maximum employment. With U.S. job openings hitting an all-time high of 11.549 million on May 3 (March results), the data is extremely bullish for Fed policy. For context, the consensus estimate was 11 million.

    Source: Investing.com

    More importantly, though, another resilient report means that there are now 5.597 million more job openings in the U.S. than citizens unemployed, also an all-time high.

    Please see below:

    To explain, the green line above subtracts the number of unemployed U.S. citizens from the number of U.S. job openings. If you analyze the right side of the chart, you can see that the epic collapse has completely reversed and the green line is at a record high. Thus, with more jobs available than people looking for work, the economic environment supports normalization by the Fed.

    Again, please consider the CPI data above with the job openings spread post-GFC. The period had well-anchored inflation and unemployed citizens outnumbered job openings until 2018. That’s nothing like the current environment. Furthermore, can you notice how the spread’s outperformance helped spur the Fed’s most recent rate hike cycle?

    To explain, the green line above tracks the job openings spread, while the red line above tracks the U.S. federal funds rate. If you analyze the relationship, you can see that the spread’s move toward neutral was a hawkish indicator.

    Likewise, with the spread positive and at an all-time high, the data alone justifies several rate hikes. However, as mentioned, we also have a YoY headline CPI that’s at its highest level since the 1980s. Thus, if investors assume the Fed lacks the ammunition to follow through with its hawkish promises, they should suffer the same fate as the “transitory” camp did in 2021/2022.

    Finally, S&P Global released its U.S. Manufacturing PMI on May 2. The report revealed:

    “Operating conditions improved markedly across the U.S. manufacturing sector, according to April PMI data from S&P Global…. New orders increased at a marked pace at the start of the second quarter, and at a rate broadly in line with that seen in March. Companies reported stronger demand conditions, with some noting that new sales expanded despite
    substantial
    rises in prices. Meanwhile, new export orders grew at the fastest rate for
    almost a year.”

    Also noteworthy:

    “Manufacturers recorded a solid rise in employment in April. Workforce numbers grew following greater production requirements and in response to staff leaving voluntarily. Some firms also stated that job creation was linked to the filling of long-held vacancies. Labor
    shortages continued to be mentioned as a weight on growth
    , however.”

    More importantly, though:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: S&P Global

    The bottom line? While investors continue to pray for a dovish pivot, they’re likely in for a rude awakening. The U.S. labor market remains abnormally hot, and the latest PMI data shows that inflation is still accelerating. Moreover, while real yields have turned positive, they have done little to cool a U.S. economy that’s flooded with too much stimulus. As a result, with a hawkish Fed poised to push the U.S. 10-Year real yield even higher over the medium term, the PMs should suffer mightily as the drama unfolds.

    In conclusion, the PMs rallied on May 3, as sentiment doesn’t die easily. However, while the technical backdrop could support a short-term rally, the PMs’ medium-term technicals and fundamentals are profoundly bearish. Therefore, investors’ optimism should turn to pessimism over the next few months.

    Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim targets for gold and mining stocks that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

    Sincerely,
    Przemyslaw Radomski, CFA
    Founder, Editor-in-chief

  • Precious Metals: We’re Almost There, Let’s Adjust Targets

    May 3, 2022, 2:24 AM

    Available to premium subscribers only.

    Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim targets for gold and mining stocks that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

    Sincerely,
    Przemyslaw Radomski, CFA
    Founder, Editor-in-chief

  • Gold’s Pause is Over

    May 2, 2022, 3:17 AM

    Available to premium subscribers only.

    Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim targets for gold and mining stocks that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

    Sincerely,
    Przemyslaw Radomski, CFA
    Founder, Editor-in-chief

  • What Will the Fed Choose: Recession or an Economic Crisis?

    April 29, 2022, 6:33 AM

    This week was all about earnings, as some of Wall Street’s heavyweights released their quarterly reports. Moreover, while mixed results caused sentiment to swing from one extreme to the other, inflation remains front and center, and the outlook for Fed policy is bullish.

    For example, whether it’s PepsiCo, Mondelez, or Whirlpool, companies have warned that inflation remains extremely problematic. Moreover, with American Express and Visa highlighting consumers’ eagerness to spend, the pricing pressures show no signs of slowing down. Likewise, S&P Global released its U.S. Composite PMI on Apr. 22, and I wrote on Apr. 25 that it was another all-time high for inflation. 

