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Risk rally faded as inflation concerns remain

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By Edward Moya  

US stocks initially rallied after the March inflation report showed consumer prices are decelerating, prompting bets that the Fed might be done tightening. ​

Wall Street wants the Fed to be done with this rate hiking campaign, but with supercore inflation nowhere near target, more work needs to be done.

The initial stock market rally was rightfully faded as inflation is still too high and as rate cut bets are still aggressively getting priced in. Investors also might not necessarily want to aggressively pile into risky assets before the big banks kick-off earnings season.

CPI

Headline inflation is coming down but Fed Chair Jerome Powell’s favourite inflation measure, core services excluding housing, is still elevated, rising 0.4% down from 0.5% in February. ​ Housing costs were the biggest contributing factor to this inflation report, with food at a distant second place.

The March inflation report showed pricing pressures moderated as the headline consumer price index climbed 5.0% in the year to March, down from 6.0% and a tick lower than the consensus estimate. ​ On a monthly basis, inflation eased from 0.4% to 0.1%.

This inflation report had a lot of mixed signals. ​

The food index at home was lower for the first time since September 2020. The energy index plunged 3.6% in March, but that is expected to rise given the sharp rise in oil prices. ​ Housing costs edged lower, but are still high and contributing the most to inflation (70% to the net monthly change in the headline CPI).

After the inflation report, Richmond Fed President Thomas Barkin said there is more to do to get core inflation down.

Oil

Crude prices are rallying after a moderating inflation report was followed by an EIA report that highlighted tightness at Cushing and strong gasoline demand. ​

In addition to a double dose of bullish reports, oil got a boost from Energy Secretary Jennifer Granholm’s comment that  the US wants to bring the Strategic Petroleum Reserve (SPR) back to pre-Ukraine War levels. ​ She didn’t specify when and if they would be buying at different levels than what they have already signaled in the past. ​

The Biden administration has signaled that they would be buyers of crude at or below the $67-72 a barrel range.

When you take a look at how stocks and other commodities have reacted to Wednesday’s CPI fireworks, the rally in crude really stands out. Oil looks like it could be breaking out here.

Gold

Inflation is not slowing enough for gold to make that record run. ​ Gold prices initially rallied after Wall Street saw consumer prices post the slowest rise since May 2021. ​

This inflation report is promising for disinflation trends, but it doesn’t mean the Fed’s tightening work is done. ​ Fed swaps were volatile and some traders were thinking that maybe the Fed would hold off on that May hike, but it seems the market is thinking one more and then they are done.

The Treasury yields (2-year and 10-year) tumbled following the inflation report release, but have pared losses, while the 3-month government bill remains elevated and unfazed. ​

Gold’s bullish outlook remains intact, but it seems prices may be stuck in a consolidation phase until we have a clearer outlook for the economy.

Bitcoin

Bitcoin profit-taking is intensifying after prices surged following the knee-jerk reaction to the inflation report. It seems the momentum rally for Bitcoin might be over for now.

Inflation hedge and or a breaking of its correlation from equities might subside for a while. ​

Bitcoin looks poised to consolidate here as it will clearly need a robust catalyst to keep the rally going. ​ Downside support should come from the $27,500 region. ​ ​

 

Edward Moya is Senior Market Analyst, The Americas 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.