Nerves ahead of US inflation

(Craig Erlam – MarketPulse)

We’re seeing plenty of apprehension ahead of the US inflation report on Wednesday, with Asia in the red and Europe following suit.

It’s impossible to get away from the fact that the inflation report has held the markets back this week. There’s clearly a desperate desire to be more optimistic about the outlook; that’s evident from the scale of the recovery already seen in equity markets despite there being seemingly little to celebrate.

But the jobs report on Friday following on from the Fed commentary in the days running up to it has left investors fearing they’ve got carried away too soon and that data dependency and aggressive tightening can go hand in hand.

I don’t think it’s an exaggeration to say that today’s inflation number could set the tone for the markets for the rest of the month. A lower than expected number could be a major tailwind for the markets while anything around or above the June reading could trigger a big risk reversal in the markets as the debate shifts to 75 or 100 basis points, with 50 left in the rearview mirror.

Encouraging inflation data from China

China is one of the few countries without an inflation problem as was evident in today’s CPI and PPI numbers. The headline CPI fell a little short of expectations, with higher pork and vegetable prices largely behind the increase to 2.7%. Core inflation remains subdued as domestic demand remains soft following lockdowns this year that are weighing on activity and putting the growth target further out of reach. Lower fuel and commodity prices contributed to the sharper decline in the PPI number, keeping the pressure off the PBOC to tighten monetary policy and even leaving room for further easing.

Oil slips amid positive nuclear talks and a surprise inventory build

Oil prices are slipping again on Wednesday with WTI dropping back below $90 a barrel amid positive noises coming from the Iran nuclear talks. I don’t think we’re at the optimistic stage yet as we’ve seen talks break down before when a deal appears close but it’s looking more promising than it has for many months. And those involved have an extra incentive to get a deal over the line.

The inventory data may have given crude another nudge lower, with API reporting a surprise increase of 2.156 million barrels last week. Data from EIA today was expected to show a 100,000 barrel increase so we could be in for another upside surprise which could further weigh on the price. A higher inflation reading could be another downside risk as traders price in further tightening and increased recession risk.

Gold driving higher ahead of inflation data

Gold has been well supported going into the inflation data this week. The prospect of a nasty surprise that has driven caution elsewhere doesn’t appear to be holding gold back, with the yellow metal testing $1,800 yesterday and taking another run in that direction today.

A softer inflation reading could be just what it needs to break through the resistance barrier and establish itself above $1,800 once more, something it hasn’t managed to do since earlier in the summer. A stronger figure on the other hand could strengthen the resistance and trigger profit-taking after a decent run over the last few weeks.

Momentum fades on approach to $25,000

Even bitcoin is looking a little nervy ahead of the inflation report. As odd as that sounds, bitcoin has shown itself to be very resilient of late, recovering quicker and seemingly not being as phased by setbacks. It will be interesting to see how it responds to any setback today or how well it capitalises on a favourable report. We have seen fading momentum in the run-up to $25,000 but a softer inflation number could be just the catalyst bitcoin needs to turn that around.

Read Gold – Oil Outlook and Analysis

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