    Isolating services:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: S&P Global

    Isolating manufacturing:

    Obraz zawierający tekstOpis wygenerowany automatycznie Source: S&P Global

    With growth, employment and inflation supporting several rate hikes over the next several months, there is little in the release that implies a dovish U-turn. To that point, please remember that the survey was conducted from Apr. 11 to Apr. 21. Therefore, while investors hope that decelerating growth and inflation will allow the Fed to back off, the PMI data suggests otherwise. As such, the Fed’s conundrum continues to intensify.

    Furthermore, with more appetizing earnings reports released on Apr. 28, the results were even more bullish for Fed policy. Likewise, with the PMs’ force fields wearing off, they should suffer profoundly as rate hike volatility increases. For example, McDonald’s released its first-quarter earnings on Apr. 28. CFO Kevin Ozan said during the Q1 earnings call:

    “In the U.S., I think last quarter, I mentioned that we thought commodities were going to be up roughly 8% or so for the U.S. That number is now more like 12% to 14% for the year. So U.S. commodities clearly have risen (…).”

    “On the labor side, in the U.S., it's probably over 10% right now. Part of that is because you'll recall that we made adjustments to our wages in our company-owned restaurants mid-year last year, so we haven't lapped that. So part of it is due to that and part of it is due to just continued wage inflation.”

    As a result, the Fed is losing control of the inflation situation, and the largest restaurant chain in the world is still sounding the alarm. Therefore, with the pricing pressures unwilling to abate on their own (which I’ve warned about for some time), killing demand is the only way to reduce the wage-price spiral.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: McDonald’s/Seeking Alpha

    On top of that, Caterpillar released its first-quarter earnings on Apr. 28. For context, the company is the world's largest construction equipment manufacturer. CFO Andrew Bonfield said during the Q1 earnings call:

    “We remain encouraged by the strong demand for our products and services. The first quarter of 2022 marked the fifth consecutive quarter of higher end user demand compared to the prior year. Services remained strong in the quarter. We continue to make progress on our service initiatives, including customer value agreements, e-commerce, connected assets and prioritized service events.”

    CEO Jim Umpleby added:

    “Absent the supply chain constraints, our top line would have been even stronger. When the supply chain conditions ease, we expect to be well positioned to fully meet demand and gain operating leverage from higher volumes.”

    Thus, with each new earnings season, companies note that demand remains resilient. As a result, why not raise prices and capitalize on too much stimulus?

    Obraz zawierający tekstOpis wygenerowany automatycznie Source: Caterpillar/Seeking Alpha

    As expected, the “transitory” camp waved the white flag in 2022. However, the merry-go-round of input/output inflation was visible from a mile away. For example, remember what I wrote on Mar. 30, 2021?

    Didn’t Powell insist that near-term inflation was only “one-time” and “transient”? Well, despite government-issued CPI data failing to capture the effect of the Fed’s liquidity circus, pricing pressures are popping up everywhere. And with corporations’ decision tree left to raising prices or accepting lower margins, which one do you think they’ll choose?

    Continuing the theme, Domino's Pizza reported its first-quarter earnings on Apr. 28. For context, the company is the largest pizza chain in the U.S. Moreover, when contrasting the quarterly results of Microsoft and Alphabet on Apr. 28, I wrote that investors fail to realize that some companies have succumbed to the medium-term realities sooner than others. Therefore, Domino's Pizza is another example. CEO Ritch Allison said during the Q1 earnings call:

    “Consistent with our communications during our prior earnings call, we faced significant inflationary cost increases across the business in Q1. Those cost pressures combined with the deleveraging from the decline in U.S. same-store sales resulted in earnings falling short of our high expectations for the business (…).”

    “We believe that we will continue to face pressure both on the top line for our U.S. business and on our bottom line earnings over the next few quarters. While we remain very optimistic about our ability to drive long-term profitable growth in the near-term 2022 is shaping up to be a challenging year.”

    CFO Sandeep Reddy added:

    “In addition, we would like to update the guidance we provided in March for 2022. Based on the continuously evolving inflationary environment, we now expect the increase in the store food basket within our U.S. system to range from 10% to 12% as compared to 2021 levels.”

