By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA
It’s been a relatively calm week for the markets; that is until the release of the US CPI data on Wednesday.
It’s getting harder and harder for the Fed to describe inflation as transitory and the response to today’s data suggests the narrative won’t work on investors anymore. The chances are, the central bank would have phased it out over the next couple of meetings anyway as it was losing credibility on that front but today may have hastened that.
Inflation is now running at a 31-year high and the core CPI reading is also well ahead of expectations which only compounds fears. This is becoming more widespread and while supply-side issues being resolved will alleviate price pressures, there’s no guarantee it will address them entirely. And the further they diverge from target, the greater the risk becomes.
The problem is that they’re unlikely to ease up any time soon so the pressure on the Fed is going to be intense. With gold prices soaring as investors seek inflation hedges, the dollar and US yields on the shorter end of the curve jumping and equities falling, it’s clear the Fed has some questions to answer. The markets and the central bank are not on the same page.
This is a big downside risk for equities now and with earnings season now drawing to a close, they may start to buckle under the pressure. Earnings have kept investors on board but the next couple of months could become very uncomfortable. In fairness, they’ve recovered well already after the initial dip but that resilience will likely be tested plenty more.
Oil eases but should remain elevated
Oil prices are pulling back a little today, once again seeing some resistance around the October highs after a strong rebound over the last week. The EIA Short Term Energy Outlook appeared to give US President Biden reason not to utilise the Strategic Petroleum Reserve in order to take some heat out of the market, as it forecast gasoline prices to fall over several months.
This may have supported crude prices in the near term, although I’m not sure how seriously traders were taking the threats from the White House. Ultimately, it’s OPEC+ that holds the power at this point and it’s unlikely that we’ll see any action from them this side of the new year. That should keep oil prices elevated for now.
Inflation hedge gold soars
It’s not often that the dollar, yields and gold surge at the same time but that’s exactly what we’re seeing today. This is most evident in gold which is flying as a result of its role as an inflation hedge. We may have seen signs of this over the last month, with the yellow metal being fairly resilient against the backdrop of higher yields. But it’s clear as day today. Inflation is uncomfortably high and investors want protection.
The move was probably exacerbated by the break of $1,833 which had been a firm level of resistance since July, despite numerous challenges during that time. Whether that be stop losses being triggered or traders piling in, the spike that followed was big and what’s more, it’s holding onto those gains.
The dollar gave a large portion back following the initial spike but recovered to trade back around its intraday highs. US 10-year yields reacted in a similar manner while those at the shorter end hung on in much the same way as gold, which suggests the Fed will be forced to act sooner than it would like. The message may well have to drastically change ahead of the December meeting, with two hikes now priced in next year, the first in July.
Bitcoin inflation hedge narrative clearly sticking
I have never been on board with the suggestion that bitcoin is an inflation hedge but it’s clear today that the narrative is sticking. The cryptocurrency rallied around 4% in the short time following the US CPI number and just like gold, it’s giving very little back. New record highs for bitcoin and another box ticked as far as the crypto community will be concerned. And if the narrative has indeed stuck, this could bode well in the near term as the inflation data may get worse before it gets better.
For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/
