By Craig Erlam
Investors are in a more upbeat mood Thursday as the relief from the US inflation data ripples through the markets.
Positive surprises have been hard to come by on the inflation front this year and Wednesday’s report was very much welcomed with open arms. While we shouldn’t get too carried away by the data, with headline inflation still running at 8.5% and core 5.9%, it’s a start and one we’ve waited a long time for.
Fed policymakers remain keen to stress that the tightening cycle is far from done and a policy U-turn early next year is highly unlikely. Once again, the markets are at odds with the Federal Reserve’s assessment on the outlook for interest rates, but this time in such a way that could undermine its efforts, so you can understand their concerns.
We’ll continue to see policymakers unsuccessfully push back against market expectations in the coming weeks, while further driving home the message that data dependency works both ways. That said, the inflation report has further fuelled optimism and could set the tone for the rest of the summer.
PBOC signals no further easing
Unlike many other central banks, the PBOC has the scope to tread more carefully and continue to support the Chinese economy as it contends with lockdowns amid spikes in Covid cases. The country’s zero-Covid policy is a huge economic headwind and proving to be a drain on domestic demand.
The PBOC has made clear in its quarterly monetary policy report that it doesn’t want to find itself in the same position as many other countries.
With inflation close to 3%, further easing via RRR or interest rates looks unlikely for the foreseeable future. Cautious targeted support looks the likely path forward as China’s central bank guards against inflation risks, despite the Wednesday data surprising to the downside.
Oil treading water after volatile 24 hours
It was quite a volatile session in oil markets on Wednesday. A positive surprise on inflation was followed by a huge inventory build reported by EIA and then the highest US output since April 2020.
Meanwhile, oil transit via the Druzhba pipeline resumed after a brief pause that jolted the markets. That’s a lot of information to process in the space of a couple of hours and you can see that reflected in the price action.
And it keeps coming, with the IEA monthly oil report on Thursday forecasting stronger oil demand as a result of price incentivised gas to oil switching in some countries. It now sees oil demand growth of 2.1 mln barrels per day this year, up 380,000. It also reported that Russian exports declined 115,000 bpd last month to 7.4 mln from around 8 mln at the start of the year.
The net effect is that after oil prices rebounded strongly on Wednesday, they are pretty flat Thursday.
WTI is back above $90, but that could change if we see progress on the Iran nuclear deal. It’s seen plenty of support around $87-88 over the last month as the tight market continues to keep the price elevated.
Gold’s handbrake turn
It was interesting to see gold’s reaction to the inflation report on Wednesday. The initial response was very positive but as it turned out, also very brief.
Having broken above $1,800, it performed a swift U-turn before ending the day slightly lower. It can be difficult to gauge reactions at the moment, in part because certain markets seem to portray far too much economic optimism considering the circumstances.
With gold, the initial response looked reasonable. Less inflation means potentially less tightening.
Perhaps we then saw some profit-taking or maybe some of that economic optimism crept in and rather than safe havens, traders had the appetite for something a little riskier.
Either way, gold is off a little again on Thursday, but I’m not convinced it’s peaked. From a technical perspective, $1,800 represents a reasonable rotation point. Fundamentally, I’m just not convinced the market is currently representative of the true outlook.
Where’s the BTC momentum?
Bitcoin took the inflation news very well and it continues to do so.
Slower tightening needs and improved risk appetite is music to the ears of the crypto community who will be more confident that the worst is behind them than they’ve been at any point this year. Whether that means stellar gains lie ahead is another thing.
The price hit a new two-month high early Thursday, but I’m still not seeing the momentum I would expect. That may change and a break of $25,000 could bring that, but we still appear to be seeing some apprehension that may hold it back 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.