    If that wasn’t enough, with unprecedented handouts reducing U.S. citizens’ incentive to work, staffing shortages materially impacted Domino’s Q1 results. Moreover, the development is extremely inflationary and only increases the chances of future interest rate hikes.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Domino’s Pizza/Seeking Alpha

    Therefore, while I've warned on numerous occasions that the Fed is in a lose-lose situation, investors still hold out hope for a dovish pivot. However, they fail to understand the consequences. For example, a dovish 180 is extremely unlikely in this environment; but even if officials completely reversed course, the long-term economic damage would be even more paramount.

    When companies are saddled with input pressures, even value-oriented chains like Domino's Pizza can only endure margin erosion for so long. Thus, with management searching for new ways to appease investors, Fed officials' patience will only cause an even bigger long-term collapse once inflationary demand destruction unfolds.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznie Source: Domino’s Pizza/Seeking Alpha

    Turning to the macroeconomic front, some interesting data also hit the wire on Apr. 28. For example, the Kansas City Fed released its Tenth District Manufacturing Survey. The headline index declined from 37 in March to 25 in April. Chad Wilkerson, Vice President and Economist at the KC Fed, said:

    “The pace of regional factory growth eased somewhat but remained strong. Firms continued to report issues with higher input prices, increased supply chain disruptions, and labor shortages. However, firms were optimistic about future activity and reported little impact from higher interest rates.”

    To that point, both the prices paid and received indexes increased month-over-month (MoM).

    Please see below:

    Obraz zawierający stółOpis wygenerowany automatycznieSource: KC Fed

    Finally, the major surprise on Apr. 28 was that U.S. real GDP contracted by 1.4% (advance estimate) in Q1. The report stated: “The decrease in real GDP reflected decreases in private inventory investment, exports, federal government spending, and state and local government spending, while imports, which are a subtraction in the calculation of GDP, increased.”

    However: “Personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment increased.”

    Therefore, with supply chain disruptions leading to import stockpiling (which hurts GDP), net trade was the weak link. However, the dynamic should reverse in Q2 and Q3, and if so, shouldn’t impact the Fed’s rate hike cycle.

    The bottom line? The Fed is stuck between a rock and a hard place: deal with inflation now and (likely) push the U.S. into a recession later or ignore inflation and watch an even bigger crisis unfold down the road. As such, the first option is the most likely outcome. Remember, while Fed officials may seem out of touch, they’re not stupid, and history shows the devastating consequences of letting unabated inflation fester. Therefore, interest rate hikes should dominate the headlines over the next several months, and the PMs and the S&P 500 should suffer mightily along the way.

    In conclusion, the PMs were mixed on Apr. 28, as silver was the daily underperformer. Moreover, while mining stocks were boosted by the S&P 500, the ‘buy the dip’ crowd is fighting a losing battle. With Amazon and Apple down after the bell on Apr. 28, weak earnings guidance should also dominate the headlines in the months to come. As a result, with the USD Index on fire and real yields poised to continue their ascent, the PMs’ medium-term outlooks are extremely treacherous.

    What to Watch for Next Week

    With more U.S. economic data releases next week, the most important are as follows:

    • May 2: ISM Manufacturing PMI

    Like this week’s S&P Global Report, ISM’s report is one of the most important data points because it covers growth, inflation, and employment across the entire U.S. Therefore, the results are more relevant than regional surveys.

    • May 3: JOLTS job openings

    Since the lagged data covers March’s figures, it’s less relevant than leading data like the PMIs. However, it’s still important to monitor how government-tallied results are shaping up.

    • May 4: ADP private payrolls, ISM Services PMI, FOMC statement and press conference

    With the FOMC poised to hike interest rates by 50 basis points on May 4, the results and Powell’s comments are the most important fundamental developments of the week. However, ADP’s private payrolls will also provide insight into the health of the U.S. labor market, while the ISM’s Services PMI will have similar implications as the manufacturing PMI. Moreover, both will provide clues about future Fed policy.

    • May 5: Challenger jobs cuts

    With the data showcasing how many employees were fired in April, it’s another indicator of the health of the U.S. labor market.

