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Peak Inflation Nations

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By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA

 

Equity markets ex-China are rallying today as US equity futures jump in Asian trading. Overnight, US inflation hit multi-decade highs, with YOY inflation printing at 8.50%, while core inflation rose by 6.50% YOY. But the perpetually bullish FOMO gnomes of the equity market, desperately searching for more drinks to keep the party alive, found it in the core inflation MoM data for March. Core Inflation undershot forecasts, rising 0.30% versus 0.50% expected.

That was all equity markets needed, using the singular data point to price in peak inflation in the US. Equity markets staged an impressive intraday rally and US yields eased somewhat at the long end. However, Federal Reserve President Lael Brainard, the dove who released the hawks last week, appeared on the wires still brandishing her talons vis-à-vis US monetary policy. That stopped the rally in its tracks, sending Wall Street to a slightly negative close.

Of course, it is not just the US that is grappling with inflation. India’s inflation rose back to early pandemic highs, climbing to 6.95% YoY for March, while Industrial Production flatlined, growing at just 1.70% YoY for February. The Indian Rupee only eased slightly yesterday though, and you could put that down to a strong US Dollar overnight.

This morning, my embarrassingly incompetent central bank, the Reserve Bank of New Zealand, delivered a hawkishly dovish rate hike. As predicted (even I get lucky sometimes), the RBNZ lifted its policy rate by 0.50% to 1.50%, versus market expectations of a 0.25% rise. The RBNZ noted that it was going to bring forward monetary normalisation to combat inflation. But tellingly, it left its terminal policy forecasts for 2022 and 2023 unchanged. So, it intends to check-in at the airport five hours ahead of departure, instead of 2 hours before departure. NZD/USD leapt 0.50% as the decision was announced but has since sunk all the back to down 0.10%on the day at 0.6845.

New Zealand remains my most likely country behind Russia to experience an economic hard landing this year. Sri Lanka and Pakistan have already got there. For my fellow Kiwi readers of this newsletter, I summarise the state of New Zealand thus. “The RBNZ and Government have commandeered and not consolidated the economy, I smell a RAT.”

So, what can we take away from all of the above? It appears that the market is swinging quickly to try and price “peak inflation.” The assumption is that the yield curves in places such as the United States, Britain, Europe, Australia and New Zealand have already moved higher to such an extent, that their respective central banks are now just “filling in the gaps.” Markets, after all, are forward-looking and in their wisdom have already pre-empted inflation and the central banks’ responses.

Naturally, “peak inflation” should be a reason to pile back into equities, especially as with the microbial attention span of people these days thanks to our smartphones, we are already seeing Ukraine fatigue/complacency setting in. However, it just isn’t that simple. In no particular order, the environment for equities remains challenging. President Putin said Ukraine negotiations are a dead end. Both sides are preparing for round two of the war, this time to be fought in open tank country. Russian oil production has fallen below 10 million barrels per day and OPEC is showing zero signs of moving to fill the gap. Only a return by Iran and Venezuela could do that. China’s Covid-zero policy is a looming threat to world growth. Ostensibly deflationary, severe disruption to China’s production lines and port exports will be inflationary, not deflationary. The slow-moving train wreck of China’s property sector. An impending US earnings season could highlight reduced earnings outlooks for many heavyweights.

Notably, the US Dollar kept rising overnight and US yields have not given back any meaningful recent gains. Oil prices are rising again, and Bitcoin is showing no signs of rallying. The story appears to be an equity market one, with other asset classes far more cautious. Perhaps the most cautionary note is gold, which has rallied to multi-week highs this week, despite a much stronger US Dollar and US yields. Either the gold market is walking into a bull trap – entirely plausible – or it is telling us something equity markets are ignoring.

The bottom line is that one monthly data point from the US does not a turning point make. Certainly, Chinese equities don’t think so.

