Inflation concerns bubbling back to the surface

Asian stocks are in the red along with US and European futures, while the benchmark dollar index (DXY) is holding on to the psychological 94.0 handle to nudge gold prices below the key $1834 level.

Inflation fears are returning to the fore, with China’s higher-than-expected consumer and producer prices being the latest in a series of red flags about risks to the global economic outlook. China’s October CPI climbed 1.5% compared to a year ago, exceeding market forecasts of 1.3%. Factory gate inflation climbed13.5% which was its highest print in 26 years.

Inflation woes raise specter of stagflation, policy mistake

All eyes are on today’s release of the October US inflation data, with the headline consumer price index expected to come in at 5.9% year-on-year and register its steepest climb since 1990. Further evidence of elevated inflationary pressures in the world’s largest economy would be the latest test for the Fed’s ”transitory” view and challenge the central bank’s stance on policy tightening.

The worry is that such stubborn inflationary pressures could choke the recovery in global demand or hasten policy tightening by major central banks. The likes of the Bank of England and Bank of Canada appear on the cusp of following the RBNZ in raising their respective benchmark rates.

The prospects of higher interest rates could sour the mood surrounding risk assets, and a faster-than-expected inflation print today would only strengthen such a narrative. There are also concerns that a faster cycle of policy tightening, done in the hopes of reining in consumer prices, could instead trigger the next recession. Further clouding the monetary policy outlook is the uncertainty over who will head the Fed next year, with Bloomberg reporting that Fed Governor Lael Brainard has held talks at the White House about potentially replacing Jerome Powell as Fed Chair.

The worries currently in play were enough to take some of the gloss off US equities hot streak overnight. Still, a surprise moderation in today’s US CPI print could help alleviate the risk-off mood and afford more breathing space for stocks to push higher, at least in the near term.

Gold eases back from key resistance level

At the time of writing, spot gold has pulled back from the key $1830 resistance region which already repelled bullion bulls on several occasions in the third quarter. The precious metal’s recent recovery has been driven by falling Treasury yields, with real yields on 10-year Treasuries looking to register a new year-to-date low.

Gold’s traditional role as a hedge against inflation may be used to justify a fresh wave of bids, especially if today’s CPI print runs hotter than expected. However, under current market conditions, the precious metal would have to muscle past alternative assets that are also vying for the role as an inflation hedge. Gold prices also face the downside risk of a strengthening dollar if an eventual rebound in Treasury yields occurs in anticipation of a more hawkish Fed, eroding gold’s recent gains lower along the way.