    • May 6: Nonfarm payrolls, unemployment rate, average hourly earnings

    Half of the Fed’s dual mandate is maximum employment, so continued strength in nonfarm payrolls is bullish for Fed policy. In addition, a low unemployment rate is also helpful, while average hourly earnings will showcase the current state of wage inflation.

    All in all, economic data releases impact the PMs because they impact monetary policy. Moreover, if we continue to see higher employment and inflation, the Fed should keep its foot on the hawkish accelerator. If that occurs, the outcome is profoundly bearish for the PMs.

    Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim targets for gold and mining stocks that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

    Sincerely,
    Przemyslaw Radomski, CFA
    Founder, Editor-in-chief

  • Are Gold Miners in a Stalemate on the Market Chessboard?

    April 28, 2022, 8:20 AM

    With the GDXJ ETF suffering a mild drawdown on Apr. 27, the recent rout has calmed for the time being. However, with the medium-term fundamental outlook remaining profoundly bearish, the junior miners and the S&P 500 are fighting a losing battle.

    To explain, the Fed needs to lower asset prices to help calm inflation. Moreover, with the earnings season delivering some hit-and-miss results, market participants are dumping the losers and holding on to the winners for dear life. However, while investors rotate from one scarred corner of the stock market to another, the hiding places are shrinking. Therefore, when the walls close in, the only place left to go is down.

    For example, Microsoft hit, Alphabet missed, and RBC Capital Markets analysts said that Microsoft’s “solid” fourth-quarter guidance “should allay investor fears of a macro slowdown.” As a result, the bull is alive and well.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Barrons

    Missing the forest through the trees, investors fail to realize that some companies have succumbed to the medium-term realities sooner than others. For context, I’ve been bullish on the U.S. economy for some time, and I still am RIGHT NOW. However, with each Fed rate hike and each passing quarter, that will change materially, and so should investors’ optimism.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Google Finance

    When You Gain, the Fed Inflicts Pain

    To explain, the figures above represent Google Finance’s tally of how much Microsoft outperformed analysts’ earnings per share (EPS) estimates over the last four quarters. Notice the trend? After beating estimates by 12.71% in Q4 2021, Microsoft’s EPS outperformance declined sequentially to a slight 0.98% in Q3 2022. Moreover, its revenue outperformance showcased a similar pattern.

    Furthermore, the decelerating trend is also present with Alphabet, only ahead of schedule. As a result, with the Fed poised to slow the U.S. economy to calm inflation, it’s only a matter of time before the stock market’s winners (Microsoft) turn into losers (Alphabet).

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Google Finance

    Speaking of winners, Visa reported its second-quarter earnings on Apr. 26. CEO Al Kelly said during the Q2 earnings call:

    “After the short four to five-week impact of Omicron in December and January in the United States and many other parts of the world, the recovery continues to be robust…. In the U.S., payments volume index to 2019 was 144 in the quarter. Volume growth relative to three years ago has been stable and strong now for four quarters in a row.”

    “When looking at specific spend categories for credit cards, we saw greater than a 10-percentage point improvement in the three-year index from Q1 to Q2 in travel, retail goods, food and drug, restaurant, QSR and fuel.”

    As a result, while investors hope that a slowing U.S. economy will allow a dovish 180 by the Fed, Visa hasn’t seen any demand description.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Visa/The Motley Fool

    Furthermore, with consumers eager to spend, companies are eager to raise prices. For example, Mondelez released its first-quarter earnings on Apr. 26. The company is home to confectionary brands like Oreo, Cadbury, Ritz and Toblerone. CFO Luca Zaramella said during the Q1 earnings call:

    “We now expect input cost inflation in the low double-digit range for 2022 versus our prior view of approximately 8%, despite our coverage is approaching 90% for the year. The revise view of inflation reflects the war in the Ukraine and the related step-up in cost pressure to our commodity basket, including energy, wheat, oil and packaging.”

    He added:

    “We continue to expect pricing to be a larger driver of top line growth, given its impact in Q1 and we are also announcing price increases across a number of markets for the rest of the year tied to inflation.”

