Oops, did Janet say higher rates?

Oops, the words just slipped from Janet Yellen’s mouth that the interest rates may have to rise ‘somewhat’ to prevent the economy from overheating, as inflation is about to become a serious topic shortly given that the commodity prices are soaring to the highest levels in a decade, the global chip shortage is threatening the production lines, bottlenecks are being formed and the global logistics are not as fluid to bring the goods to their final destination. Inflation is already a red spot in producer prices and it’s about to hit consumer prices shortly. Though, Yellen doesn’t think inflation will be a problem in the long term, and she doesn't recommend hiking the rates, but it all depends on how much the price rise will threaten the Fed’s 2% inflation target on average, really.

So, we are well in the middle of the reflation theme, which pushes capital from growth to value stocks. As such, Nasdaq tumbled 1.88% on Tuesday, while the Dow Jones eked out a tiny 0.6% of gains thanks to banking, healthcare, mining and energy stocks. I expect the reflation to be the major play for the rest of the week, as besides the inflation worries, the expectation of another solid month in terms of US jobs data should keep investors away from the volatile tech stocks. 

Due today, the ADP employment report should give a flavour of what to expect from Friday’s figures, although there is no preset correlation between ADP and NFP numbers. A consensus of analyst expectations point at a solid 872K rise in US private jobs last month. And the expectation for Friday’s NFPs is another million of nonfarm job additions to the US economy. These numbers could only add fuel to the inflation discussion, as people who would earn more would spend more. So inflation which is mostly driven by the supply-side components for now, would also be boosted by the demand-side factors.  

Under these circumstances, even if the Fed continues pushing back the urge of tightening its policy, if we start seeing a similar jump in consumer prices than we’ve seen in producer prices, it will be hard to contain the Fed hawks. And that could mean a further profit-taking for the average tech investor simply because higher funding costs would tap into tech companies’ profits, and at the current price levels, investors have no tolerance to see a single penny lost on the way. Otherwise, they desert the marketplace. 

Gold sees some serious resistance near the 100-day moving average, which currently stands just below the $1800 mark. It’s curious because, the US yields remain stable despite Yellen’s comments on inflation. There is, in theory, no better combo than low yields, rising inflation expectations to push gold prices higher, but that’s not what we see. Is it because of the risk of seeing the US yields take off, or because investors are looking for an alternative inflation hedge, or is it just that returns they get elsewhere remain particulary lucrative that there is no reason to rush to gold just now. 

In this sense, alternative and ultra-speculative cryptocurrencies such as Dogecoin and Dash surge, with Dogecoin price gaining as much as 50%.  

One place I would expect to see better appetite is Coinbase, as we see a clear acceleration in the global crypto trading volumes. Moreover, frauds we see in local crypto exchanges should also encourage traders to move on to the big and well-known companies to avoid taking an additional counterparty risk. In this respect, Coinbase price hasn’t seen the daylight since its IPO last month, yet buying Coinbase shares would be a way of going long vol in the crypto market without necessarily taking a view on whether the prices should go significantly up or down. Both ways is good as long as the trading volumes remain strong. So, Coinbase’s morose debut and the price dynamics hint that the risks are tilted to the downside.  

Elsewhere, US crude is preparing to test the March peak neat $68 per barrel on prospects of improved global demand, and the cautious winding of the OPEC+ production cuts. BP is finally showing a sign of a positive breakout above the 310p level and I remain bullish on BP. And if we see a further appreciation in the US dollar with the Fed hawks coming in, we could see an additional appetite for BP thanks to a relatively cheaper pound.