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Inflation concerns bubbling back to surface

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By Han Tan, Chief Market Analyst at Exinity Group

Asian stocks were in the red on Wednesday, along with US and European futures, while the benchmark dollar index (DXY) held on to the psychological 94.0 handle to nudge gold prices below the key $1834 level.

Inflation fears are returning to the fore, with China’s higher-than-expected consumer and producer prices being the latest in a series of red flags about risks to the world economic outlook.

China’s October CPI climbed 1.5% compared to a year ago, exceeding market forecasts of 1.3%. Factory gate inflation climbed13.5% which was its highest print in 26 years.

 

Inflation woes raise spectre of stagflation

All eyes were on the October US inflation data, with the headline consumer price index expected to come in at 5.9% year-on-year and register its steepest climb since 1990. Further evidence of elevated inflationary pressures in the world’s largest economy would be the latest test for the Federal Reserve’s ”transitory” view and challenge the central bank’s stance on policy tightening.

The worry is that such stubborn inflationary pressures could choke the recovery in global demand or hasten policy tightening by major central banks. The likes of the Bank of England and Bank of Canada appear on the cusp of following the RBNZ in raising their respective benchmark rates.

The prospects of higher interest rates could sour the mood surrounding risk assets, and a faster-than-expected inflation print only strengthens such a narrative. There are also concerns that a faster cycle of policy tightening, done in the hopes of reining in consumer prices, could instead trigger the next recession.

Further clouding the monetary policy outlook is the uncertainty over who will head the Fed next year, with Bloomberg reporting that Fed Governor Lael Brainard has held talks at the White House about potentially replacing Jerome Powell as Chair.

The worries currently in play were enough to take some of the gloss off US equities hot streak. Still, a surprise moderation in US CPI could help alleviate the risk-off mood and afford more breathing space for stocks to push higher, at least in the near term.

 

Gold eases back from key resistance level

Spot gold pulled back from the key $1830 resistance region which already repelled bullion bulls on several occasions in the third quarter. The precious metal’s recent recovery has been driven by falling Treasury yields, with real yields on 10-year Treasuries looking to register a new year-to-date low.

Gold’s traditional role as a hedge against inflation may be used to justify a fresh wave of bids. However, under current market conditions, the precious metal would have to muscle past alternative assets that are also vying for the role as an inflation hedge.

Gold prices also face the downside risk of a strengthening dollar if an eventual rebound in Treasury yields occurs in anticipation of a more hawkish Fed, eroding gold’s recent gains lower along the way.

 

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Exinity ME Ltd, a company registered under the Laws of the Abu Dhabi Global Market (ADGM), is authorised and regulated by the Financial Services Regulatory Authority (FSRA)