Volatile session after another cool CPI report, Fed’s Harker/Collins support another downshift, Claims suggest labor still too strong, Oil rallies on weaker dollar, Gold tests $1900, Bitcoin nears $18,500

US stocks initially rallied as inflation continues to ease and as Fed members are clearly signaling a smaller tightening pace going forward.  The dollar also headed lower as a subdued inflation report should let the Fed slow their hiking pace again.

It became clear fairly quickly that stocks would not hold onto initial gains as we will likely remain being data-dependent going forward. The labor market is still hot and much of the relief we saw with energy prices appears to be going away this month.

CPI

Wall Street is feeling more confident about another downshift in tightening by the Fed after a pivotal inflation report showed pricing pressures continue to cool. Disinflation trends are clearly intact as cheaper energy costs helped deliver the first month-over-month decline in 2 ½ years. 

The headline CPI index cooled from 7.1% to 6.5% as gasoline prices tumbled. Gasoline prices fell 9.4% on a monthly basis and declined 1.5% from a year ago. New and used vehicles also posted declines from a month ago, while shelter and apparel posted strong gains. Shelter prices take the longest to cool, so many traders are not too worried about the 0.8% monthly gain. As expected, core CPI on a monthly basis edged higher for a modest 0.3% gain.

Inflation isn’t broadly coming down, but it is cooling as the economy starts to feel the impact of the Fed’s earlier rate hikes.

Claims

The Fed almost had a perfect economic day, but weekly jobless claims continues to support the idea that labor market will keep wage pressures alive. Initial jobless claims were little changed after the prior week saw a modest revision lower. Claims fell 1,000 to 205,000, verse an expected increase to 215,000. Everyone is expecting claims to rise but seasonality typically distorts this data set in January. Until we see strong signs the labor market is cooling, the Fed will keep suggesting a rate hike could be coming.

Fed

Yesterday’s Fed comment by Collins that she’s leaning toward supporting a quarter-point interest rate hike is looking like it could become the consensus view. Fed’s Harker also joined the 25 bp pace camp and signaled that they could raise rates a few more times this year.  Harker’s comments are what moved the market as it clearly outlines what the Fed’s path playbook will be for the rest of the year.  The Fed appears poised to deliver a 25 bp rate hike at the February 1^st meeting, then be data-dependent for the February and March meetings. 

Oil

Crude prices extended gains after the dollar weakened as inflation slowed for a sixth straight month.  This inflation report supports the idea that the Fed could be close to done with raising rates soon and that the US economy might avoid or see only a shallow recession.  Oil has been rallying on China’s reopening momentum and now that they stopped reporting COVID tally data, traders are focusing on satellite images. China could face a difficult surge over the Lunar New Year holiday period, but for now energy traders are locked into the potential upside risks to demand. 

WTI crude has initial resistance at the $80 a barrel level and that could hold as the weaker dollar trade might have been exhausted. 

Gold

Gold prices tested the $1900 level after inflation cooled again and confirmed what everyone was already thinking the Fed would do going forward.  Gold has been steadily climbing since November, but it could be running out of momentum right now.  The dollar might be poised for a short-term rebound that could weigh gold down.  Gold needs to have a daily close above the $1900 level to pave the way for another move higher. 

Bitcoin

Bitcoin made a run towards the $18,500 level after inflation slowed for a sixth straight month.  The nearing of the end of Fed tightening gave risky assets an initial boost, but that is quickly fading away.  Bitcoin was unable to break the $18,500 barrier, which suggests price might remain trapped in the trading range that has been in place over the past couple of months.  

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