Gold, silver see good price gains as Powell seen leaning easy

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Kitco NEWS 14 July, 2021 - 08:10am 9 views

When is Powell testimony?

Powell will testify to the House Financial Services Committee at noon on Wednesday and on Thursday, he will appear before the Senate Banking Committee at 9:30 a.m. Eastern. MarketWatchPowell will stress patience in Capitol Hill testimony this week

(Kitco News) - Gold and silver prices are firmly higher and near daily highs in early U.S. trading Wednesday. The market place focus is on Federal Reserve Chairman Jerome Powell’s testimony to a House of Representatives committee today on U.S. monetary policy and the economy. In his prepared text for his speech that was released about 30 minutes ago (as of this writing), Powell did lean a bit dovish on U.S. monetary policy by saying the Fed is still a ways off on tapering its bond-buying program (quantitative easing). Traders and investors will be closely parsing Powell’s remarks to Congress, especially any comments on inflationary pressures after the U.S. consumer price index on Tuesday was reported at up 5.4% in June, year-on-year, which is the hottest in 13 years. August gold futures were last up $18.80 at $1,828.50 and September Comex silver was last up $0.335 at $26.48 an ounce.

Speaking of inflation, the U.S. producer price index for June that was just released came out at up 1.0% from May, beating the forecast of up 0.6%. The hotter number in today’s PPI report was not surprising to many and had little impact on market prices.

Global stock markets were mostly weaker overnight. The U.S. stock indexes are pointed toward firmer openings when the New York day session begins. The global markets are starting to pay more attention to the new Covid-19 variant that is spreading in some parts of the world, including the U.S., and is beginning to threaten some regional economies.

The key outside markets today see the U.S. dollar index lower on the dovish Powell text, while Nymex crude oil prices are modestly up and trading around $75.50 a barrel. OPEC and the United Arab Emirates have reportedly agreed on a solution to their dispute and the oil market is apparently reading it as neutral or a bit friendly. The 10-year U.S. Treasury note yield is presently fetching 1.35%.

U.S. economic data due for release Wednesday includes the weekly MBA mortgage application survey, the producer price index, the weekly DOE liquid energy stocks report and the Federal Reserve’s beige book.

Technically, gold futures bulls have the slight overall near-term technical advantage. Bulls’ next upside price objective is to produce a close above solid resistance at $1,850.00. Bears' next near-term downside price objective is pushing futures prices below solid technical support at the June low of $1,750.10. First resistance is seen at $1,840.00 and then at $1,850.00. First support is seen at the overnight low of $1,804.90 and then at $1,800.00. Wyckoff's Market Rating: 5.5

The silver bulls and bears are on a level overall near-term technical playing field. Silver bulls' next upside price objective is closing September futures prices above solid technical resistance at $28.00 an ounce. The next downside price objective for the bears is closing prices below solid support at the June low of $25.58. First resistance is seen at today’s high of $26.52 and then at $26.75. Next support is seen at $26.00 and then at last week’s low of $25.82. Wyckoff's Market Rating: 5.0.

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This surge in inflation will soon be history -- because companies will sacrifice profit for market share

MarketWatch 15 July, 2021 - 05:38am

What will determine the path of consumer-price inflation from this point on is how companies answer a key question: What is more important, protecting profit margins or protecting market share? 

There is no doubt that input costs have soared. Paying higher wages to attract new workers and retain current employees does raise operating expenses. So does spending more on key commodities. The temptation therefore to pass those higher costs on to customers is strong. 

But it is also a calculated risk. There is always the fear that longtime clients will walk away and instead do business with a competitor who suddenly sees an opportunity to stand out from the pack by dropping prices. And if there is one painful lesson companies of all sizes have learned it is that once you lose market share, it is hellishly difficult and expensive to get it back.

What June’s 0.9% jump in the consumer price index tells us is that most businesses found their operating expenses increased way too much and way too quickly to simply be absorbed. They had to make up for those shrinking margins by charging consumers more. 

Again, it’s a calculated risk and probably a safe one…for now! After all, households are flush with cash and eager to spend, and that means Americans are less likely to be price sensitive at this time. We haven’t seen such pricing power in decades. Inflation has risen by 5.4% over the past 12 months, the fastest gain since the summer of 2008, with core CPI up a sharp 4.5%, the most since 1991.

