US equities first struggled to find direction, as the Federal Reserve (Fed) Chair Jerome Powell kept mum on monetary policy in Stockholm yesterday, worried about the World Bank’s morose growth projections, but then turned north on hope that a softer US inflation print tomorrow could boost the Fed doves and enhance appetite in US equities.
The S&P500 found support at the 100-DMA and closed the session above the 50-DMA, while Nasdaq advanced 0.88%. We could see some more optimism into tomorrow’s CPI print in the US.
Gold benefits from softer US yields, and softer dollar on expectation that a softer inflation could soften the Fed’s policy stance. So, a softer inflation could indeed send the price of an ounce above $1900 to the end of the week.
Stop fighting the Fed
What’s happening right now is absurd. The market is fighting back the Fed. The Fed says ‘we will hike the rates above 5%’, and investors reply ‘we don’t believe you; we think that you will NOT raise the rates above 5%!’
As a result, the financial conditions in the US are now neutral, while inflation, though easing, remains more than three times higher than the Fed’s 2% target. This means that the Fed will continue hiking rates even if it means slower economic growth.
World Bank forecasts aren’t cheery
The World Bank predicts a global growth of about 1.7% this year, about half the pace it predicted last summer. It would also be the third worst year in three decades after 2009 and 2020 slowdowns.
The US is expected to grow by only 0.5%, the Eurozone should not grow nor contract, while growth in China will be around 4.3% according to their latest forecasts for 2023.
Although the slowing economic growth softens the rate expectations – and boost equities, a weaker global economy should weigh on corporate profits and should not let the rally run too far.
Have you gone out of your mind, Goldman?
Then you have Goldman Sachs, which predicts that the Eurozone will finally not enter into recession… after all.
The bank said yesterday that the European GDP should grow by around 0.6%, versus a 0.1% contraction predicter earlier. And oh, they also see inflation easing faster than expected to around 3.25% by the end of this year.
Why? Because the boost from Chinese post-Covid reopening, and the sharp fall in natural gas prices thanks to the Weather Gods which prevented the continent from cold weather so far should help tempering slow down. ¨
… then unicorns will invade Europe and we will all leave happily ever after.
ECB remains determined to hike rates
European Central Bank (ECB) officials stand behind their hawkish view despite the latest softening in inflation. ECB’s Schnabel said at her speech yesterday that the ECB will have to raise the rates much further because ‘inflation will not subside by itself’.
The EURUSD tested the 1.0760 resistance again yesterday, forming a triple top since mid-December. The positive pressure is the fruit of the divergence between softening Fed expectations and hawkish ECB bets.
Strong Australian inflation revives RBA hawks
In Australia, inflation advanced more than expected to 7.3% in Q4 fueling the expectation that the Reserve Bank of Australia (RBA) could opt for another 25bp hike in its February meeting. The AUDUSD is ready for fighting the 0.70 offers, if, of course, tomorrow’s inflation read in the US doesn’t reveal a bad surprise.
Crude under pressure
In energy, crude oil is dragging its feet below the $75 this morning and will likely remain under pressure as yesterday’s API data showed that the US oil inventories rose by a little less than 15 mio barrels last week as the refining activity returned to normal following weather-related shutdowns. I still believe that price pullbacks could be interesting dip-buying opportunities as there are many supportive factors, including the Chinese reopening, and the globally tight supply.