Inflation fears are boosting gold and the US dollar

Prices are going up but so is the US dollar

By Julia Horowitz, CNN Business

    (CNN) -- The stock market is booming, and despite uncertainty about the economy, Wall Street is confident it can keep pressing ahead. But as inflation surges, there's also an undercurrent of anxiety about what the future holds.

Want evidence? Just look at the recent rise in gold and the US dollar.

What's happening: Gold prices are back above $1,870 per troy ounce, their highest level in five months. The US dollar, meanwhile, is the strongest it's been since July 2020.

"Inflation upside catalysts are clearly materializing and look unlikely to fade in the near-term," commodities strategists at JPMorgan said in a note to clients on Monday.

The trigger for the recent move up in gold and the dollar is data last week that showed US consumer prices are rising at the fastest rate in three decades. Companies like Tyson Foods have indicated that they don't expect inflation to ease up any time soon, and they will likely continue to hike prices.

"We expect to take continued pricing actions to ensure that any inflationary cost increases that our business incurs are passed along," Tyson's Chief Financial Officer Stewart Glendinning told analysts on Monday.

Breaking it down: Gold is a favorite hedge for investors looking to guard against the long-term effects of inflation. It's a tangible asset with limited supply, making it less vulnerable to erosion in the value of money caused by rising prices.

The inflation outlook is also pushing money managers toward the US dollar. Bets are growing that the Federal Reserve could need to hike interest rates next year to keep a lid on prices. That could boost returns on assets like US government bonds — which investors would need more dollars to scoop up.

What else? Nicholas Colas of DataTrek Research pointed out in a research note Tuesday that the rally in the US dollar is also "a signal that markets are more confident in future US economic growth relative to other economies."

Coronavirus cases are skyrocketing again in Europe, forcing countries including Germany to consider implementing new restrictions.

Step back: Wall Street has been rattled by surging inflation but isn't running scared. Just take a look at the CNN Business Fear & Greed Index, our main gauge of market sentiment. It remains firmly in "extreme greed" territory.

A majority of respondents in Bank of America's survey of global fund managers published Tuesday acknowledged inflation is a risk. But just 35% think it's a permanent phenomenon, while 61% believe it's transitory. Cash levels are slightly down, indicating growing bullishness.

Still, the jump in inflation hedges indicates a degree of cautiousness at a moment with plenty of unknowns.

Business groups want US tariffs on China gone

Business leaders are putting pressure on the Biden administration to consider removing tariffs on China to help ease surging inflation.

But high-stakes talks between President Joe Biden and Chinese President Xi Jinping on Monday produced no breakthroughs on trade — dashing the hopes of affected companies looking for relief.

The latest: Genial greetings turned more serious as Biden raised concerns about human rights, Chinese aggression toward Taiwan and trade issues. Throughout, the leaders engaged in a "healthy debate," according to a senior administration official present for the discussions.

The meeting may have lowered tensions between the world's two largest economies. As expected, however, no major policy outcomes were announced.

In a letter to the Biden administration sent before the summit, trade groups including the powerful US Chamber of Commerce and Business Roundtable warned that tariffs on China are hurting US companies and families by raising costs. They urged the government to reconsider.

Treasury Secretary Janet Yellen said on CBS' "Face the Nation" Sunday that such a move is "under consideration."

But it may not happen. While the Biden administration recently reached an agreement with the European Union to ease Trump-era sanctions on aluminum and steel, it's continued to criticize China's trade practices and subsidies for domestic businesses.

The United States has backed the "Phase 1" trade deal former President Donald Trump signed with China in January 2020. In a speech last month, US Trade Representative Katherine Tai said China must be accountable for promises made in that agreement. Beijing has not delivered yet on all its commitments, she said.

Tai also indicated the United States could push China to go even further.

"We continue to have serious concerns with China's state-centered and non-market trade practices that were not addressed in the Phase One deal," Tai said. "As we work to enforce the terms of Phase One, we will raise these broader policy concerns with Beijing."

A major central bank could be ready to hike interest rates

The Bank of England surprised markets earlier this month when it voted to keep interest rates at record lows.

Remember: The central bank was tipped to be the first major player to start raising interest rates to fight inflation. Instead, the Bank of England opted to stay the course as it waited for more data on the job market, concerned that unemployment could rise as UK government support for employers lapsed.

Now, the numbers are in — and that fear doesn't appear to have materialized.

UK unemployment fell to 4.3% in September even as the country's furlough program ended, the Office for National Statistics said Tuesday.

That could pave the way for the Bank of England to take action in December. Societe Generale strategist Kit Juckes said the employment data appeared "to be the missing link" needed to convince central bankers to make a move.

"There could still be more layoffs to come," he told clients. "But when [the Bank of England] weighs risks to the jobs market against the upward trend in inflation, the latter will surely win."

Others think the waiting game could be stretched a bit longer, however. Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said it's still "not a done deal," pointing to uncertainty about whether furloughed workers who are back at their jobs are working full time or just part time.

Up next

Dolby Labs reports earnings after US markets close.

Also today:

• US retail sales for October post at 8:30 a.m. ET.
• Industrial production data follows at 9:15 a.m. ET.

Coming tomorrow: Earnings from Target, Lowe's and Nvidia.

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