Thursday’s data showed that consumer prices in the US advanced from 7.0% to 7.5% in January, more than 7.3% penciled in by analysts.
The Fed hawks came back in charge aggressively following the US inflation print as St Louis President Bullard said he’d ‘like to see 100 basis points in the bag by July 1’.
We went from no rate hike in 2022 to the growing possibility of a 100bp hike by July – which also implies that the first rate hike in March would be no tinier than 50bp. The probability of a 50bp rate hike went from a meagre 20% to a solid 93% in a single session.
The 2-year yield jumped to 1.60% and the 10-year yield drilled above the 2% mark for the first time since summer 2019. The 10-year yield is now about where the 2-year yield kicked off the year.
So, the things are going quite fast in the US sovereign markets, almost as fast as Dogecoin.
Gains given back
All three major US indices were moody yesterday, but Nasdaq led losses as it’s the most sensitive to the rate changes. The index which was flirting with its 200-DMA the day before slipped more than 2% following the inflation data. Even the companies that are thought to do well in tighter monetary conditions like Apple slid. Apple lost more than 2.30%, as Google slid 2%, and Amazon gave back 1.36%.
The S&P500 on the other hand remained within its 100 and 200-DMA, having not damaged an important technical level just yet, but there is a bigger chance that we see the index close the week below the 200-DMA, than above it.
In the FX
Rising hawkish noises from the Federal Reserve (Fed) backed the US dollar. Buying the dip in the dollar has become a good bet lately, as the hawkishness in the Fed could go way deeper than many would have thought a couple of months ago.
The EURUSD is back below the 1.14 mark, but if there is one place where there is potential for hawkish surprises, it is well the euro, given that the European Central Bank (ECB) has also been ignoring the inflation problem – which will certainly come back as a slap in the Eurozone’s face in the foreseeable future.
For now, Christine Lagarde insists that acting too fast could choke the economy’s recovery, but not acting at all will choke the economy, as well. Therefore, despite being bullish in the dollar, I still think that the EURUSD will make its way higher against the greenback, because the inflation situation in Europe will likely become unbearable, as well.
Gold, no luck
Gold first rallied to $1842 an ounce as a kneejerk reaction to the US inflation data then tanked to $1820s as the rising US yields increased the opportunity cost of holding the non-interest-bearing gold and got investors to dump their positions.
Best places to go
Gold is therefore not the best hedge against inflation, commodity ETFs and energy-heavy stock indices are. iShares Diversified Commodity index runs from record to record, the British FTSE and the Brazilian Ibovespa outperform their rate-sensitive and tech-heavy US peers since the beginning of the year and should open up a lead in the actual energy-led inflationary setup.
