Friday’s jobs report was very good indeed, and now the focus shifts back to inflation with this week’s upcoming data releases as investors continue to speculate about the timing of the Fed’s decision to taper its bond purchases. It looks like investors are starting to believe that we are getting very close to that time and Fed Chair Jay Powell may well provide the roadmap for tapering either at the Jackson Hole Symposium or at the FOMC’s September meeting. Several Fed officials including Vice Chairman Richard Clarida, Mary Daly and James Bullard have all recently indicated that an announcement to start reducing the massive asset-buying programme may be appropriate soon, effective later this year or early next year.
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Incoming macro data in recent times have supported the hawkish view. There was nothing not to like about Friday’s nonfarm payrolls report, with the headline jobs number coming in at just shy of 1 million and there was favourable revision to the previous month’s figure while average hourly earnings rose strongly.
How Will Markets Respond To Inflation Data?
Now in terms of inflation, we already know how high prices have been lately, but Wednesday’s CPI is expected to show a slight moderation. In July, the CPI is seen easing lower to 5.3% from 5.4% in June, with core CPI also expected to ease a tad to a still-very-high 4.3% from 4.5% previously. More inflation gauges will come in later in the week, in the form of PPI on Thursday and UoM’s Inflation expectations survey on Friday.
So far, the reaction to rising inflationary pressures and improvement in the labour market has been reflected in the US dollar only. The US stock markets have continually been bought on the dips and trade near all-time highs, even as the improving data and rising inflation signs brings tapering forward. If CPI overshoots expectations, we may see the stock market rally come under a bit of pressure, or at best we may see a muted response. So, ahead of the data release it is worth proceeding with a higher degree of caution, although we are yet to see any key reversal signs to turn full-on bearish. In fact, if CPI comes in much weaker, this will keep the goldilocks scenario intact for stocks and we may well see new all-time highs for the indices.
Triple Whammy For Precious Metals
Gold and silver got an absolute hammering on Friday and Monday as the metals suffered a triple whammy of bad news, with bond yields, dollar and equity markets all rising in response to the solid jobs report on Friday. Monday saw metal prices drop further as the dollar extended its recovery and yields remained supported. However, we feel that the downside is probably limited from here for precious metals. Even if US CPI overshoots on Wednesday, this won’t come as a major surprise and investors are already prepared for tapering to start later this or early next year. With the Fed’s bond purchases programme to remain at full throttle for at least another few months, while the first rate hike may not come until late 2022 at the earliest, it is too soon for traders to punish precious metals this severely. Added to this, the potential for safe-haven flows and inflation hedging means gold could find some much needed support soon, especially as it has arrived near longer-term technical support around $1680 to $1700.
The biggest risk facing gold though is a continuation of the rally in US dollar. With the likes of the ECB remaining quite dovish, the EUR/USD may remain under pressure for a while yet as the divergence in US and German yields grow further. Still, for as the dollar doesn’t rally across the board, or global yields do not rise sharply, the potential weakness in the positively-correlating EUR/USD exchange rate should not be too much of a headwind for gold.
Cryptocurrency
Gregory Klumov, CEO of Stablecoin platform, STASIS adds: Every time the market starts to shows signs of relief, many analysts naturally tend to say that the next few months may result in massive cash inflows into the cryptocurrency sector from myriad sources. I wouldn't be so optimistic. That "to buy the dip" mentality was rather an argument during the late spring. This might be the right time to go back to transparent stablecoins and to wait for how the start of the autumn unfolds.
Article By Victor Argonov, senior analyst at EXANTE, and Gregory Klumov, CEO of STASIS
