US stocks initially rejoiced a tame inflation report, but that was short-lived after Elon Musk’s tweet about cryptos triggered a wave of selling of Tesla stock, which also dragged all the big-tech stocks. Financial markets are still worried about inflation as massive stimulus nears and a great reopening of the economy could lead to price pressures getting out of control. A record savings glut could be unleashed if the vaccine rollouts are successful and that could lead to a sharper rise of inflation than the Fed is currently thinking.
Stocks got a limited boost from Fed Chair Powell and settled little changed on the day.
Powell
Where does Fed Chair Powell hide his dovish cape? Super Powell’s speech at the Economic Club in New York did not deliver anything close to a hawkish comment. Powell’s ultra-accommodative stance was confirmed but was not enough of a catalyst for stocks to recover all of the morning’s losses. With no hints of scaling back the Fed’s massive asset purchases, Powell is a super dove. The key highlights from his speech was his standard reiteration of the need for fiscal support, a sustained rise in inflation is unlikely, and that they are not even thinking of withdrawing support.
Tame inflation readings took away some trading firepower from Powell’s big speech. Risky assets will continue to benefit from the Fed put but for US stocks to finish the year higher much higher, fiscal relief needs some bipartisan support (just enough Republicans to suggest future talks could be warranted, not necessary to garner 60 votes) and for optimism that infrastructure spending will be big and happen in the fall.
CPI
Forget jobs data, it is all about inflation. Stable core inflation was very much a surprise that gave a tentative boost for risky assets. Core inflation, which excludes food and energy costs, posted a surprise flat monthly reading, down from 0.1% and a miss of the eyed 0.2% consensus estimate. On an annual basis core inflation declined from 1.6% to 1.4%, while the headline reading remains unchanged at 1.4%.
Everyone is bracing for inflation, but this report shows it’s still not here.
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FX
The dollar has been all over the place today, lower after the CPI miss, but resilient after risk aversion settled in. Powell’s dovish comments confirmed the Fed put but it seems FX markets have heavily priced that in already. The dollar softened against the euro, pound, and franc.
