Thu, Jun 01, 2023 @ 02:03 GMT

Peace and Inflation

Investors loved the sound of peace and the risk appetite came back yesterday as Russians started pulling a part of their troops back from the Ukrainian border. Although, news of a cyber-attack on some Ukrainian banks and some government websites including the defense ministry’s website raised a couple of eyebrows again, and turned all eyes to the Russians. But there is no report suggesting that Russia is behind the cyber-attack just yet.

Oil fell as much as 4% yesterday on de-escalation news. The barrel of US crude fell below the $91 mark and rebounded back above the $92. This was the most expected kneejerk reaction to the latest news, yet it’s important to keep in mind that oil prices have been surging due to a lack of supply and decreasing global reserves. The Russian crisis certainly added an extra pressure on an already-bullish setting, but explained only a part of the gains. Therefore, the end of the Ukrainian worries won’t be the end of the rally in oil. OPEC+ countries are still struggling to meet their current production targets and the post-pandemic activity is increasingly energy hungry. Yesterday’s API data showed another weekly decline in the US crude inventories. The stockpiles decreased by about a million barrels last week, lower than nearly 1.8 million barrel decline expected by analysts. Today’s more official EIA data is expected to confirm a 2.2-million-barrel decline. A larger decline could revive the bulls, while a softer figure will certainly not do much to the actual positive trend. Oil bulls have still their eyes set at the $100 per barrel level, and are poised to take advantage of any price pullbacks to strengthen their long positions.

Gold, on the other hand, dropped 35 dollars yesterday, as the safe haven money poured into the risk assets. We could expect a further easing and a return to and below the $1800 if the risk appetite is fully restored. The rising US yields are not necessarily supportive of a stronger gold, and the yields are set to rise higher, especially with the US inflation that proves to be much more resilient than what analysts think.

Released yesterday, the US producer inflation data came in as a bad surprise, yet again. The factory-gate prices in the US rose 9.7% in January, significantly higher than 9.1% penciled in by analysts. The market reaction remained subdued as investors only saw the Ukraine de-escalation news. Nasdaq rallied 2.50%, while the S&P500 gained a bit more than 1.50%. Let’s see if today’s FOMC minutes will kill that joy.

FOMC minutes

The latest Fed decision was more hawkish than expected, and the minutes could smooth out a part of the extra hawkishness.

Even though the market was pricing in an almost certain 50-bp hike from the Fed in the March meeting after the US CPI data, the probability of a 50-bp hike fell to near 60%.

So the game is not over yet for the Mach meeting: a more dovish than expected tone from the FOMC minutes could get the market re-focus on a 25-bp hike.

Rushing to the exit won’t necessarily do good to the economy nor to the financial markets, especially knowing that the rising rates won’t bring the energy prices lower, or ease the chip and other supply shortages that are mostly responsible for the rising global inflation.

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