By Naeem Aslam
US and European stock futures are focused on one thing and one thing only, the US CPI data.
US inflation data on Wednesday is going to be much better than most speculators believe. This means that the CPI data is highly likely to print, which is not going to be anything higher than the forecast or even lower.
The forecast for the US CPI m/m is 0.3%, and the CPI y/y, which matters the most, is supposed to come in at 3.1%, while the previous reading was at 4.0%.
If the number comes close to the forecast of 3.1% or even at 3.1%, this will be considered good news for the markets as the Fed’s inflation target is 2%. If the number comes in below 3.1%, it will be celebrated by market players, as that would mean a significant shift in the inflation reading.
But there is one thing that is highly important to pay attention to, and that is where the inflation reading will go from here.
We are going to see a massive drop, and that is due to tighter monetary policy, a slowdown in economic activity, and lower oil prices.
From here on, these factors aren’t going to have a significant impact on the inflation number, but it also means that the difference between the Fed’s target number and the actual reading may not be double what it is now.
Even a really good reading in terms of inflation data is still likely to bring one more interest rate hike, and this particular fear may keep traders somewhat worried. The Fed should take the summer off when it comes to its monetary policy action and only watch and see the results of its hard work.
The moves in the 2-year Treasury yield and the dollar index will be the most important ones to watch on the back of this data, as they will suggest and give us a signal of what the next reaction of the Fed could be. Also, with inflation slowing down, the path of least resistance for the US equity market is very much skewed to the upside.
Moving away from the US, Bank of England governor Andrew Bailey will be speaking later Wednesday.
Tuesday’s economic data and move in sterling confirmed that there are more chances for the BoE to continue to increase rates. Although market players believe that the BoE is really playing with fire as the cost of living crisis and the UK’s $4 trillion mortgage market are on the verge of explosion.
In the forex world, traders are going to focus on the Bank of Canada, which is expected to increase interest rates by another 25 basis points in order to tame inflation further. This will push the interest rate in Canada to 5% from its current level of 4.75%.
Oil prices hold their ground
Oil prices continue to hold their ground, and crude oil prices are looking strong. However, this could change on Wednesday as the US crude oil inventory data is due and the expectations are for -1.1 million.
If the actual number shows a supply glut, which is not expected, oil prices could see some adverse influence. Traders believe that oil demand has started to build up, and this means that the data should show improvement, which could provide a further lift to oil prices.
Of course, the big factor for oil traders is also the US CPI, and a more positive reading — a reading that eases off the concerns of an economic recession taking place due to higher inflation and aggressive monetary policy — would support the narrative for oil demand.
Gold to remain volatile
Gold prices are likely to remain volatile on Wednesday, although it is clear that the support of $1,900 is very strong.
Having said this, the support could see a big test if inflation data doesn’t ease off. A significant drop in the inflation reading would support gold prices, and we could see the price testing the level of 1950.
A strong reading or anything that continues to show the sticky nature of inflation could push gold prices higher, as that would increase the odds that the Fed will increase interest rates perhaps more than once.
Naeem Aslam is Chief Investment Officer at Zaye Capital Markets.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Zaye Capital Markets.