US consumer inflation is in the spotlight today. Investors expect a slowdown in the year-over-year growth rate from the current 5.4% (it’s a high of the last 30 years).
The wait-and-see attitude of the markets probably reduced the degree of pressure on the US stock prices, where indices managed to turn higher intraday and close in the green zone after four sessions of decline.
Inflation data can add to market volatility by triggering a reassessment of Fed policy expectations, affecting currencies, equities, and gold prices.
The producer price data showed a decline in the monthly price growth rate, but enough to push the annual inflation rate further upwards. Furthermore, the overall price growth rate remains distinctly above the Fed's target, exceeds the average inflation rate of the last 20 years (2.2% for PPI and 2.1% for CPI) and removes the anchor of inflation expectations.
Higher inflation figures would raise again a question of accelerating the withdrawal of stimulus. If data is firmly above forecasts it will revive speculation that the Fed is supposed to announce the start of a QE rollback as soon as the next week. These expectations have fallen sharply after the disappointingly weak labour market figures at the beginning of the month. Several other indicators also demonstrated a loss of economic growth momentum.
High inflation figures have the potential to bring back correction sentiment in equity markets after a brief pause. Annual inflation above 5.5% might be a strong reason for the S&P500 to break support at its 50-day moving average (now at 4430), sending the index to test the August lows at 4353 and even trigger a deeper correction towards 4100.
Gold, hovering around $1790 since last Thursday, might take an even harder hit. The bears are waiting for a good signal to launch an attack. It is now holding it below significant levels, a major round level of $1800 and under the 200 and 50-day moving averages. The first of these averages have been in place for the last two and a half months.
Gold stocks have continued to fall in recent days, losing 3-4% over the last month, although gold prices have been little changed over the same time, reflecting disbelief in the sector's prospects.
Meanwhile, uncertainty over the Fed's future moves and inflation is now relatively high. The closest similar period in history was in 2011-2012 when gold prices fluctuated between $1530 and 1800. Now a similar sideways movement is in the range of $1690-1900.
The inability to steadily overcome $1800 in previous weeks and weak interest in gold stocks suggest that in the coming days, we will see a move towards the lower boundary of the range to the area of $1690.
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