Biggest nightmare: Inflation

Global equities breathed a sigh of relief yesterday as the Federal Reserve (Fed) Chair Jerome Powell said, at his congressional confirmation yesterday, that he could pull off the hard task of fighting back inflation without damaging the economy.  

He soothed investors’ nerves sayinf that the Fed is ‘just going to be moving over the course of this year to a policy that is closer to normal, but it’s a long road to normal from where they are now’, and ‘really should not have negative effects on the employment rate”. Hopefully, yet throwing easy money to keep the financial markets on track for a record-breaking year was the easy part of the task, now it’s time to pay the bill, and the bill is high as the party was wild.  

All eyes are on the US inflation as today’s data may reveal that consumer prices in the US advanced to or above the 7% mark, a four-decade high, but investors believe that inflation will peak at this month’s print, and the trend will reverse before spring. But the truth is, no one knows where we are headed to, all we know is that the Fed has waited too long before taking an action, and if today’s inflation print is higher-than-expected, recent gains in equities will melt like snow in the sun.  

Released earlier today, inflation in China eased both for consumer and producers in December. While the Chinese factory gate prices remains above the 10% mark, the easing pattern gives hope for the rest of the world.

Market roundup 

US dollar is giving toppish signs as the dollar index slipped below its 50-dma, where it had been finding support for the past six months. The EURUSD finally broke above its 50-dma average and is preparing to pull down the December horizontal channel top, which is a touch below the 1.14 mark. If we see the Fed hawks take a pause, we could well see the EURUSD surge toward the 1.15 mark, but that is contingent on a no-bad-surprise on the US inflation data front as things on the European Central Bank (ECB) side are moving too slow to trigger any reversal in the trend. Gold on the other hand soared to $1821 per ounce, along with the risk rally. But I believe that the rising US yields will likely limit the upside potential in the yellow metal. And US crude is pushing above the $80 mark amid the API data showed that the US crude inventories dropped more than 3 million barrels last week. The more official EIA data is due today. The expectation is a 2-million-barrel decline, a higher decline should help the bulls drilling into the thick above $80 resistance, and any pullback will likely get a support near the $78 per barrel mark to support the actual positive trend towards the $85 level. But oil rally is also contingent on the global risk appetite and the prospects of demand recovery. If omicron continues dent the economic activity, oil bulls could find it hard to carry on with the actual crude rally.