US and European stock futures are focused on one thing and one thing only, which is the US CPI data. We strongly believe that today's US inflation data will be much better than most speculators believe. This means that the US CPI data is highly likely to print, which will not be anything higher or lower than the forecast. The forecast for the US CPI m/m is 0.3%, and the US CPI y/y, which matters the most, is supposed to come in at 3.1%, while the previous reading was at 4.0%.
If the number comes close to the forecast of 3.1% or even at 3.1%, we believe this will be considered good news for the market as the Fed’s inflation target is 2%. If the number comes in below the 3.1% mark, it will be celebrated by market players, as that would mean a significant shift in the inflation reading.
But there is one thing that is highly important to pay attention to, and that is where the inflation reading will go from here. Yes, today, we are going to see a massive drop, and that is due to tighter monetary policy, a slowdown in economic activity, and lower oil prices. From here on, these factors aren’t going to have a really significant impact on the inflation number, but it also means that the difference between the Fed’s target number and the actual reading may not be double what it is now.
We think even a really good reading in terms of inflation data is still likely to bring one more interest rate hike, and this particular fear may keep traders somewhat worried. Although we continue to hold our base view, which is that the Fed should take the summer off when it comes to its monetary policy action and only watch and see the results of its hard work,
The moves in the United States 2-Year Treasury yield and the dollar index will be the most important ones to watch on the back of this data, as they will suggest and give us a signal of what the next reaction of the Fed could be. We also continue to hold our base view that, with inflation slowing down, the path of least resistance for the US equity market is very much skewed to the upside.
Moving away from the US and closer to home, the Bank of England’s governor, Andrew Bailey, will speak later today. Yesterday’s economic data and move in sterling confirmed that there are more chances for the BOE to continue to increase rates. Although market players firmly believe that the BOE is playing with fire as the cost of living crisis and the UK’s $4 trillion mortgage market are on the verge of explosion,
In the forex world, traders will focus on the Bank of Canada, which is expected to increase interest rates by another 25 basis points to tame inflation further. This will push the interest rate in Canada to 5% from its current level of 4.75%.
Oil Prices
Oil prices continue to hold their ground, and Crude oil prices are looking strong. However, this could change today as the US crude oil inventory data is due today, and the expectations are for -1.1 million. If the actual number shows a supply glut, which we do not think is going to be the case, oil prices could see some adverse influence. Traders believe that oil demand has started to build up, and this means that the data should show improvement, which could provide a further lift to oil prices.
Of course, the big factor for oil traders is also the US CPI data, and a more positive reading—a reading that eases off the concerns of an economic recession taking place due to higher inflation and aggressive monetary policy—would support the narrative for oil demand.
Gold Prices
Gold prices will likely remain volatile today. Although it is pretty clear that the support of 1,900 is solid, Having said this, the support could see a big test today if inflation data doesn’t ease off. A significant drop in the inflation reading would support gold prices, and we could see the price testing the level of 1950. A strong reading or anything that continues to show the sticky nature of inflation could push gold prices higher, increasing the odds that the Fed will increase interest rates perhaps more than once.