US Inflation: CPI data out of the US saw yet another strong upside surprise highlighting the risk that inflation will be more persistent than expected by the Federal Reserve, thus raising the probability of a faster tightening of monetary policy. The market now prices three 25bp hikes in 2022. Core inflation increased 0.6% m/m (consensus 0.4% m/m) taking the yearly rate to a new cycle high of 4.6%. The market response was clear with a jump in bond yields, equities selling off and the USD strengthening.
Global Inflation Watch: This morning we published Global Inflation Watch – Highest US wage growth in more than 10 years, where we go through inflation drivers globally with focus on the US and the euro area. Inflation pressures are growing in general but with key differences across the US and the euro area, not least on wages.
Equities: Equities fell yesterday, once again with US setting the directions. Europe and Asia finished higher but Europe will have some catching up to do today as the drop in US stocks happened after the close of cash trading in Europe. One obvious candidate to blame, the +6% CPI print from US. With that in mind it is no surprise to see defensive, value, large cap and min vol stocks outperforming. It was more or less a textbook reaction taking place in the US even if it took a little time to unfold. In US, Dow -0.7%, S&P 500 -0.8%, Nasdaq -1.7% and Russell 2000 -1.6%. Maybe worth to note, albeit not surprising, the VIX moving higher for the fifth consecutive day. Asian stocks doing fairly well this morning in light of the US data and market moves yesterday. US futures are mixed while European futures are lower.
FOREX MARKET: USD rose on a broad basis yesterday after US CPI inflation rose much more than expected. EUR/USD dropped below 1.15, USD/JPY rebounded back towards 114 and GBP/USD fell close to 1.34. The EUR/USD pair settled below 1.1500, its lowest since July 2020. GBP/USD nears 1.3400 as investors await news on the Brexit front.
The AUD/USD pair is down to the 0.7330 region, USD/CAD flirts with 1.2500 as crude oil prices gave up to the ruling dismal mood.
COMMODITIES: Bumper day for Gold as the safe haven asset, as the bright metal trades around $1,840 a troy ounce after reaching a multi-month high of 1,868.54.
Crypto: Bitcoin to reach $100000USD by end of 2021?
Historically, spikes in BTC prices correspond with a rise in US inflation.
Renowned cryptocurrency analyst Peter Brandt commented on Bitcoin’s price rally. Brandt is bullish on XRP and expect’s BTC price to go up. Interestingly, in addition to acting as an inflation hedge, Bitcoin has an impact on monetary policy. A rise in inflation and a drop in the US employment rate encourages the Fed to tighten its policy. Therefore, inflation is considered as a key indicator of Bitcoin’s price trend and upcoming reversal.
Many analysts are of the belief that Bitcoin has just presented its most bullish setup of the year. Rollercoaster end to 2021 is definitely on the cards.
Local Markets: ZAR has taken a battering this week after last weeks correction with early hours trade reaching R15,47/USD. All eyes nor firmly turn to the MTBPS later today with markets weary about what to expect. Positive would be seen as reduced government spending on wages and an improvement in wasteful expenditure as a start. The new social grant proposition could be seen as negative and there is a chance of R15,75-R16,00/USD by end of day should markets perceive a lack of tightening around government spending especially the bloated public sector wage bill and continuous bailouts of SOEs.