January’s CPI print from the US definitely caused a stir in financial markets. The headline and core inflation prints both printed higher than expectations and with that, hopes for a May rate cut from the Fed have receded. The CPI results were only marginally higher than expectations (0.3%actual for CPI in January m/m verses 0.2% expected), but this was enough to rattle market nerves and push back the timeline for when the first rate-cut is expected.
The latest CPI stats serve as a reminder that inflation is a beast not easily tamed. Meanwhile, the push higher in the oil price added some salt to the wounds, with crude adding a further 1.2% and building on the substantial gains seen last week. With energy prices edging higher and an ongoing conflict in and around a major oil producing region (the Middle East),oil has the potential to throw a spanner in the works when it comes to the path of global inflation and in-turn, the time horizon for when interest rate relief could arrive.
While risk-assets took a dive on the US CPI print, the USD and bond yields headed in the opposite direction on a repricing of when the rate-cutting phase may commence. With jobs data remaining solid and inflation not being easy to budge, monetary policy easing from the Fed is looking increasingly likely to be seen in the middle of the year at best, or perhaps in the second half of 2024. This pushing back of the rate cut timeline is preserving the yield advantage of the USD. The Dollar Index (DXY) is making a run towards the 105 level in response to rapidly ascending treasury yields. Essentially, other currencies were left in the wake of the greenback. The USDJPY rate reclaimed the 150 level, while the AUDUSD rate dipped below the0.65 mark.
Gold succumbed to the rampant USD also, with the precious metal sinking below the psychological $2k level. Gold was trading just above the immediate support level of around $1990 during early Asian trading hours on Wednesday. Below this, support levels await at $1976 and $1961. Though given the steep fall on the back of the January CPI, a bounce of some description in gold can’t be ruled out based on oversold conditions. However, if gold is to make a move back towards resistance at $2020, it will likely require a pull back in the USD and bond yields.
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Looking ahead for the rest of the week, US Retail Sales data for January is due on Friday, which is expected to show a decrease from the December stats, which could help market sentiment recover somewhat. Though we are also due to see the latest PPI figures, and if they demonstrate that wholesale prices have again shifted higher, it could create more anguish for financial markets on expectations that we may need to wait longer for that first rate cut.
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