Daily Market Analysis

Traders Focus on Upcoming US Inflation Gauges

April 13, 2023

There is no shortage of economic data for traders to chew on this week. With inflation still the prevailing market theme, upcoming US CPI and PPI reads this week could effectively set the table for a further 25bp Fed hike in May. Particularly if we see any upside surprises in these key inflation gauges. So, with traders being wary of the potential for inflation data to come in on the hotter side of expectations, it would not surprise to see the current positive market sentiment take a more circumspect turn ahead of key macro data this week.

In the past week we have already seen the chances of a May hike from the FOMC increase from a 50/50 bet to closer to 80%, with last week’s NFP data confirming that there is still plenty of steam left in the US labour market. And while there is a move towards a consensus view about what the market expects the Fed to do come May with regards to rates, looking at the back-half of the year, the picture becomes much cloudier. Markets are expecting the Fed to be pivoting to rate cuts by year end, while the FOMC for its part has so far given no inkling that this is their intention. Time will tell whose crystal ball was correct (either that of traders or the FOMC) but in any event this divergence of interest-rate expectations reflects the uncertain economic landscape looking forward.

The reaction of US Treasury yields to the upcoming CPI and PPI data could dictate not only the direction of the USD but also gold. Gold is still seeing good buying flows as an inflation hedge, but any hint of greenback strength could at least temporarily dent the appeal of the precious metal (as it becomes more expensive for offshore investors to purchase). But for the time being gold is contently consolidating above the psychological US$2k level.

The IMF global growth downgrades did little to dim the oil price, which is maintaining its current elevated levels. The WTI price is holding above the US$80 handle despite the IMF news and in the absence of any strong economic indicators from China, with the supply-side production cuts still the main driver of the oil price.

Elsewhere, the Australian Dollar is again facing downside pressure after failing to find its feet above the US$0.67 last week. Today the AUDUSD rate has been traversing around the US$0.6650 level ahead of local employment numbers due on Thursday. Despite higher gold and iron ore levels, the Aussie is struggling to attract much buying attention due in part to yield expectations when compared to not only the USD but also the euro and sterling.

Across Asia on Wednesday, traders were generally in an upbeat mood despite the upcoming US inflation readings, with the ASX200 and Nikkei registering gains during the session. But it’s fair to say that the buoyant mood also comes with an air of caution given the importance and potentially policy-influencing impact of the US inflation data this week.

‘General Advice only. All trading involves risk.’

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