Fri, Mar 24, 2023 @ 21:50 GMT

Calm But for How Long

Some calm appears to have returned to financial markets in early trade in Europe this morning but how long will it last?

While everyone will be hoping that the turmoil that swept through markets since Friday is dealt with and behind us, I’m not sure anyone can say with any confidence that this is the case and investors will remain very sensitive to ongoing developments.

What’s more, we’ve seen a dramatic repricing of interest rate expectations, to the extent that markets now price peak rates to be here or near and rate cuts this year to be highly likely. In much the same way that I wasn’t convinced by pricing in the aftermath of Powell’s appearances, barring much greater fallout in the financial system, I struggle to see expectations remaining so dovish.

The timing of today’s inflation data is therefore all the more intriguing as, what was meant to be the dominant driver this week has fallen down the pecking order. But to what extent isn’t clear. And depending on the outcome, it could either compound expectations or create an even greater headache for the Fed which will already be questioning whether a pause this month may be the best course of action.

Some good news for the BoE

The UK jobs data was largely in line with what markets were expecting and didn’t really shift the dial in any significant way. The unemployment rate didn’t tick higher as expected, remaining at 3.7%, but hourly earnings did soften to 5.7% including bonuses – from an upwardly revised 6% – while excluding bonuses they fell a little further to 6.5%.

All told, I don’t think either aspect of the report will fuel or ease concerns at the Bank of England about inflation and the path for interest rates. Meanwhile, markets are still pricing in a 25 basis point hike over the next couple of meetings and the pound is only marginally softer than it was pre-release. Focus now shifts to the budget tomorrow and whether the Chancellor will use the new-found fiscal headroom or save it for later.

Wild fluctuations in oil

Oil prices are continuing to whipsaw while remaining within the broad ranges they’ve traded within since early December. Yesterday we saw Brent and WTI testing the lower end of these in response to the turmoil that erupted in the financial system that triggered widespread risk aversion.

Today we’re seeing them trade lower again, albeit still higher than yesterday’s lows. If we see markets settle down, that could prevent a break of the lows but oil traders, like those elsewhere, will remain nervous about the prospect of further turbulence. Suddenly, a break below the lows looks a much greater risk which may keep pressure on in the short term.

A strong rally

An extraordinary rally in gold over the last couple of sessions has seen it rebound almost 5% and move back above $1,900 which could have been a major barrier of resistance under normal circumstances. But that isn’t what we’re seeing at the moment and the dramatic decline in yields, combined with a softer dollar and clamor for safe havens sent the yellow metal soaring.

That may not last if markets correct themselves, assuming the dust settles, which could see interest rate expectations shift higher. Then there’s today’s CPI data which may refocus attention on the Fed’s primary goal of price stability and the success it’s having, or not, in driving inflation back to target. It promises to be another interesting day for gold.

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