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Relief as US inflation offers hope

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By Craig Erlam

European stock markets braced for a second day of losses at the start of the week, while the US is enjoying a boost following the latest inflation data.

I never thought I’d see markets responding positively to inflation rising 1.2% on the month and 8.5% on the year, but these are not normal times. The headline numbers still don’t make for easy reading, especially for households that continue to see real incomes fall as a result of higher prices, particularly for energy and food.

But two things stand out from the report that is giving investors hope that inflation is peaking.

One is that following months of the headline rate far exceeding expectations, Tuesday’s number was roughly in line which has come as a relief. The report delivered a monthly blow to the markets for a long time and that may be at an end.

More importantly, core inflation – which strips out volatile food and energy components – was much lower than expected on a monthly basis and a little below on an annual basis at 6.5%. Again, there isn’t much to celebrate about that number, but the trend has been a major concern and this report suggests it may be about to improve.

After a period of US yields rising and markets pricing in an increasingly aggressive tightening cycle, the inflation data has come as a relief. Yields have slightly pared gains, the dollar has softened and stock markets have bounced back; particularly the tech sector which has once again been hammered as a result of rapid tightening expectations.

Of course, this is just one report. But it comes at a time when many expected inflation to peak, so it goes some way to confirm those views.

A lot can change and repeatedly has. But oil prices have eased in recent weeks thanks to the SPR release and lockdowns in China, among other things, which could be important.

Oil spikes as OPEC offers EU little hope

Oil prices are spiking after flirting with sub-$100 levels in recent days as China appeared to loosen lockdown restrictions and OPEC warned that it would be impossible to replace Russian crude, while pushing back against calls for it to utilise its spare capacity.

This also came as it reported a decline in supply and demand growth this year and another missed month of production targets; something that the market expects after months of the same.

While the EU continues to push for higher output which would enable it to consider sanctions on Russian oil without severe economic damage at home – with current prices already causing problems – it seems it’s not going to be aided by the group that remains Russia’s ally in the OPEC+ alliance.

With that in mind, the brief flirtation with double-digit oil may already be at an end for now.

Gold jumps

Gold was up around 1% Tuesday, buoyed by lower yields and a softening of the dollar in the aftermath of the inflation data. While the data brought some relief, it continues to drive demand for the yellow metal as a hedge against the highest price increases in more than 40 years.

Gold has now broken through the upper end of the range it traded within for much of the last month and could potentially have sights set on $2,000 where it could run into some resistance.

Bitcoin minor rebound

Bitcoin has had a tough time recently, but pared some of those losses Tuesday as it tried to hold above $40,000. A significant move below would be another blow as it continues to experience substantial downside pressure.

A 7% hit on Monday will have come as a bit of a shock, but it occurred alongside a broader risk-off move in the markets. Perhaps more concerning is how minor the rebound has been which could cause a wobble in the near term.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.