US and European futures are taking a break after an intense sell-off yesterday, triggered by the US CPI number. The data confirmed that inflation isn’t dead yet.
In the UK, where the cost-of-living crisis has become a significant headache for policymakers, we had another fresh reading of the UK’s CPI number. The data has confirmed one message: inflation isn’t going anywhere, and the BOE’s tools aren’t bringing any meaningful results for inflation.
Factors Impacting markets
The US CPI number, released yesterday, spooked investors and traders as not many were expecting that number. Market players were of the mind frame that US inflation has peaked and the path of the least resistance is skewed to the downside. However, the fact that the actual inflation number printed a reading higher than the market expectations took everyone by surprise and created a massive event in the market.
All the major Us stock indices took a sharp nose dive yesterday on the back of the US CPI data. We have seen such a reaction in the markets mainly because now traders aren’t sure what will happen with the Fed’s monetary policy. Clearly, the interest rate hikes that the Fed has introduced so far haven’t been able to tame inflation in the way that they have been expecting. Yes, indeed, inflation hasn’t printed another peak reading for the past two months, but at the same time, inflation isn’t slowing down. For instance, if we had a number yesterday that printed a reading lower than the market forecast, then trades would have been much more comfortable. This is because the message would have been that the Fed’s monetary policy is working. Under those circumstances, the Fed would have only increased the interest rate by 50 basis points and maximum by 75 basis points.
Now, the situation is looking completely different. Traders are worried that the Fed will be immensely aggressive; they have already been sending many hawkish messages, but now the delivery and action could be even more hawkish. This is what creates significant chaos in the market.
Speculators have started to tout that the next interest rate hike by the Fed could now be even a whole percentage point, which means 100 basis points. Many Fed members have wanted the Fed to increase the interest rate more aggressively, but the Fed Chairman has been reluctant to that idea as higher rates also cut economic growth.
Jerome Powell will now struggle in front of hawkish Fed members, and he will have very little to say in his defence. This is what is worrying the most; hence, bulls are nowhere to be seen in the markets.
Gold traders are also feeling enormous pain due to the strength in the dollar index, which has been increasing mainly due to higher bets on a more aggressive monetary policy. The path of the least resistance for gold prices is likely to be skewed to the downside, which means we could see the gold price plunging towards 1650.
The crypto king also felt a lot of heat yesterday as the dollar index picked up more strength. There is no doubt that the Fed’s monetary policy and the US CPI are still moving the price of BTC. Bitcoin is no longer acting as a safe haven asset, it is a risk-on asset, and the remainder of this was sent yesterday when the BTC price began to melt down along with major US stock indices. Having said that, gold, the ultimate safe haven, didn’t act as such yesterday, falling sharply. Thus, it would not be wrong to say that the sell-off in the market was mainly driven due the strength in the dollar index and future expectations around the Fed’s monetary policy.