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Hope fades ahead of CPI data

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By Craig Erlam

We’re seeing some risk aversion in markets on Thursday as we await inflation data from the US later in the week.

It probably won’t come as a surprise to many that we’re seeing stock markets in the red considering how well they’ve performed in recent days and weeks. It would appear we’ve seen a lot of buying on the hope of a Fed pivot and some weaker inflation and labour market figures.

Well, the Federal Reserve kind of pivoted, but indicated that the terminal rate may be higher.

The labour market is still extremely tight and Friday delivered another hot report. Big tech seems to find itself in the minority in terms of its decision to let go of large numbers of staff, with Twitter and Meta most notably making huge redundancies in recent weeks.

With neither the Fed nor the labour market fully delivering – and one could argue they never were likely to – Thursday’s inflation report becomes ever more important. Another hot reading could be the latest in a growing list of setbacks for investors, who have been all too keen to buy at discounted levels in the hope the data rewards them. So far it hasn’t.

That will turn at some point, of course, and this could be that moment. The million-dollar question is how fast will it fall. As this will ultimately determine the Fed’s response.

The best thing about a slower pace of tightening is that it allows time for the data to justify smaller rate hikes and an eventual end to the tightening process. Without it, the Fed will be in a very uncomfortable position of blindly weighing up inflation, recession and overtightening risks.

Oil slides amid Chinese Covid restrictions

Oil prices fell again on Wednesday, taking losses over the last couple of days to more than 5%. Brent and WTI are basically flat early on Thursday, settling towards the lower end of their recent trading ranges.

While the narrative in recent weeks has focused on the potential for Chinese Covid restrictions to be relaxed, which has driven Chinese equities higher and lifted oil prices, the reality has seen case numbers soaring, restrictions re-imposed and mass testing undertaken.

This doesn’t exactly add substance to the rumours and we may be seeing some unwinding of those positions.

Gold steadies

Gold has steadied over the last 24 hours after surging late last week and early this in the hope that inflation data delivers what the Fed, and investors, crave so much. It’s a very hopeful-looking move and one that could end badly if the CPI data continues this year’s trend of disappointing to the upside.

I wonder at this point what investors need to see because the recovery of the last week has been strong – more than 5% – which suggests expectations are quite high. Time will tell if hopeful traders will be burned once more.

Is FTX a one-off?

Bitcoin is trading up more than 5% Thursday, but that comes following two terrible days for cryptos.

Bitcoin fell more than 25% from the start of trade on Monday, before finding support around $15,500 and recovering slightly.

The situation at FTX has unravelled at a remarkable pace, culminating on Wednesday evening with Binance bailing on its rescue offer following some due diligence and new allegations.

The ripple effects throughout the industry have been severe so far, with the fear not just being which other tokens could be exposed but whether similar vulnerabilities exist elsewhere.

As Warren Buffett says, it’s only when the tide goes out that you learn who has been swimming naked. Well, it may well be on its way out and traders are fearing what it will uncover.

 

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.