Week Ahead: Inflation obsession set to sway USD, gold, tech stocks
Global financial markets have kicked off 2022 with a bang! The VIX index has spiked back up to the psychologically-important 20 mark, with the selloff in US Treasuries, tech stocks, and gold all fuelled by ramped-up expectations for the expected US rates liftoff this year.
Investors and traders who are fretting over how surging US inflation could force the Fed’s hand into action earlier would be honing their sights on Wednesday’s release of the consumer price index, among these other scheduled economic data releases and events in the coming week:
Monday, January 10
- EUR: Eurozone November unemployment rate
- USD: Atlanta Fed President Raphael Bostic speech
Tuesday, January 11
- AUD: Australia November external trade and retail sales
- USD: Fed Speak – Kansas City Fed President Esther George, St. Louis Fed President James Bullard
Wednesday, January 12
- CNH: China December CPI and PPI
- JPY: BOJ Governor Haruhiko Kuroda speech
- EUR: Eurozone November industrial production
- USD: US December CPI and Fed Beige Book
Thursday, January 13
- USD: US initial weekly jobless claims and December PPI
- USD: Fed Speak – Richmond Fed President Thomas Barking, Philadelphia Fed President Patrick Harker, Chicago Fed President Charles Evans
Friday, January 14
- CNH: China December external trade
- GBP: UK November industrial production and trade balance
- USD: US December retail sales, industrial production, and January consumer sentiment
- USD: New York Fed President John Williams speech
Higher-than-expected CPI could reinforce hawkish Fed and USD bulls
Median estimates for the December US consumer price index is expected to register a 7.1% year-on-year reading. If so, that would be its highest print in nearly 40 years (CPI for June 1982 also came in at 7.1%). A higher-than-expected reading could trigger the Fed into action sooner rather than later in order to stem runaway inflation.
Yet markets haven’t been lying around waiting. Since December 31st, Fed funds futures have raised the odds of a March liftoff in US interest rates by 20 percentage points to 83%. A hike in May is already fully priced in.
If, after this December CPI reading is released, markets push up the odds for the Fed hike to happen in March, that could spell more immediate gains for Treasury yields and the US dollar.
This could translate into the equally-weighted USD index into pushing back closer to its recent cycle high of 1.129.
Bullion bears to reign?
The inverse relationship between the US dollar and gold prices could see another leg lower for the precious metal if Treasury yields climb higher. Spot gold is already testing the upward trendline since the August low for support (pre-NFP prices).
A break below could invite bullion bears to test the mid- to low-$1700 regions for stronger support.
Bye-bye 100-day SMA support for Nasdaq 100?
Ever since the Nasdaq 100 fell off a cliff at the onset of the pandemic, its stunning rebound has reliably found support at its 100-day simple moving average (SMA). However, a period of reckoning awaits, as tech afficionados must come face-to-face with the prospects of Treasury yields climbing even higher and the pencilled-in Fed rate hikes over the course of this year. Both of these factors are expected to be a major drag on growth stocks with lofty valuations.
With prices now testing this key support level, it only remains to be seen how much longer the 100-day SMA will hold, though the path of lesser resistance appears to the downside considering the headwinds that are already in play for this asset class.