On the subject of China, its March trade Balance has just been released. The headline number in US Dollar terms shot higher to $47.38 billion versus $22.4 bio expected. The headline flatters a worrying set of data, though. Exports outperformed, rising by 14.70% in March. However, imports, instead of rising by 8.0%, flat-lined to -0.10%. Slumping imports will make the noise around slowing China growth intensifies and its ramifications will shake nerves in the rest of Asia. The data shows that demand internationally for China products remains as robust as ever and mass Covid-zero shutdowns will lead to higher pricing pressures around the world. None of this trade data makes particularly good reading for anyone today.

The United Kingdom releases a swath of inflation, core inflation, RPI and PPI data today. There are upside risks to all of it and higher than expected numbers will increase the pressure on the Bank of England to accelerate tightening. That may save the Sterling from an ominous technical break of support at 1.3000 on a closing basis. The US PPI will be of passing interest if it slightly undershoots MoM. That may give more ammunition to the equity bulls. The Bank of Canada is expected to announce a 0.50% rate hike this evening as it plays catchup. Finally, given the oil rally overnight, tonight’s official US Crude Inventories should be good for volatility, especially if they retreat sharply.

Ex-China equities rally sharply in Asia.

Equity markets ex-China, in Asia, are having a positive session, helped by US index futures booking strong gains today after Lael Brainard torpedoed the “peak inflation” rally on Wall Street overnight. Overnight, The S&P 500 finished 0.34% lower, the Nasdaq lost 0.30%, and the Dow Jones fell by 0.26%. Futures in Asia have found their highs in inflation mojo once again, though. S&P 500 and Dow Jones futures have rallied by 0.50%, while Nasdaq futures have jumped by 0.75%.

That has boosted Asian markets with Japan’s Nikkei 225 leaping 1.60% higher, and South Korea’s Kospi adding 1.40%. Taipei has recorded an impressive 1.75% gain, with Singapore rising by 0.65%, Jakarta by 0.35%, and Kuala Lumpur by 0.25%. Bangkok is closed, with Manila gaining 0.25%. Australia has followed US futures higher, helped by higher overnight oil prices. The All Ordinaries has risen by 0.50%, with the ASX 200 gaining 0.35%.

China markets continue to be heavy despite government officials encouraging institutional investors to buy dips yesterday. That lead to a sharp rally by onshore equities yesterday. Today, Covid-zero nerves have returned as cases in Shanghai stay stubbornly high. As I alluded to yesterday, the small print of the easing of Shanghai restrictions contained plenty of poison pills. Flat-lining imports in today’s trade data will not alleviate concerns over domestic consumption. The Shanghai Composite has fallen 0.45%, with the CSI 300 down 0.50%. Hong Kong has limped to a 0.30% gain this morning.

President Putin’s comments about a dead-end in Ukraine negotiations and hints that he is comfortable with a drawn-out “special operation” will not sit well with European markets today. Nor will the overnight rebound in energy prices. Concerns of more hawkish guidance from tomorrow’s ECB policy meeting will also temper sentiment today.

US Dollar rally accelerates overnight.

In contrast with the exuberance of equity markets, the US Dollar rally accelerated overnight, with dollar index gains led by weakness in the Euro and Sterling. The dollar index ignored the softer monthly core-inflation print, rallying an impressive 0.34% to 100.33, where it remains in Asia. A test of 100.50 and then 101.00 seems imminent and the dollar index remains in a technical uptrend as long as support at 99.35 holds.

EUR/USD slumped 0.50% to 1.0827 overnight, as negative comments around Ukraine by President Putin, and an impending ECB policy meeting tomorrow, weighed on the single currency. EUR/USD remains uncomfortably near to the multi-year support line at 1.0800. Failure signals more losses to 1.0600 and 1.0300 initially, and possibly back to parity. Resistance is at 1.0950 and 1.1200, with longer-term resistance at 1.1300. Rising oil prices, Ukraine risks and/or an ECB moving to a hawkish stance all threaten more downside pressure.

