Yesterday was one of those days when investors insisted on seeing a glass that was one-tenth full as completely full.
The US producer price data came in higher than expected. The US factory-gate prices jumped 0.5% on a monthly basis instead of 0.3% penciled in, the yearly figures increased in line with expectations.
US President Joe Biden announced eye-watering tariffs on Chinese imports as he accused Chinese companies of ‘stealing, cheating and dumping underpriced goods to the international markets’. He wouldn’t say it, but I am sure Donald Trump was proud of him. Semiconductor tariffs for example will double from 25% to 50% and tariffs on Chinese EVs will almost quadruple to above 100%! Tariffs on Chinese goods won’t necessarily bring jobs back to the US – as confirmed by a recent study on Trump’s tariffs - they will however boost inflation in the US and maybe – but just maybe – bring Biden some votes at November’s
Federal Reserve (Fed) President Jerome Powell called for patience, again yesterday, and said that they did not expect the inflation battle ‘to be a smooth road’ but that the numbers ‘were higher than anybody expected’, and that it will probably take them ‘longer to become confident that inflation is coming down to 2%’. Indeed, Biden is throwing a wrench in the works of the Fed with his China trade policy.
Overall, the inflation, Fed and China news weren’t supportive. But the market was quick to shrug off the bad news because some components of the PPI number that feed into the PCE – the Fed’s favorite gauge of inflation that’s due later in the month – were more muted. These components include the cost of hospital outpatient care for example which fell 0.1%, and airfares which dropped 3.8%. Yet, the same PPI report showed that services costs increased 0.6% - at the highest pace since last July - and the latter accounted for three-fourths of the overall increase in the PPI last month. Goods prices also rose on higher fuel prices. There is no right or wrong in the market, but yesterday’s reaction to the PPI data didn’t feel ‘right’.
All eyes are on the US CPI update today. Both headline and core inflation are expected to have moderated last month. If that’s the case, the risk rally will likely continue. And if it’s not the case, the risk rally could continue, as well. Until when? Until it doesn’t.
Questionable Optimism
The US 2-year yield fell to 4.80% after, yet, a strong PPI read, hawkish comments from the Fed President Powell and increased tariffs on Chinese imports. The S&P 500 and Nasdaq 100 gained. Yesterday’s rally was fueled by technology stocks. Meme stocks extended their rally to a second day. GameStop (NYSE:GME) gained 60% while AMC (NYSE:AMC) added more than 30%. Cocoa futures tanked nearly 20%.
In the FX, the US Dollar Index slipped below a minor Fibonacci retracement. The EUR/USD jumped above the 1.08 mark and as such, cleared the major 38.2% Fibonacci retracement on ytd decline and stepped into a medium term bullish consolidation zone. But the ‘diverging US/EZ inflation’ narrative and the widening gap between the Fed/ECB policy outlooks doesn’t support the positive breakout above the 1.08 level. Hence, the recent gains in the EUR/USD are vulnerable to a ‘emperor is naked’ moment, if investors realize that the latest rise in the US inflation may not be a blip. Similarly, Cable is testing its 50-DMA, near 1.26, to the upside, but the gains are driven by a questionable decline in the US dollar.
Good news for inflation is the subdued oil prices. The barrel of US crude remains offered below the $80pb which distinguishes the current bearish trend (building since April) from a bullish reversal. A 3-mio-barrel decline in US weekly inventories versus a mio-barrel build expected could’ve given a boost to the bulls, but the news that some OPEC countries exceeded their quotes in April and OPEC opening the door a crack for potential quota increases gave a boost to the oil bears yesterday. The next critical support stands a touch below the $78pb level, the 50% retracement, if broken will pave the way to a deeper decline toward the $75pb mark. A higher-than-expected US inflation data could support a further oil selloff – if it fuels hawkish Fed expectations, of course.