1. Market volatility escalated this week as inflation in the U.S. surged to 40-year highs. The war in Ukraine continues to rage on with Russia making further gains in its quest to seize the Donbas region in Eastern Ukraine. Stocks began selling off around mid-week and the plunge accelerated on Friday after the release of the U.S. Consumer Price Index and the latest University of Michigan Consumer Sentiment survey results.
2. For the week ending June 4, the seasonally adjusted number of Americans filing initial claims for unemployment surged by 27,000 from the previous week’s revised level to reach a new level of 229,000. The previous week’s level was revised higher by 2,000 claims. The 4-week moving average of claims was 215,000, an increase of 8,000 from the previous week’s revised moving average. The previous week’s moving average was revised higher by 500 claims.
3. The Consumer Price Index report (CPI) for May was released on Friday and the data showed a much faster-than-expected surge in prices. Economists surveyed by Dow Jones had expected the report to show core inflation cooling slightly and for the CPI to remain steady at 8.3%. The official data showed the CPI rising at 8.6% in May from one year ago and core inflation, which excludes highly volatile food and energy prices, jumped 6%. The 8.6% jump for the CPI is the highest increase since 1981. Food, gas, and energy prices were all higher, with fuel oil alone up over 106% from one year ago. Shelter costs, which make up roughly one-third of the CPI rose at their fastest 12-month pace in over 30 years. The continued surge in inflation adds further pressure on workers. Real wages declined 0.6% from April and were down 3% on a 12-month basis. The accelerating decline in real wages means that even though workers might be seeing an increase in pay, their new paycheck is still not keeping up with the increasing cost of living.
4. Also released this week was the initial reading on consumer sentiment for June according to the University of Michigan Survey of Consumers. The initial survey showed consumer sentiment declining by 14% from May, reaching a 50.2, its lowest ever recorded value. The plunge represents a 41.3% decline year over year and according to Joanne Hsu, the survey’s director, “All components of the sentiment index fell this month, with the steepest decline in the year-ahead outlook in business conditions, down 24% from May.” Hsu continued, saying “Consumers’ assessments of their personal financial situation worsened about 20%. Forty-six percent of consumers attributed their negative views to inflation, up from 38% in May; this share has only been exceeded once since 1981, during the Great Recession.”
5. Mortgage demand in the U.S. fell to its lowest level in 22 years, declining by 6.5% last week, compared to the previous week. Rates saw a brief dip in May, in spite of expectations for the Fed to continue raising interest rates but appear to be back on the rise ahead of the upcoming Fed meeting next week. The average interest rate for a 30-year fixed mortgage for loans of $647,200 or less ticked up to 5.40%. Refinance demand dropped another 6% for the week, which reflects a demand that is 75% lower than the same week one year ago.
6. The Russia-Ukraine war continues with no apparent end in sight. Ukraine’s President Volodymyr Zelenskyy said that Ukraine’s troops continue to hold out in the Donbas region, which Russia is currently trying to seize control of, but Russia continues to make incremental gains in the region despite fierce resistance. The U.K.’s Ministry of Defense warned this week that Russia is struggling with providing even basic services to the territories that it has occupied in Ukraine and that the port of Mariupol, which was virtually destroyed by Russia’s onslaught, is in very real danger of undergoing a major outbreak of cholera. Russia continues to blockade Ukraine’s ports and it is widely expected that their refusal to allow the grain to leave the country will eventually trigger a global food shortage.
7. The Reserve Bank of Australia announced a 50 basis-point increase on Tuesday, which was larger than the expected 25 basis-point moves. Paul Bloxham, chief economist for Australia, New Zealand, and global commodities at HSBC told CNBC’s Capital Connection on Tuesday that “The market expectation and ours as well as that they wouldn’t go as hard as this. Obviously… the RBA is feeling pinched, they’re feeling that the global inflation pressures are there, that it’s arrived in Australia too and they’re watching their colleagues offshore, and [the] fast-moving pace of what other central banks are doing probably played a role as well.”
8. Russia, in addition to its ongoing invasion of Ukraine, has been making moves in the Arctic that are elevating levels of concern among NATO members. Late in May, Nikolai Korchunov, a Russian Ambassador told state media that there was “a very disturbing trend that is turning the Arctic into an international arena of military operations” and hinted that NATO was expanding its influence in the Arctic. While NATO did hold an operation, called Exercise Cold Response, in Norway this past March, it has no plans to establish any new permanent forces or military bases in the Arctic. Russia, however, has spent the last decade reopening old Soviet bases in the mineral-rich Arctic region, possibly as many as 50 according to some counts, and has established a new “Arctic command” and increased its mock military attacks on Nordic countries, even jamming GPS and radar signals during NATO exercises. Russia has also recently increased its testing of hypersonic weapons in the region. An unnamed U.S. State Department official told Yahoo News “We’ve seen increased Russian military activity in the Arctic for some time.” The official noted that Russia apparently has plans to carry out at least 19 more tests in the region, including some new weapons. The official added “Seeing Russia’s aggressive and unpredictable behavior, particularly since the Ukraine invasion, has really heightened concerns about Russian activity.”