Sterling tested support at 1.3000 once again overnight but this time, only managed to close on support at 1,3000. Positive UK data may give Sterling a temporary respite, but a daily close under 1.3000 signals another round of losses targeting 1.2850 and 1.2700.

With US yields edging lower overnight, USD/JPY remained steady at 125.40 before resuming its climb in Asia today, rising to 125.65. USD/JPY is just below its multi-year highs at 125.80 and despite some more official noise from Tokyo today, looks poised to break through it this week. That will set the scene for a test of the May 2002 highs at 128.90. Any drop to 124.00 and 123.50 should find plenty of keen dip buyers. Only a sharp fall in US yields changes the bullish outlook.

Asian currencies held steady overnight, and have rallied with equity markets this morning, continuing a pattern of choppy short-term range trading. A gentle move lower by US yields overnight proved slightly supportive. USD/KRW, USD/PHP, USD/INR, and USD/TWD are down around 0.20% today. Weak China imports will temper any gains with onshore USD/CNY, and offshore USD/CNH holding steady at 6.3660 and 6.3750. Interestingly, both USD/CNY and USD/CNH are approaching one-year trendline resistance levels, today at 6.3775 and 6.3960 respectively. Daily closes above would signal another leg of Yuan weakness.

Oil prices rally overnight.

Oil prices rallied sharply overnight as OPEC rebuffed increasing production above already agreed amounts, and Russian oil production fell below 10 mio barrels per day. Putin’s Ukraine negotiation dead-end comments also dampened hopes that a negotiated settlement could relieve tight energy markets.

Brent crude rallied 5.55% higher to $104.85, and WTI leapt 6.105 higher to 101.00 a barrel. In Asia, oil prices are almost unchanged after China imports slumped today. Asian buyers, having been able to pick and choose dips to buy into over the past week, seem reluctant to chase prices at these levels. That implies plenty of interest will be around to buy on any dips.

With the latest scheduled OPEC+ increase, and US and IEA SPR release out there and priced in, it seems that China continues to drive the bearish price action. That impact may be waning now as OPEC refuses to increase production, and the situation in Eastern Europe continues to darken. Brent and WTI have fallen to the bottom of my ranges, but I expect Brent to remain in a choppy $100.00 to $120.00 range, with WTI in a $95.00 to $115.00 range. Brent crude has further support at $96.00, and WTI at $93.00 a barrel.

Gold charges higher overnight.

Despite a much stronger US Dollar, and US yields holding steady, gold prices charged higher once again overnight. Gold rose 0.63% to $1866.50 an ounce, gaining another 0.26% to $1971.60 in Asia today.

I will admit to scratching my head about the longevity of the gold rally at this stage. Either the gold bugs are walking into a huge bull trap that will end in tears, or the gold market is telling us the inflation and geopolitical risks are much higher than we are seeing in the headlines. I know which side my money is on, but one must respect the upward momentum until it turns.

Gold has initial resistance at $1980.00, the overnight high. After that, a test of $2000.00 is entirely possible, although I believe option-related selling there will be a strong initial barrier. If that is cleared, gold could gap higher to $2020.00 an ounce quite quickly. A retreat through $1940.00 will signal a whipsaw move lower, chopping out the short-term money. Failure of $1915.00 will signal a retest of important support at $1880.00 and possibly $1800.00 an ounce. I can honestly say I don’t know which scenario will be the winner at this moment.

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Another Turbulent Day

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been another turbulent session after stock markets turned sharply lower on Wednesday as investors fret over the outlook for the economy this year.

Results from Walmart and Target this week have brought into sharp focus the plight facing companies and consumers as inflation begins to bite. And that’s in a country that is still performing relatively strongly with a consumer that still has plenty of savings built up over the last couple of years. Others are not in such a fortunate position.

