Inflation, inflation, inflation

Last week’s US producer price data wasn’t encouraging, with the factory gate prices accelerating to 8.3% in August from 7.8% printed a month earlier. The strong PPI read hints at the possibility of an unpleasant surprise on the CPI front at today’s release, as well.

The consensus of analyst expectations on a Bloomberg survey for the US inflation hints that consumer prices may have slightly fallen from 5.4% to 5.3% in August. Yet, of course, there is always room for a positive surprise in inflation figures as we are not done worrying about the global chip shortage, the slow logistics, firm energy and commodity prices, rising wages, and rising Covid worries. 

Of course, rising Covid cases wouldn’t be a headache for financial markets, if we weren’t feeling the supportive hand of the Fed gently being pulled away due to the rising inflation.  

The market should take a breather for a CPI figure softer than the 5.3% expected, but a strong release will likely further dampen the mood, as the bad news on inflation front won’t boost the Federal Reserve (Fed) doves, as high inflation is the major reason why the Fed can’t keep doing what it does: throwing cheap liquidity into the market.  

The market mood wasn’t so bad on Monday. European indices traded in the positive, Dow Jones gained 0.29% as energy stocks led gains on US crude advancing past the $70pb mark. As such, the price of a barrel just broke above its two-month downtrending channel top, as a sign of a bullish reversal in energy prices on US supply concerns following the Hurricane Ida hit. But, the major driver of oil prices is a short-term factor, and the bulls may not last long due to various other concerns, such as a new delta outbreak in China that has been recently discovered. Still, I revise short-term view to neutral from bearish, and keep an eye on the evolution of US inventories this week.  

Else, the S&P500 closed last week below the 4500 mark and could continue falling toward its 50-dma (4425) in the coming sessions. Testing the 50-dma isn’t a big deal for the S&P500, as it has regularly tested this metric and rebounded higher to claim new records. That means that, so far, the price retreats below the 50-dma only served as an opportunity of buying the dip. However, prospects of rising inflation and tighter Fed policy could further weigh on the risk appetite and let the S&P500 slip below the 50-dma this time.  

But gold may not be the perfect hedge against an eventual market turmoil. Although the rising inflation is positive for gold, the positive pressure in the US yields will also rise the opportunity cost of holding the non-interest-bearing gold and limit the upside potential of the yellow metal above the $1800 per oz.   

In the UK, the inflation data due Wednesday is expected to reveal a surge in British consumer prices to 2.9% from 2% printed a month earlier. Rising inflation can only revive the Bank of England (BoE) hawks, after Governor Bailey hinted that the ‘growth is plateauing and the minimum criteria for a tighter UK policy is now met’. The pound sterling has broken above its downtrending channel top building since June against the US dollar and could well claim another advance toward the 1.40 on the back of the hawkish shift in BoE expectations. So, the FTSE 100 will continue swinging between firming energy, commodity prices and stronger pound.