Something about inflation

Joe Biden told Americans on Thursday that the cost of goods and energy is starting to ease, but this wouldn’t necessarily be reflected in today’s CPI inflation data. From this, we can assess that the number is going to be high, very high. The CPI is expected to hit a 40-year high and rise by 6.8% in November, +0.7% month-on-month. That would mark a sharp acceleration from October’s 6.2% print – the highest in over 30 years. Given Biden’s comments, 7% is not out of the realms of possibility. Such a number piles pressure on the Fed to accelerate its tapering of asset purchases – I expect it to confirm this at the FOMC meeting next week. Markets are already pricing for potentially 3 rate hikes next year, so a hawkish Fed is already discounted. A weak 30-yr bond auction yesterday underlined nervousness about the inflation figures. But this morning data showed German inflation rose 5.2% in November, falling 0.2% on the month, so maybe Biden is right and we will see a cooling in inflation…My bet for what it’s worth is that it peaks around now, possibly in Q1, recedes somewhat but remains elevated for some time to come.

Meanwhile, omicron worries persist even if markets seem to side on the notion that it’s unlikely to be as bad as first thought and certainly not as problematic as delta. Even so, as we discussed a couple of weeks back, the playbook from the summer and the delta wave is for markets to pull back then chop sideways for a time as it all shakes out. US hospitalisations are up 40% in a month. Seasonal factors might support a swifter return to ATHs, but the worries about omicron remain in the background – a more aggressive Fed could feed further worry, though as noted yesterday the market is already pretty well-positioned for anything that the Fed is likely to deliver in terms of tightening. Moreover, it’s hard to find much protection against inflation outside of equities.

European markets are a tad softer in early trade Friday, though the FTSE 100 is holding its nose above 7,300, after a pretty weak reversion in the US saw the S&P 500 decline 0.7%. Tech and small caps were bashed down in equal measure – Nasdaq -1.7%, Russell 2000 -2%. Momentum hit hard with ARKK down 5%, Tesla off by 6% as filings showed Musk unloaded yet more stock worth almost $1bn. Gold continues to chop sideways around $1,780, Bitcoin is weaker at $48k. WTI a tad firmer after pulling back from the $73 handle yesterday, now trading in a $71-73 range for the time being.

UK growth stalled in the Sep-Oct period, with the economy expanding by just 0.1%, vs 0.4% expected. With growth slowing into these new restrictions, it’s hardly a great setup for sterling, but the GBPUSD charts are interesting. There are signs sellers are losing momentum and starting to look tired; potential bullish MACD crossover about to strike, RSI looking sideways close to oversold like sellers are all washed out, two rejections in the last day of a 1.31 handle and it all looks as if we could see a near-term bounce in the cross. Even if the longer-term channel downtrend is dominant a quick flip towards 1.35 may be one to consider. Likely to be volatile to today’s US CPI number of course, so beware.