But inflation is catching up and profit margins are taking a hit. Soon enough though, those higher costs will continue to be passed on and consumers will stop dipping into savings and start being more careful with their spending. There’s a feeling of inevitability about the economy, the question is whether we’re going to see a slowdown or a recession.

The language we’re seeing from Fed officials isn’t filling me with confidence either. We’ve gone from them being confident of a soft landing, to a softish landing and even a safe landing, as per Patrick Harker’s comments on Wednesday. I’m not sure who exactly will be comforted by this, especially given the Fed’s recent record on inflation and past record on soft landings.

And it seems investors aren’t buying it either. A combination of these factors and no doubt more has sent equity markets into another tailspin, with Wall Street registering another big day of losses on Wednesday and poised for another day in the red today. Europe, meanwhile, is also seeing substantial losses between 1% and 2%.

Oil slips as economic concerns weigh

Those economic concerns are filtering through to the oil market which is seeing the third day of losses, down a little more than 1% today. We were bound to see some form of demand destruction if households continued to be squeezed from every angle and it seems we may be seeing that expectation weigh a little as we move into the end of the week.

Meanwhile, China is reportedly looking to take advantage of discounted Russian crude to top up its reserves in a move that somewhat undermines Western sanctions. Although frankly, it would have been more surprising if they and others not involved in them didn’t explore such a move at a time of soaring oil prices.

Still, I expect Brent and WTI will remain very high for the foreseeable future, boosted by the inability of OPEC+ to deliver on its targets and the Chinese reopening.

Gold buoyed by recession fears?

Gold appears to be finally seeing some safe-haven flows as markets react strongly to the threat of recession rather than just higher interest rate expectations. The latter has driven yields higher and made the dollar more attractive while the economic woes they contribute to seem more suited to gold inflows, it seems.

It will be interesting to see how markets react in the coming weeks if the investor mindset has turned from fear of higher rates to the expectation of a significant slowdown or recession. And what that would mean for interest rate expectations going forward. Perhaps we could see gold demand return.

Can bitcoin continue to swim against the tide?

Bitcoin is holding up surprisingly well against the backdrop of such pessimism in the markets. Perhaps because it’s fueled by economic concern rather than simply interest rates. Either way, it’s still trading below $30,000 but crucially it’s not currently in freefall as we’re seeing with the Nasdaq. Whether it can continue to swim against the sentiment tide, time will tell.

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Markets

Inflation Hits 40-Year High

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

European equity markets are a little flat on Wednesday, with inflation data this morning once again offering a reminder of the struggles that lie ahead.

Not that we need reminding given all of the data we’ve seen recently. And then there are the gloomy forecasts from central banks, with even the Fed now targeting a softish landing which feels very much like the stage before a mild recession. It may be time to buckle up and prepare for a very bumpy year.

Will BoE move to super-sized rate hikes?

UK inflation is running at a 40-year high and it’s not peaked yet as the cost-of-living crisis looks set to squeeze the economy into recession. While annual inflation came in slightly below expectations at 9%, pressures are broad-based and as the year progresses, it is expected to hit double figures.

There is still plenty more pain to come for households, most notably when the energy price cap increases again in October. But price increases are broad-based, as evident in the jump in core inflation to 6.2%. This comes as the Bank of England has warned of more pain and a probable recession, as it continues to aggressively raise interest rates in the hope of being able to catch up without inflicting too much harm in the process.

Like many other central banks, it has been heavily criticised for its misjudged faith in pandemic-induced inflation being transient for too long. And in the UK’s case, the problem looks far greater and more widespread, with Brexit effects compounding the problems and driving up prices. Can the BoE afford to continue raising rates so gradually, as markets expect with 25 basis points every meeting or will they be forced to join their US counterparts with super-sized hikes? Pressure is mounting.

Oil higher as China starts reopening

Oil prices are on the rise again as Shanghai takes a big step towards reopening following three days of no new cases in the broader community. Restrictions have been tight in many cities across China which have helped keep a lid on oil prices in this very tight market. But with activity now likely to pick up, crude prices could be on the rise once more.

