All eyes on the Inflation data
If price pressures should be stronger than feared, then markets will be in for more turbulence and selling pressure
The market is currently in a state of flux. Worries that the US Federal Reserve’s resolve to hike interest rates by 0.50% increments will not be enough to hold price pressures at bay are spooking investors.
As such, the US inflation data tonight will determine the direction of markets for the near future. The market expects the headline number to show that prices rose by 8.1% (vs the previous print of +8.5%) when compared with the prices in April last year and stripping out volatile components such as energy and food, prices rose by 6.0% (vs previous print of +6.5%).
If the actual print is lower than expectations, the market will be cheered as it will show that price pressures are not as bad as feared and the trajectory is for lower inflation pressure going forward. Risk assets will be supported in such a scenario.
If price pressures should be stronger than feared, then markets will be in for more turbulence and selling pressure.
TRADING TIP
Beware the stormy waters
Markets have been turbulent for the past week now and will likely continue until it is clear that policymakers are in control. If you are already on the sidelines and not invested in the markets, it is prudent to wait for this storm to pass before starting to allocate capital.
If you’re invested, it is the time to reduce risk till there is more clarity on what the future holds.
Turbulent times will result in swings in your portfolio value that can be hard to stomach no matter how long you have been in trading. Understand that some troubles in life are avoidable and this is one of them.
DAY AHEAD
US Consumer Price Index (CPI) data released tonight is key as the market remains worried about the Federal Reserve’s ability to control inflation.
TRADING PLAN
1. Currencies:
EUR — Short the EUR. EUR remains weak.
2. Commodities: Uranium & Energy — Stay the course, but caution is warranted as the market is now in full risk aversion mode.
3. Stocks:
US Stock Index: The US stock market gyrated from positive to negative throughout the trading session as investors try to adjust their positions ahead of the key US inflation data later today.
Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.
Key risks: US Federal Reserve policymakers’ comments will dictate how the market perceives future policy path for now. The Ukraine-Russia war rages on, but the market impact is limited for now. The US Inflation data today will provide the market direction for the short term.
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WHAT HAPPENED YESTERDAY
- The US 2 year Treasury Bond yield rose +0.01% while the 10 year yield decreased -0.06% to 2.99%, bringing it below 3%.
- Federal Reserve Speakers: Williams (usually dovish, current voter) echoed comments from Powell’s press conference last week saying that +0.50% hikes at the next 2 meetings makes sense but stated the importance of being data dependent. Waller (hawkish, current voter) was more hawkish, stating that it is time to hit with rate increases and that downward pressure can be exerted on the labour market to reduce demand. Mester (hawkish, current voter) was hawkish as well, stating that a +0.75% hike is not ruled out forever and more can be done if inflation does not slow down after the 2 +0.50% hikes in the next 2 meetings. She also added that we may see a negative GDP print and higher unemployment.
- The US stock market whipsawed in yesterday’s trading session as the market remains confused and turbulent. The S&P 500 inched higher by +0.25% (intraday high and low: +1.94% and -0.83%), the Dow Jones Index dipped -0.26% (intraday high and low: +1.56% and -1.11%) while the Nasdaq climbed +1.30% (intraday high and low: +2.87% and -0.12%).
- The crypto market saw a period of respite yesterday after the freefall the day before. Bitcoin increased +3.1% to 31,005 while Ether rose +5.1% to 2,342. The drama in the depegging of UST (Terra) seems to be over for now, and the impact on the overall market lessened. Luna, however, continued to lose ground, trading around $13+, falling more than 75% from $60+ just 2 days ago.
HEADLINES & MARKET IMPACT
UAE, Saudi energy ministers hit back at ‘NOPEC’ bill, say it could send oil prices surging
Notable Snippet: UAE Energy Minister Suhail Al Mazrouei told CNBC Tuesday that OPEC was being unfairly targeted over the energy crisis, and moves by U.S. lawmakers to disrupt its established system of production could see oil prices shoot up by as much as 300%.
“If you hinder that system, you need to watch what you’re asking for, because having a chaotic market you would see … a 200% or 300% increase in the prices that the world cannot handle,” Al Mazrouei told CNBC’s Dan Murphy during a panel at the World Utilities Congress in Abu Dhabi.
The bill, which aims to protect U.S. consumers and businesses from engineered spikes in energy prices, would see the alliance open to antitrust lawsuits for orchestrating supply cuts that raise global crude prices.
WHAT WE THINK: The OPEC countries will want to continue enjoying the high profits from the current surge in energy prices and will do whatever it takes to enjoy the current privilege. Oil importers are at the mercy of OPEC and the bill is unlikely to move the OPEC.
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Biden says White House could drop Trump China tariffs to lower consumer prices
Notable Snippet: President Joe Biden said he could drop some of the tariffs imposed against Chinese imports to help control rising consumer prices in the U.S. — just as Wall Street braces for another inflation report north of 8%.
The White House is reviewing the penalties imposed under former President Donald Trump — which raised prices on everything from diapers to clothing and furniture — and could opt to remove them altogether, Biden said in addressing the nation from Washington on Tuesday.
The extent to which removing Trump’s taxes on Chinese products would cool inflation is a matter of debate among economists, but many say easing or removing the tariffs altogether is among the few options available to a White House eager to pull every lever available to ease costs.
WHAT WE THINK: This is a win-win decision for both US and China as both economies face their own set of challenges amidst this time of turmoil. We may start to see alleviation of the situation in the near future.
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Ukraine to halt key Russian gas transit to Europe, blames Moscow
Notable Snippet: kraine said on Tuesday it would suspend the flow of gas through a transit point which it said delivers almost a third of the fuel piped from Russia to Europe through Ukraine, blaming Moscow for the move and saying it would move the flows elsewhere.
Ukraine has remained a major transit route for Russian gas to Europe even after Moscow’s invasion.
GTSOU, which operates Ukraine’s gas system, said it would stop shipments via the Sokhranivka route from Wednesday, declaring “force majeure”, a clause invoked when a business is hit by something beyond its control.
WHAT WE THINK: The trend for higher energy prices continues, stay with the trend.
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SENTIMENT
FX
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Best,
Phan Vee Leung
CIO & Founder, TrackRecord