9. The Organization for Economic Cooperation and Development cut its predictions for global growth this year but noted that it did not foresee a prolonged period of “stagflation”. The OECD now estimates that global GDP will only hit 3% in 2022, a downgrade of 1.5 percentage points from a previous projection made in December. The organization, based in Paris, said “The invasion of Ukraine, along with shutdowns in major cities and ports in China due to the zero-COVID policy, has generated a new set of adverse shocks.” The OECD’s projections came on the heels of similarly negative outlooks made by the World Bank, which said on Tuesday that it expected global GDP to only reach 2.9% this year versus its previous outlook of 4.1% in January.
10. Oil prices sank on Friday along with Wall Street stocks following the announcement that U.S consumer prices surged more than expected in May. The increase, largely driven by record-high gasoline and food prices, has analysts worried that consumers may soon begin cutting unnecessary travel from their budgets, triggering a decrease in demand for oil and its derivatives. Shanghai and Beijing also both went back on Covid alert Thursday, with new lockdowns going into effect. Earlier in the week, oil prices had risen on fears that there could be supply disruptions in Europe and Africa. Brent crude settled at $121.90 per barrel while West Texas Intermediate settled at $120.70 per barrel.
11. The euro moved mostly sideways against the U.S. dollar for much of the week, trading in a very narrow range. The euro bounced briefly higher to touch its highs late on Thursday but then dropped near vertically into negative territory immediately after. The euro paused briefly and attempted a recovery overnight, but the drop resumed and even steepened late Friday morning. The euro will finish out the week at its lows against the U.S. dollar.
12. The Japanese yen moved sideways against the U.S. dollar to start off the trading week, but quickly began a downward move as Monday got underway. The yen accelerated to the downside through Tuesday, paused to briefly move sideways through the overnight session on Tuesday, and then resumed its downward move, touching what appeared to be its lows for the week late Wednesday afternoon. The yen attempted to reverse its course but could not manage to maintain any momentum and after two brief attempts to return higher, dipped a final time just before market close to finishing the week out against the U.S. dollar at its low.
Surging inflation, geopolitical uncertainty, and ongoing and worsening supply chain issues remain the primary concern for markets in the near term. The worse-than-expected U.S. Consumer Price Index (CPI) report this week that revealed inflation in the U.S. had hit a 40-year high triggered a selloff in stocks. Friday saw the Dow Jones Industrial Average tumble over 800 points to log its 10th losing week out of the last 11 weeks, something that has not happened since the Great Depression. Consumer sentiment in the U.S. plunged in May and early June, hitting historic lows as inflation continued to take more and more out of the U.S. consumer’s paycheck. The University of Michigan’s Index of Consumer Sentiment, a widely followed gauge of consumer optimism, fell to 50.72 according to data released on Friday. This is the lowest reading on consumer sentiment in survey data that dates back to 1978. Many analysts have begun to openly speculate that the U.S. may already be in the midst of a recession. Peter Boockvar, chief investment officer at Bleakley Advisory Group said “I wouldn’t be surprised if it [a recession] started in the third quarter of this year. You can say that we’re in the midst of it right now, in the beginning phase. Only in retrospect will we know for sure, but it should not surprise us at this point.” Consumer spending, which makes up the largest part of the U.S.’ gross domestic product, has so far remained resilient, staving off back-to-back quarters of contracting GDP that would be the “official” indication of a recession, but as prices continue to climb, the savings rate in the U.S. has begun sharply coming down. The plummeting savings rate could lead consumers to be more cautious with parting with their remaining cash. The savings rate in the U.S. has dropped back to its 2008 levels, last seen just one month before the Lehman Brothers bankruptcy tipped the world into a massive financial crisis.
Russia’s continued invasion of Ukraine has some experts concerned that the Kremlin may effectively be weaponizing food. Russia has blockaded Ukrainian ports, preventing grain from leaving the country and making its way into the global food supply chain. Ukraine, Russia, and Belarus account for a large portion of the world’s grain supply, and with Ukrainian goods not flowing, Russia under sanctions that have crippled its own exports, and Belarus seemingly siding with Russia in the conflict, grain, and many other agricultural products are in very short supply. One Spanish celebrity chef and restaurateur, José Andrés, who has been working to try to keep Ukrainians fed, said “I’ve seen how Russia in a way, very directly, is using this war to put extra pressure around the world by creating famines in places that we should not have.”
As geopolitical and economic turmoil continues to escalate around the world, market uncertainty and therefore market volatility can be expected to continue. Portfolio diversification is key in such an environment, according to many financial analysts, in order to offer at least some protection against corrections that might occur across multiple market sectors. Real estate has begun to show signs of weakening as interest rates rise. Bitcoin and other cryptocurrencies have recently seen massive volatility, with some supposedly “stable” coins bankrupting some investors overnight. In the face of such events, many analysts have returned to recommending that investors consider holding a percentage of precious metals in their portfolios as a means of diversification. Buying opportunities in the form of temporary price dips have allowed many investors to add additional physical precious metals to their portfolios at a relative discount compared to other asset classes. Many still consider physical precious metals, particularly gold, as a hedge against inflation, and physical precious metals have long been viewed as a safer store of value during times of economic and geopolitical turmoil. Always remember, however, that the key to profitability through the ownership of physical precious metals is to acquire the physical product and hold it for the long term and you should never overextend your ability to maintain ownership of your precious metals over the long run.
Trading Department – Precious Metals International, Ltd.
Friday to Friday Close (New York Closing Prices)
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Previous year Comparison
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