Swissquote Bank: Inflation

Swissquote Bank: Inflation

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By Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

Risk appetite was surprisingly strong into the US inflation data, expected to advance to another forty-year high at today’s print.

The S&P 500 jumped above its 100-DMA, and Nasdaq hit its 200-DMA after pulling out an important Fibonacci resistance, the major 38.2% retracement on November – January selloff, hinting at a short-term bullish reversal in Nasdaq 100 index.

The pre-CPI rally in the US stocks suggests that the hawkish Federal Reserve expectations have been broadly priced in, and that the perception that the worst reaction to the Fed rate hikes is mostly done.

But there is a risk that investor optimism is premature, and a stronger-than-expected inflation read could send all the recent gains crashing, as there is still room for Fed hawks to price in a tighter Fed policy. Activity on Fed fund futures hint that there is only about 20% chance of a 50bp hike from the Fed in March. There is room to bet for a more aggressive first rate hike from the Fed if inflation goes further out of control.

So, US equity futures are pointing to the downside at the time of writing, as the US inflation data is still a threat to the overall market mood, and could be a pivot moment for this week. Either we will see a reasonable CPI read and the equity rally could carry on, or we will see an ugly number, and the bears will run into the marketplace and destroy the recent gains.

One last thing about inflation. The Fed cannot do miracles by hiking the rates faster as inflation doesn’t necessarily come from the demand side. One of the biggest drivers of higher consumer prices has been the supply chain crisis.

Maersk, for example, which handles a fifth of containers shipped globally has been capable of rising its prices by 80% last year without putting costumers off- Although the company warned that supply chain crisis will improve from the second half of the year, the rising consumer prices could continue translating into higher wages and higher rents and make inflation stickier.

And if rising the rates doesn’t bring inflation down, it could cause recession. Therefore, the Fed’s got to find the right balance, to be patient and to tighten gradually.

There is a decent acceleration in the gold prices. The price of an ounce rebounded 3% since its $ 1780 dip two weeks ago. Gold is now behaving positively in risk-on markets, and negatively in risk-off markets as the rising yields hit appetite in gold as much as they hit appetite in equities.

Therefore, if we see the markets changing direction and hit the south, again, we could well see gains in gold crumble and pull the price of an ounce back below the $ 1800 mark.