Wed, Feb 01, 2023 @ 06:49 GMT

All Eyes on US CPI

European equities traded in the red at the start of the week, but equities in the US rebounded as investors are hanging on to hope of slower inflation and reasonably hawkish Federal Reserve (Fed) by their fingernails.

Today and tomorrow will tell whether they are right being optimistic or not.

The latest US CPI data will reveal whether inflation in the US eased, and by how much. It’s highly likely that we will see a number below the 7.7% printed a month earlier. But a number below 7.7% won’t be enough as analysts expected it to ease all the way down to 7.3%.

Last Friday, the PPI figure showed that the US factory gate prices eased in November, but not as much as penciled in – leading to some disappointment among investors. Today, a similar disappointment could erase yesterday’s 1.43% rebound in the S&P500 and could easily send the index below its 100-DMA.

But if, by any chance, we see a softer CPI figure, then the S&P500 could easily jump above its 200-DMA, and even above the ytd descending channel top.

But, but, but…

Today’s US CPI data, unless there is a huge surprise, will probably not change the Fed’s plan to hike the interest rates by 50bp this week. Activity on Fed funds futures gives 77% chance for a 50bp hike, and a slim chance of 23% for another 75bp hike.

What will probably change is where investors see the Fed’s terminal rate, and for how long.

More importantly, it will give us an idea on how the market pricing for the Fed’s terminal rate will clash with the dot plot projections that will come out tomorrow, and that will, in all cases, hammer any potentially optimistic market sentiment.

Therefore, even if we see a great CPI print and a nice market rally today, it may not extend past the Fed decision on Wednesday.

Energy up

European stock investors are uncomfortable this week due to the icy cold weather, that will get the countries to tap into the natural gas, and other energy supplies.

The US nat gas prices jumped more than 30% since last week due to a powerful Pacific storm bringing cold and snow to the norther and central plains in the US.

In the UK, power prices hit another ATH yesterday.

Happily, we haven’t seen a significant rise in the European nat gas futures, which in contrary kicked off the week downbeat.

But crude oil rallied as much as 2.60% on Monday as Russia said that the EU’s $60 cap on its oil could lead to supply cuts, as Goldman said that Chinese reopening could boost demand by 1mpd – which would mean a $15 recovery in crude’s price – and as a key pipeline supplying the US closed following a spill discovered last week.

I think that the oil rebound due to these three factors could be short-lived and may offer interesting top selling opportunities for medium term bears looking for a further dip in oil prices to below $70pb. Because, the Russia is not harmed by $60pb currently, US supplies will be restored and the Chinese reopening may not be smooth due to potential disruptions in economic activity, because people are sick.

Don’t count on strong UK GDP

The British GDP grew more than expected last month and that was mostly due to the rebound in activity after Queen Elizabeth’s death slowed activity earlier. But strikes across the country are so severe that they could wipe half a billion pounds off the hospitality industry’s pre-Xmas earnings. PM Rishi Sunak thinks that military staff could help cover for striking workers.

Cable consolidates gains below 1.23 but is at the mercy of the US dollar. The Bank of England (BoE) is expected to hike by 50bp at this week’s MPC meeting, but the hike will certainly be accompanied by dovish statement as the UK economy is not strong enough to withstand a Fed-like tightening in the middle of an energy, and cost-of-living crisis.

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