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Stocks Rebound As Peak Inflation Appears To Be In Place

By Anna Peel. Originally published at ValueWalk.

states giving inflation stimulus checks

Inflation remains hot, Stocks rebound as peak inflation appears to be in place, Oil’s pullback ends, Gold steadies, Bitcoin breached $30k – OANDA

Fighting Inflation

At first, it looked like inflation broke the S&P 500’s back as investors sold everything following across the board hot beats with every inflation headline, as the initial take was that the Fed will need to do more to fight inflation. ​ Today’s market reaction to the inflation report will make it hard to attract any investor who is still on the sidelines. ​ The risks on Wall Street are growing and now include a Fed policy mistake, liquidity and credit risks, and growth concerns. The Fed is still behind the curve with fighting inflation and is now at risk of losing the soft landing it was trying to navigate.

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Stocks turned positive as investors picked apart the inflation report and decided it won’t change Fed policy in the short-term. ​ The 1.1% increase with new vehicle prices was mainly attributed to the change in the BLS’s methodology and the peak seems to firmly be in place, while the increase in shelter and food prices still remains troubling. ​ ​ ​

CPI

The April inflation report came in hotter-than-expected and triggered a complete reset in Fed rate hike expectations. Today’s headlines were supposed to be that inflation peaked in March, not plateaued. ​ The month-over-month core reading surging from 0.3% to 0.6%, which should make some Fed members feel uneasy about only raising rates by half a point at the next meeting. ​ Wall Street thought it was going to be done with inflation rearing its ugly head but that does not appear to be the case.

Headline inflation dipped for the first time in eight months with a print of 8.3%, down from an 8.5% annual rate in March.

Inflation is still expected to decelerate over the next few months, but it won’t be sharp given the rising prices on gas, hotel, airfares, and possibly a wide-range of goods that will be impacted by China’s COVID lockdowns.

Oil

Energy traders are bullish on oil prices again as China’s COVID situation shows signs of improving and after the dollar eased following a hot inflation report that did little to change short-term Fed rate hiking expectations. The oil market can’t justify oil prices below $100 given the potential shock that will occur once the EU is able to move forward with their ban on Russian crude. ​ ​

WTI crude tentatively pared gains after the EIA crude oil inventory report posted a surprisingly large build with stockpiles. ​ This report was full of surprises as US production declined by 100,000 bpd, the first drop since January.

The oil market seems to have made up its mind and it will focus on how tight supplies will be and not the eventual demand destruction that might happen later this year. ​

Gold

Gold prices tumbled as the dollar surged following a hotter-than-expected inflation report that will likely force the Fed into delivering more tightening than they were initially thinking. ​ Today’s inflation report proves that Fed Chair Powell made a mistake last week when he removed the option of a 75-basis point rate hike at the next policy meeting. The overall takeaway for much of Wall Street however is that the Fed is still poised to deliver consecutive half-point rate increases at the June and July FOMC meetings.

Gold gave up a majority of its gains after the inflation report but found massive support around the $1830 level, which is where the 200-day simple moving day resides. ​ Gold was close to showing signs of stabilizing as many investors were hoping for a sharper deceleration of pricing pressures, which was supposed to pave the way for a dollar pullback and a peak in with the rally in Treasury yields.

Gold is tentatively holding onto the $1830 level and should continue to stabilize, but that may get tested if a steady wave of Fed speak raises market expectations for more aggressive tightening later this year.

Bitcoin

Bitcoin saw the $30,000 rug pulled after a hot inflation report sent the Nasdaq and all risky assets tumbling. ​ It is a very nervous time in crypto markets following the collapse of the controversial stablecoin UST and as the majority of institutional crypto investors that invested last year are now losing money.

Bitcoin showed resilience alongside other risky assets as the overall takeaway from the inflation report was still that the peak is in place and that much of the inflation is demand driven. Bitcoin is back above the $31,000 level and will likely continue to take a cue from the Nasdaq. ​ ​

Bitcoin remains very vulnerable to further selling pressure and could see further technical selling if the $28,500 level breaks.

Article By Edward Moya, OANDA

Updated on

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