US and European futures are trading lower as investors show their concern about the Fed’s hawkish monetary policy stance. The fact is that traders aren’t ready to support the riskier assets as they did before because they believe that four interest rate hikes this year will be too much as the US economy isn’t ready for such an aggressive monetary stance. However, the Fed itself is in a very tight spot, especially after yesterday’s inflation data.
The inflation number confirmed that the Fed can’t afford to sit on its hands, and action is required. In fact, there was further noise in the market related to a possible interest rate hike that could take place as soon as March. The question for traders is whether the US economic situation can withstand such a liquidity shock given that the whole economy and equity markets are addicted to a dovish monetary policy stance.
One particular factor which is going to make or break the foundation of a risk-on rally for traders will be the strength in the economic data, as we have mentioned several times before. Suppose traders see that economic data is only coming off its recent high and not actually losing steam. In that case, it is likely that we will see the major US equity indices continuing their gains. On the other hand, if the economic numbers display weakness due to a liquidity dryness, then this will effectively be a disaster for the US.
On the economic data front, today, we are going to get further information on US inflation as the PPI m/m is slated to be released at 13:30 GMT. The forecast for this number is to be at 0.4%, which is literally half compared to the previous reading. In addition to this, we also have the US unemployment claims data—this will also be an important reading given the fact we have seen a rotten US employment number earlier this month. Finally, watch the speech of FOMC member Brainard who will also give more information on his thinking about interest rate hikes this year.
On the commodity front, if traders are worried about Omicron, they must pay attention to the price of oil. WTI’s price is sky high once again, and this is mainly due to the fact that the supply and demand equation is out of whack once again. Traders do not see Omicron as a major threat to the world economy. In fact, it is likely that once we reach a climax—which is close enough, traders and investors are not going to pay any significant attention to any other variant of Covid. In simple terms, oil demand is once again in focus, and traders believe that supply shortage is likely to be an issue. This means that we are likely to see WTI oil price continue to move higher from here onwards, and it is likely that we will see a $100 a barrel number for Brent oil sooner than currently anticipated.
The precious metal is in a sweet spot given the fact of inflation is in the US. In fact, inflation is a major concern for every single central bank. This is the reason that the Fed’s hawkish monetary isn’t pushing gold price off the cliff. Generally speaking, the dollar index climbs on the back of the Fed’s hawkish stance, which isn’t great for the gold price. However, yesterday’s inflation reading brought more bids than market players anticipated, and this particular trend that has been in place for the past two days is likely to continue.
The gold price is trading above the 1,800-support level, a number that traders closely watch, and it is also considered an important support level. It is likely that we may see the 1850 handle for the gold price in the coming days.
Bitcoin, which is naturally known as an inflation hedge, has also been experiencing some bids as well over the past number of days. However, there is more to the story than just that. The exchange data shows that whales are actually playing with the bitcoin supply. This means that there has been a significant spike in bitcoin outflow from crypto exchanges to personal wallets. This is creating a shortage of bitcoin supply, and it is pushing the bitcoin price in the right direction.
In terms of price action, the biggest and the most important number for bitcoin is the support of 40K, and as long as this remains intact, a scenario which isn’t likely, we are likely to see higher moves for the Bitcoin price.