In the wake of a much stronger than expected US job report for the month of February, JOLTs job data for December beating expectations, and stellar US ISM services report for the month of January have suddenly turned around sentiments and views on inflation.
Market participants are becoming concerned that notwithstanding economists’ forecasts of upcoming January’s US inflation data to continue the declining trend, the data may actually turn out to be hotter than expected.
It is to be noted that the US Federal Reserve speakers continue to remain hawkish in their stance as they recognise and support the need for a higher-for-longer interest rate regime.
Although the Federal Reserve Chair Powell stated that disinflation has begun in the US economy, investors are rethinking the implications of his remarks. He acknowledged that the US economy is strong.
Powell also said that shortage of workers seems to be structural rather than cyclical. Some of the Fed speakers have dismissed the possibility of inflation coming down quickly.
One of the major factors instrumental in the sharp commodities rally in December- January period has been the reopening of China as China is the leading commodities consumer.
However, this factor has turned out to be a wet blanket as the country’s demand is yet to pick up. China’s Producer price Index declined 0.8% y-o-y in February following a 0.70% decline in December as the nation’s economy is yet to gather pace. This was the fourth straight decline on a y-o-y basis.Bond market traders seem to be paring back their bets on the Fed pivot and sharp decline in inflation. Ten-year US yields closed at 3.74% in the week ending February 10. The yields are up nearly 7% on the week.
The University of Michigan’s one-year inflation expectations (February preliminary reading) came in at 4.2% as against the forecast of 4%, thus beating the prior reading of 3.90%.
As the risk appetite takes a hit due to sluggish Chinese demand, upside surprise thrown by the US data of late, and higher-for-longer rate concerns, the US Dollar Index is expected to strengthen further, which will be bearish for the yellow metal. The Dollar Index, at 103.58, was up nearly 0.50% on the week.
Spot gold closed at $1866 as it was almost unchanged on the week. The metal risks a fall to $1830 level unless the US CPI data due on February 14 underwhelm.
Resistance is at $1900.
(The author is AVP, Fundamental currencies and Commodities analyst at Sharekhan by
)
(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of the Economic Times)
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