US inflation: Was that the top?
We were aware that gas bowser prices had dropped back significantly, which really opened the door for the pullback in consumer inflation expectations that we saw a few days earlier.
Then, there are the slightly reassuring attempts to re-establish food exports from Ukraine and Russia. This has seen some moderation in food prices too.
The problem is that even a re-treat to around 5% inflation, is highly problematic in an already slowing economy.
The silver lining, would appear to be the prospect of a resultant slowing in Federal Reserve rate hikes. Certainly, they will be pleased with this latest data. However it is only one month, and it is likely they will again raise rates at the next FOMC by 75 points. At least the risk of a 100 point hike is off the table now. Should this reversal in inflation be sustained with the next month’s data, then the Fed could possibly go on full pause to wait watch and see from there.
Markets reacted with a leap higher in the first five minutes post the release, but failed to continue significantly higher from there. The Nasdaq did not even make a new high. The US500 only managed around 8 points more. What this shows us is that there was a relative balance of buyers and sellers after the release of this data. This could prove telling. Certainly the strong daily closes will encourage the price action analysts of a significant resumption of upward momentum.
Though, when we consider the gains on the day were really just an immediate pricing higher and not really based in an imbalance of interest either way, there is cause for slight suspicion.
Could it be, that both inflation and the equity market are peaking at about the same time?
Not a common suggestion on the day, but then, the un-common has become the mainstay of market behaviour over the past two years.
The expectations of a peak in inflation around current levels, above 9%, not unrealistic, may have already been priced in by the very impressive stock rally over the previous month. There may simply be too many people waiting to take profit on long positions upon an inflation reversal. It is the case, that most of the funds management industry is already long, on the belief that recession will lead to lower bond yields as inflation drops away.
Hence, the potential for market long positioning to have now gotten ahead of itself.
Why was the market unable to kick on after the first re-pricing high? Which was within just a few minutes of the data release?
My central theme remains that the US economy is in much more trouble than just a momentary technical recession. That there are real forces of decay at work. Profit margins were fattened momentarily, hence strong earnings, but these margins are again being eaten away by higher labour costs, declining productivity, and simultaneously higher borrowing costs.
In these circumstances, it is possible that equity markets will again need to price in a significantly weaker economic outlook than they were expecting. Much as occurred across the first half of the year. This would point to the risk, as I have highlighted recently, of another 20% decline from existing levels.
What would surprise the market the most at this point? A simultaneous peak in both inflation and equity market pricing.
Note: All information on this page is subject to change. The use of this website constitutes acceptance of our user agreement. Please read our privacy policy and legal disclaimer. Opinions expressed at FXstreet.com are those of the individual authors and do not necessarily represent the opinion of FXstreet.com or its management. Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.
Recommended Content
Editors’ Picks
AUD/USD holds above 0.6500 in thin trading
The Australian Dollar managed to recover ground against its American rival after AUD/USD fell to 0.6484. The upbeat tone of Wall Street underpinned the Aussie despite broad US Dollar strength and tepid Australian data.
EUR/USD comfortable below 1.0800 lower lows at sight
The EUR/USD pair lost ground on Thursday and settled near a fresh March low of 1.0774. Strong US data and hawkish Fed speakers comments lead the way ahead of the release of the US PCE Price Index on Friday.
Gold price finishes Thursday’s session set to reach new all-time highs
Gold price rallied during the North American session on Thursday and hit a new all-time high of $2,225 in the mid-North American session. Precious metal prices are trending higher even though US Treasury yields are advancing, underpinning the Greenback.
Bitcoin price extends retreat from $69K as old whales shift their holdings to new whales
Bitcoin price continues to move further away from the $69,000 threshold, gaining ground as BTC bulls hope for a retest of the $73,777 peak. This is because of the general assumption that clearing this blockade would set the tone for a reach higher, marking a new all-time high.
Bears have been standing before a steamroller so far this year
Despite a pushback on rate cuts from Christopher Waller, and what was supposed to be cautious trading sentiment ahead of critical US inflation data released later on Friday, the S&P 500 rose on Thursday, marking its best first-quarter performance in five years.