MID-WEEK MARKETS UPDATE OVERVIEW:
- Fed rate hike odds started to move up after the October US inflation report, giving a lift to the US Dollar.
- Gold prices are surging on the back of falling US real yields (nominal yields less inflation).
- US stock markets may see a bit of difficulty in the coming days ahead of the November options expiry.
US Inflation Presses Higher
In this Mid-Week Markets Updates session, we explored the ramifications of the October US inflation report (CPI) and how it may impact various asset classes, including the US Dollar (via the DXY Index), US equities, gold and oil prices, as well as Bitcoin and Etherium.
While Fed rate hike odds may be pressing up a natural ceiling thanks to rates markets already pricing in June 2022 as the most likely period for the first rate move, the strongest US inflation reading since 1990 has markets speculating that the Fed will act sooner. If tapering must finish before tightening starts, then the market is effectively saying that the Fed will accelerate its taper program over the coming months.
US equity markets may be a good inflation hedge as firms maintain pricing power to pass on costs to US consumers – who are enjoying their lowest debt burdens in history – but markets tend to act up around options expiries each month. After a significant rally over the past few weeks, it may be the case that US stocks face difficulty in the run-up to next Friday’s option expiry.
High inflation also has ramifications for gold and silver prices, insofar as falling US real yields makes precious metals more appealing on a relative basis. The gold price breakout that we’ve been watching since late-October and discussed again yesterday appears to be starting, as the key 1835 level was breached after this morning’s US inflation report.
Elsewhere, with Bitcoin and Etherium retaining strong technical momentum setups, it’s worth noting that both tend to track forward-looking measures of inflation expectations. With inflation expectations continuing to run higher, cryptocurrency markets appear well-poised to continue their bull run after some of the majors just broke out to fresh yearly and all-time highs.
For full commentary on the US S&P 500, crude oil prices, and gold prices, please watch the archive of this week’s Mid-Week Market Updates session held on Wednesday, November 10.
CHARTS OF THE WEEK
DXY INDEX TECHNICAL ANALYSIS: DAILY CHART (SEPTEMBER 2020 TO NOVEMBER 2021) (CHART 1)
GOLD PRICE TECHNICAL ANALYSIS: DAILY CHART (MAY 2020 TO NOVEMBER 2021) (CHART 2)
CRUDE OIL PRICE TECHNICAL ANALYSIS: DAILY CHART (NOVEMBER 2020 TO NOVEMBER 2021) (CHART 3)
— Written by Christopher Vecchio, CFA, Senior Strategist