Inflation data to test Powell’s vow
US equities are looking to further pare 2022’s losses with futures now edging higher, potentially extending Tuesday’s rebound in which tech stocks outperformed. Asian stocks and European futures are also carrying on in similar risk-on fashion on Wednesday. The benchmark dollar index (DXY) is holding on to losses having slid below its 50-day moving average, which in turn allowed spot gold to resurface above $1800.
Stock bulls are taking a liking to Fed Chair Jerome Powell’s reassurances that the central bank could trigger rate hikes to rein in surging inflation without harming the US economic recovery.
It’s intriguing how a volatile market that had dreaded the prospects of more rate hikes than previously expected has been suddenly soothed by near-term policy tightening. That said, Powell did confirm his view that the Fed expects inflation to peak mid-year.
While risk sentiment is being offered some solace for the time being, it remains to be seen whether fears of a Fed policy error come to pass as 2022 gathers pace and more economic data comes to the fore.
Can the Fed tame inflation menace?
More immediately, the Fed’s intentions will be tested with inflation data due to be released today. The December US consumer price index is estimated to have surged 7% year-on-year, which would be its highest print in nearly 40 years. The CPI figures for the first quarter of 2022 could read even higher, with Omicron-related disruptions still felt along the supply chain.
Such daunting data would underscore the sheer challenge that lies before policymakers.
It’s one thing for the Fed to say it can subdue inflation without breaking the US economic recovery; it’s another matter if they can actually pull it off.
Inflation obsession could trigger more volatility
The first weeks of 2022 have already seen markets scurrying to price in a steeper ramp up in the Fed’s policy normalisation intentions. The Fed Funds futures now point to an 84% chance of a March liftoff in US interest rates, significantly higher than the 63% that was priced in coming into this year.
If today’s inflation data prompt further adjustments to the expected timeline for Fed rate hikes, then that is likely to trigger further volatility across global financial markets.
Bond markets will be closely monitored as to whether 10-year US Treasury yields will continue marching towards the psychologically important 2% mark. Another leg up for yields may see bullion bugs and tech aficionados scurrying for the exit once more.