Today is the most important day for market players as we will get the US Consumer Price Index CPI data. The US and European stock futures will likely remain quiet ahead of this critical economic reading coming out at 12:30 GMT.
Speculators are hoping that we may get the US inflation reading showing that it has reached its peak, and if that becomes a reality, it could bring a relief rally for the US stock market. This is because traders and investors will not anticipate a further hawkish stance from the Fed. The most likely scenario will be that the Fed’s monetary policy will remain on autopilot, i.e., an interest rate hike of 50 basis points in the coming meetings.
However, if the inflation reading shows that the number has yet to reach its optimal level, a scenario which we believe is highly likely as oil prices are likely to soar further, we could see more panic in the stock market. Traders will likely favour a risk-off rally because they will believe that the Fed is still behind the curve. To play to catch up with inflation, they are most likely to send even more hawkish monetary policy messages to the markets.
The reasons that we believe that inflation has not peaked in the US are that we do not see oil prices falling below the $100 price mark any time soon, and the reason is that the supply and demand equation is entirely out of whack. In other words, the supply will likely remain an issue as demand picks up more steam. Secondly, the ongoing conflict between Russia and Ukraine doesn’t seem to be ending soon, and this is creating more issues in terms of supply issues and geopolitical uncertainty. The IMF, the World Bank, the ECB, the BOE, the BOJ, and many other central banks have mentioned the war in Ukraine as a primary concern and a factor that is acting as a denominator for inflation.
The Volatility
The VIX index, often called Wall Street’s fear gauge, closed above the 26 mark yesterday for the first time this month ahead of this data. This shows that traders aren’t expecting the CPI numbers to be encouraging. The US stock indices also took a severe beating yesterday and closed sharply lower yesterday. The S&P 500 index fell 2.38%, the Dow Jones Industrial Average declined 1.94%, and the Nasdaq index fell 2.12%. Looking at the charts for these indices on the daily time frame, it is clear the path of least resistance is skewed to the downside for now.
Gold
Gold prices are likely to remain highly volatile today. Traders will expect the gold price to move lower if the inflation reading comes red hot as that would entail that the Fed will send a more hawkish message, pushing the dollar index higher. On the flip side, any clues that indicate that inflation has reached its peak or is nearly there could make the dollar index fall further, and we could see more encouraging price action for the precious metal.