    As a result, the Fed can’t wish its problems away, and these hawkish realities should spook investors over the next few months.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: Mondelez/Seeking Alpha

    Singing a similar tune, PepsiCo released its first-quarter earnings on Apr. 26. CFO Hugh Johnston said during the Q1 earnings call:

    “Inflation has clearly gotten a bit more challenging for the year. No question about that. We had previously indicated it was low teens. It’s several points higher than that now (…).”

    “We think the consumer is very early in this process of adjusting to the new inflationary environment. I think there’s going to be new behaviors adapting to the new realities.”

    As such, while Johnston didn’t mention any specifics on pricing, “new realities” are not what the Fed had in mind. Moreover, CEO Ramon Laguarta raised PepsiCo’s full-year guidance and added that elasticities are still outperforming. Therefore, with inflation “several points higher” than previously expected, would you bet that PepsiCo isn’t riding the inflationary merry-go-round?

    For context, positive elasticities mean that when PepsiCo increases prices, it’s not seeing a drop-off in demand.

    Please see below:

    Obraz zawierający tekstOpis wygenerowany automatycznieSource: PepsiCo/Alpha Street

    Thus, while the U.S. economy remains on solid footing RIGHT NOW, the reality is that all of this data is bullish for Fed policy. With companies still raising prices and receiving little pushback from consumers, we're nowhere near the demand destruction needed to reduce annualized inflation from 8.6% to 2%. As such, the Fed will have to do the heavy lifting. 

    Moreover, while investors breathe a sigh of relief that corporate profits haven't collapsed, the optimism is short-sighted. Of course, a recession isn't upon us; the Fed has only hiked interest rates once. The damage occurs after the fourth, fifth, sixth, etc., rate hike, as higher interest rates eat away at consumers' disposable income and depress corporate profits. Therefore, the current environment is full of clear skies. However, if you want to get 8.6% annualized inflation down, everything else likely goes down with it.   

    Also noteworthy, the Richmond Fed released its Fifth District Survey of Manufacturing Activity on Apr. 26. The data was largely bullish for Fed policy. The report revealed:

    “Our wage index increased to 41 in April from 37, and firms don’t expect the increase in wages to let up. The average growth rate of prices paid increased slightly in April while the growth rate of prices received from customers edged down slightly. Firms expect growth rates for both prices paid and prices received to decrease somewhat in the next 12 months.”

    Please see below:

    Source: Richmond Fed

    Likewise, with employment also moving higher, continued strength in the U.S. labor market is also bullish for Fed policy.

    Source: Richmond Fed

    In addition, the Dallas Fed released its Texas Manufacturing Outlook Survey on Apr. 25. Showcasing similar results, the data is also supportive of Fed policy. An excerpt from the report read:

    “Prices and wages continued to increase strongly in April, though the indexes eased off their historical highs. The raw materials prices index fell 13 points to 61.5, its lowest reading in more than a year, though still well above its average of 27.7. The finished goods prices index moved down from 47.8 to 43.5. The wages and benefits index came in at 50.9, down slightly from its high last month of 55.2 but still markedly elevated from its average reading of 20.1.”

    Finally, the Dallas Fed released its Texas Service Sector Outlook Survey on Apr. 26. Similar to the other reports above, inflation increased, though at a slower pace in April. The report stated:

    “April saw continued upward pressure on wages and prices, though growth in wages and input prices eased slightly. The wages and benefits index fell from 36.5 to 33.0, still near a record high. The selling prices index was unchanged at 33.7, with 37 percent of respondents noting monthly price increases, while the input prices index declined five points to 54.2.”

    The bottom line? While investors are supposed to be forward-looking, they fail to realize that current earnings and guidance don’t reflect the impact of future rate hikes. Moreover, with the Fed on a mission to curb inflation, quarterly price increases and robust elasticities are not helping the situation. As a result, once this reality hits home, the PMs will suffer mightily as the negativity cascades across Wall Street.

    In conclusion, the PMs declined on Apr. 27, as commodities have lost some of their mojo. Moreover, while technical conditions may present an opportunity for a short-term rally, both technicals and fundamentals signal lower lows over a medium-term time horizon. As such, long-term buying opportunities will likely present themselves later in 2022.

    Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim targets for gold and mining stocks that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

    Sincerely,
    Przemyslaw Radomski, CFA
    Founder, Editor-in-chief

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