By Craig Erlam
Stock markets are mixed on Thursday following a rollercoaster week in the run-up to, and aftermath of, the US inflation report.
Investors got ahead of themselves in a desperate attempt to board the peak inflation train early.
The collapse on Tuesday – carrying into Wednesday in Asia and Europe – looked quite severe on the face of it but it, was simply an unwinding of positions built on the anticipation of a good set of numbers in the days leading up to it.
While the Fed is now almost certain to hike by 75 basis points next week and more in the months that follow than previously anticipated, the view still seems to be that Tuesday was a setback rather than a game changer.
Confidence that we are at or near peak inflation is dented, but not broken, and this week serves as a reminder that as was the case on the way up, the path back to 2% will likely be littered with nasty surprises.
RBA welcomes labour report
This will likely be the case for most central banks, not just the Fed, with the RBA seen to be in the early stages of its pivot towards slower tightening.
After hiking rates by 50bps, markets are now pricing in a 25bps hike next month, although as we’ve seen so often this year, that could quickly change with the data. The labour market figures on Thursday could support such a move, as employment rose a little less than expected while participation also rose, unexpectedly lifting the unemployment rate to 3.5%.
The Aussie dollar rose after the release, but has since given the bulk of that back.
PBOC leaves MLF unchanged
The PBOC’s battle to support the yuan continued on Thursday as it left the 1-year MLF rate unchanged at 2.75% and set a stronger fix on the currency. The result was around 200 billion yuan being withdrawn from China’s banking system, with the central bank stating that it would “keep banking system liquidity reasonably ample”.
The dual threat of a slowing economy and tumbling currency against the dollar is posing quite the challenge for the central bank which is continuing to try and push back against both, with limited success.
The yen remains a key focus after a slew of intervention commentary on Wednesday which accompanied reports of a rate check by the BoJ.
While officials have been keen to state that no warning of intervention will be forthcoming, nor perhaps even confirmation of it, the line in the sand around 145 against the dollar appears to have been drawn.
The message was loud and clear and now it’s just a case of whether markets will respect it. That’s not always the case and we could see its resolve tested after 24 years without such action.
Oil prices have steadied after rebounding strongly this past week. There are many forces dictating the price action in oil markets right now, with economic uncertainty right up there alongside a potentially unpredictable OPEC+.
The stronger dollar is potentially another headwind, with the rally losing steam earlier this week as the greenback surged in the aftermath of the inflation release.
The inventory data on Wednesday didn’t cause much of a wobble despite surpassing forecasts with a 2.442 million barrel build against expectations of something far more modest.
Of course, this was still much smaller than what the API number indicated a day earlier, so perhaps that limited the surprise factor.
Gold still hurting
Gold is still hurting after the inflation data on Tuesday. It was just starting to find its feet again ahead of the data and the report delivered a crushing blow.
The yellow metal is off around four-tenths of one percent Thursday morning and comfortably below $1,700. The key level though is $1,680 and a significant break of this could be painful, with it having been a floor over the last couple of years.
We could then see some support around $1,660 but at that point, the damage will have been done.
Will Merge be a “sell the fact” event?
Bitcoin has stabilised once more around $20,000 after Tuesday’s bruising encounter with the US inflation data. As we saw elsewhere, the cryptocurrency had rallied in anticipation of something more favourable but it wasn’t to be.
With that now behind us, the question will become how the crypto space reacts to the Ethereum Merge.
It’s been a long time in the making and the question on traders’ lips right now is will it be the next bullish catalyst for cryptos or a “sell the fact” event.
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.