Stock markets remain in positive territory on Wednesday after a reassuring appearance from the Chairman of the Federal Reserve and some inflation data.
Jerome Powell put in a decent performance on Tuesday but sentiment is clearly very fragile and it may not take much to tip investors over the edge again. Three rate hikes are now heavily priced into the markets this year, with balance sheet reduction perhaps starting in the third quarter.
While investors could get on board with that, the situation is clearly extremely fluid. Expectations have changed considerably in recent months and while a few rate hikes and some balance sheet reduction may be preferential to prolonged, uncontrolled inflation, there is a limit to what investors will tolerate.
In a sign of the times we’re living in, the US inflation data wasn’t too bad. At 7% year on year, the CPI was in line with expectations while the core reading was only marginally ahead at 5.5%. On a monthly basis, the CPI readings were also marginally ahead of expectations, although not to the degree that has caused any alarm.
Rather, it seems the inflation data has been welcomed with investors seemingly fearing much worse. The dollar is slipping after the data, while US yields have eased and US futures are rallying. It would appear relentless optimism is perhaps returning to the markets and dip buyers are diving back in.
This once again brings me back to two key points this week. It’s a strange time of year and one in which we should never read too much into investor doom and gloom. That’s not to say this time may not be different, and there’s certainly cause for concern. But it’s not unusual for investors to suffer the January blues in what otherwise turns out to be a very good year.
And then there’s earnings season which kicks off on Friday. While there is a good reason for caution at the moment, fourth-quarter earnings could offer a timely reminder that there is still plenty to be optimistic about this year. Inflation and interest rates are major headwinds but the economy is strong, the labor market is tight and consumers are in a good position. This may be what investors are clutching on to.
Fundamentals remain bullish for crude
Oil prices are trading back around their highest levels since late October after another surgeon Tuesday. The rally continues as OPEC continues to miss output targets and Libya reportedly struggles to ramp up production again. There was some good news as Kazakhstan looks set to get back to pre-disruption levels in a couple of days.
But the fundamentals still look bullish for crude, with omicron seen being less of a drag on growth and demand than feared. Combine this with short supply and there may be some room to run in the rally as restrictions are removed. Of course, Covid brings unpredictability and zero-covid policies to China and some others bring plenty of downside risk for prices.
Gold choppy after inflation data
Gold prices are quite choppy on Wednesday after making decent gains on Tuesday. The CPI data has weighed on the dollar, despite beating expectations, which has given gold a lift. It briefly went above yesterday’s highs before some profit-taking kicked in, with focus now back on the $1,833 resistance that’s proven so key in the past.
Powell’s testimony took some heat out of the move in yields yesterday which hit the dollar and boosted gold. It’s weathered the storm incredibly well in recent weeks as yields have surged and the dollar remained strong.
With markets potentially at peak Fed fear, at least for now, perhaps the bullish case for gold stems from yields not rising much further and expectations perhaps being slightly pared back. Because while the tightening environment shouldn’t be bullish for gold, it’s certainly doing it no harm at the moment. Which shouldn’t be ignored.
Bitcoin staging a recovery?
Bitcoin is enjoying some mild reprieve over the last couple of days as risk appetite has returned a little in the markets. While some may be hoping the crypto has hit a bottom, after seeing strong support around $40,000 earlier this week, there’s little yet to suggest that’s the case. It’s still early days but the rebound hasn’t been particularly forceful. It was lifted by the US inflation data though, which has boosted risk appetite more broadly. Whether that will be enough is another thing.