 So long as pricing power doesn’t threaten market share, inflation will continue to creep higher. But history has shown this cannot last long. Price competition will re-emerge in the second half of the year and more vigorously in 2022 and that should soften inflation pressures. Here’s why.

First, as Washington transitions from fiscal stimulus to fiscal restraint, we expect to see household consumption ease accordingly. 

Second, the enormous buildup in pent-up demand by consumers over the past year provided the economy with much forward momentum. But as demand is being satisfied, this spending drive will lose momentum.

Third, there is little doubt the Federal Reserve is gearing up to scale back purchases of mortgage-backed securities and Treasuries. Whether it begins to taper quantitative easing at the end of this year or early next, once they do, the cost of borrowing will increase. That will slow both home sales and capital investments.

Fourth, the supply-chain bottlenecks of the first half have begun to ease. Cargo ships are being unloaded at a faster pace, especially on the West Coast. This improvement in logistics sets the stage for the price of commodities and finished goods to drift lower.

Finally, and I say this will some reluctance, as much as we wish to declare victory over the COVID-19 virus, it would be premature to do so. The appearance of new variants (Delta, Delta plus and now Lambda) in the U.S., combined with the challenge of getting 70% to 80% of the U.S. population fully vaccinated (the figure is only 48% as of today, according to the CDC) raises the specter of another wave of infections in the fall and winter. That, too, could also take some wind out of the economy. 

Our assessment is we are near the peak in the inflation cycle and most voting members on the Federal Open Market Committee share this general sentiment. The forces that drive price competition and bring down retail prices are bound to emerge as consumers seek out more deals and as firms refocus on locking in, if not expanding, their market share.

The cost of living leaped in June by the largest amount since 2008 as inflation spread more broadly through the U.S. economy, raising fresh questions about whether the spike in prices will subside as quickly as the Federal Reserve predicts.

Powell says the Fed is still a ways off from altering policy, expects inflation to moderate

CNBC 15 July, 2021 - 05:38am

Federal Reserve Chairman Jerome Powell said Wednesday that the economy needs to improve more before the central bank will change its ultra-easy monetary policy.

In remarks prepared for the House Financial Services Committee, the central bank chief noted improvements but said the labor market in particular is still well below where it was before the Covid-19 pandemic hit.

Powell noted that the Fed's benchmark of "substantial further progress" toward full employment and stable prices remains "a ways off." He did remark that Fed officials at least are talking about reducing the pace of asset purchases.

On inflation, Powell said it "has increased notably and will likely remain elevated in coming months before moderating."

But he stuck to his oft-stated belief that the current surge is temporary and will be offset as conditions return to normal. He stressed that much of the current price pressure comes from a few industries such as used cars that are sensitive to temporary conditions. Multiple members of the House committee pressed him on the current inflation trends.

"It's all kind of the same story. It's a shortage of semiconductors. There's also very high demand for various reasons," Powell said in response to a question from Rep. Madeleine Dean, R-Pa. "It's just a perfect storm of high demand and low supply and it should pass. Unless we think there's gonna be a multi-year, many-year shortage of used cars in the United States, we should look at this as temporary. We very much think that it is."

Pushed during the hearing to explain what "substantial further progress" will mean, Powell said that in regards to employment "it's a very difficult thing to be precise about."

"It really is a very broad range of things," he added. He said the Fed "will provide lots of notice" before it considers tightening policy.

Markets have been watching Fed communication for indications about when the central bank will begin tapering its minimum $120 billion a month in bond purchases as it keeps interest rates anchored near zero.

Powell noted that the two policy measures "along with our strong guidance on interest rates and on our balance sheet, will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete."

The chair's comments came as part of his mandated semiannual testimony to Congress on the state of monetary policy and the economy.

As he has in the past, Powell noted that the pandemic-related hit to the economy is falling on those least able to shoulder it.

"Conditions in the labor market have continued to improve, but there is still a long way to go," he said. "Job gains should be strong in coming months as public health conditions continue to improve and as some of the other pandemic-related factors currently weighing them down diminish."

While the unemployment rate has dropped to 5.9% from its pandemic high of 14.8%, the Fed is focused on an inclusive employment mandate across racial, gender and income groups.

"Despite substantial improvements for all racial and ethnic groups, the hardest-hit groups still have the most ground left to regain," Powell said.

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