By Naeem Aslam
US and European stock futures are trading with a lot of caution as the most important economic reading of the week will be released Thursday, the US CPI. So far, the trend has been a straight line, which means that we have seen inflation fall from 9.1% to just 3% as of last month.
A lot of this was mainly due to the hawkish monetary policy adopted by the Federal Reserve, which increased the interest rate at the fastest rate in decades.
Thursday’s number is expected to show that it is not possible for inflation numbers to continue to move in a straight line. In fact, the number is likely to show that the journey for the inflation number from here onwards is going to be a lot more difficult than previously anticipated, and there are a number of important factors behind this, such as soaring oil prices.
The expectations for the US CPI inflation number are to inch higher to 3.3%, while core CPI m/m is expected to remain the same at 0.2%.
The question for many traders is: what will be the reaction in the US if the inflation matches the headline number, or, what will happen to the riskier assets if the actual inflation number comes in higher than the expected forecast?
If the number matches expectations, we may not get much of a hot reaction from the Fed members who have left the door open for a further rate hike, but the current expectations from them are that they are more likely to do jawboning than following up with action.
However, if the number picks up pace to the extent that the inflation reading jumps above 3.5%, it is likely to rock the boat for many investors, as that would increase the chatter in the market that the Fed isn’t done with the job and they must get off the bench once again as it is time to control the situation again.
Gold Prices
When it comes to the US inflation reading, it is not only US equity traders who are focused on price action, but gold traders also. This is because a strong inflation number is likely to bring mammoth moves in the dollar index, which could weaken the price action for gold.
At the same time, traders know that gold also acts as a safe haven, and if the sentiment shifts significantly and panic begins to creep into the market, we could see traders running for safety, which means that we could experience some buying for the gold price.
Oil Prices
Oil prices are back in positive territory for the week, despite the fact that concerns continue to linger about the revival in oil demand from China.
The data out of China continue to disappoint, and many traders are thinking that softness in Chinese demand may unpack disappointments from traders who have been upbeat about the massive drawdown in US fuel stockpiles.
On Wednesday, we saw another encouraging reading from the US crude inventory data, which helped the oil prices recover their weekly losses. But the fact that the Chinese import numbers released on Thursday failed to impress has made traders a bit concerned.
The US inflation data will also be closely watched by oil traders as it has the ability to influence the demand equation as the Fed is likely to make its monetary policy comments, which influence economic activity.
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.