Efforts toward a Russian oil embargo have failed, with Hungary continuing to stand in the way. That could be slowing the rally in oil still, as could US talks with Venezuela which may eventually lead to additional supply. Although ultimately, this comes at a time when major producers simply aren’t producing as much as they should. Russia saw its output fall by another 9% last month as a result of sanctions, which contributed to OPEC+ producing 2.6 million barrels below target, lifting compliance with cuts from 157% to 220%.

Gold looking shaky once more

Gold is a little lower on Wednesday, as the dollar strengthens once more following a few days of declines. We’ve seen a slight corrective move in the greenback which has eased some of the pressure on the yellow metal but we may be seeing that return already. Gold is currently trading a little over $1,800 and a break of it could trigger another wave lower as investors continue to factor in more interest rate hikes and therefore higher yields.

The path of least resistance

With risk aversion starting to creep back in, bitcoin finds itself back below $30,000 which may make some a little nervous. It was always going to be difficult for risk assets to significantly build on the rally in the current environment. What may be encouraging to some is that we haven’t seen a sharp reaction to the move back below such a key level. Of course, that could quickly change with below appearing to offer the path of least resistance.

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Markets

Further Pressure on Central Banks

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been a relatively calm start to trading this week, with Europe a mixed bag at the close and the US a little lower.

The weaker Chinese figures overnight will be of some concern at a time of slowing economic activity around the world. Still, as has been the case so often in recent years, the lockdowns will have heavily distorted the data. With lockdowns priced in to an extent, the key will be how quickly restrictions are lifted and then how well the economy bounces back.

Stock markets have come under heavy pressure globally as central banks have been forced to become part of the problem rather than the solution, as has so often been their job in the past. We’ve become very used to easy monetary conditions but now we have a devastating combination of a cost-of-living crisis, looming recession, very high inflation and much higher interest rates.

And as we’re hearing so often now, policymakers understand the pain that households are feeling and will experience going forward but getting inflation back under control is the primary focus. Which means further pain ahead.

The BoE monetary policy report hearing reflected everything we’ve heard in recent weeks as the UK heads for recession and double-digit inflation. Bailey and his colleagues accept how bad the situation in the UK is and the scale of the task at hand but whether they’re doing enough to address it is hard to say. They were among the first to start hiking late last year but have still been criticised for starting too late.

Oil near recent highs after falling on Chinese data

Oil prices have recovered earlier losses that came in the wake of the Chinese figures. While lockdowns have been priced in over the weeks, the numbers were much worse than expected which weighed heavily on crude. While an EU ban on Russian oil suffered another setback as Hungary stood firm against it, the bloc is continuing to work on an agreement while Germany is reportedly planning to phase it out regardless, which could be helping to support prices today.

Oil is trading around $110, towards the upper end of where it’s traded over the last couple of months. China looking to ease restrictions could keep prices more elevated having contributed to them trading at more reasonable levels. A move above $115 in Brent would be interesting, with that having been something of a ceiling for rallies over the last couple of months.

Gold flat but remains under pressure

Gold is flat on the day after slipping this morning below $1,800 for the second time in as many sessions. The yellow metal has been very vulnerable to rising yields and a stronger dollar recently as central banks are forced into much more aggressive action. With the dollar remaining a hot favourite and pressure intensifying on central banks to tackle inflation, gold could remain out of favour for a while yet.

Bitcoin struggles at $30,000

An impressive rebound in bitcoin after breaking $30,000 may already have run its course, with the cryptocurrency giving up earlier gains to trade a little lower on the day. It’s spent a little time over the last couple of days above $30,000 but it is struggling to hang on to them. That doesn’t bode well at a time of risk aversion in the markets and such negative coverage of stablecoins following the Terra collapse. There may be more pain ahead.

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