Hurry up and wait

Markets await US inflation data

Hurry up and wait best sums up the overnight session as the street treads water while remaining laser-focused on tomorrow night’s US CPI data. Inflation fears suffered a setback after the NFIB survey showed business confidence slipping. That was enough to lift US equities a smidgen higher. However, the street ignored the considerable rises in the job opening and wage components. Like much data of late, you can cut the cake both ways, depending on your point of view.

The inflation trade has tended to have short legs in months past, and I believe we would need to see the MoM CPI for May print at or above last month’s 0.80% increase to give it more momentum. Anything less, and we’re likely to be back in the market happy space of buy everything except the US dollar. So, US bonds and equities will rally along with commodities and precious metals, and the US dollar will fall.

The week’s other heavyweight inflation release from China was out this morning and has passed without incident. MoM Inflation for May came in at -0.20%, slightly lower than forecast. Interestingly, PPI YoY for May surged to 9.0% as the global commodity rally and pandemic supply chain disruption make themselves felt. The big question for markets going forward is whether China’s factories can pass on those increases to consumers globally. History suggests not, and the complete lack of reaction from Asian markets today suggests they think the same. That is being helped along by a procession of Chinese officials promising “action” on rising commodity prices in various shapes and forms.

Off the front pages, it seems, the Biden infrastructure deal appears to be in trouble, with the Democrats and Republicans far apart to the surprise of precisely nobody. A drawn-out process getting that deal across the line, or not, is another headwind in the medium term for the inflationistas.

The rest of the day’s calendar doesn’t look too inspiring, with South Korean GDP and Unemployment, Australian Consumer Confidence, and the Philippines Balance of Trade all completely ignored before the alter of China inflation. The same fate awaits Germany’s Trade Balance this afternoon, and tomorrow’s ECB policy meeting will meet the same fate unless they mention the t-word, a most unlikely outcome.

One data point that may cause some fireworks is the official US Crude Inventories number. Typically, the impact of the official crude inventory number is directly proportional to the amount of directional speculative positioning in the futures markets and extremes in prices. Right now, the street is very long, and oil prices are at 20-month highs. So a rise instead of a fall in inventories tonight could spark a corrective sell-off.

Bitcoin continues to grab headlines overnight, with a sell-off yesterday partly prompted by the FBI’s mysterious ability to use a private key to retrieve some of the Colonial Pipeline loot. I’m just gutted that the FBI spokesperson wasn’t called Agent Smith so that I could make some Matrix jokes. It seems the FBI has used some other chicanery to obtain the private key other than cracking the Bitcoin algorithm, to the relief of Bitcoin evangelists and cybercriminals everywhere. That saw it pare much of yesterday’s losses. Nevertheless, the technical breakdown through USD35,000.00 mentioned yesterday is still in play targeting USD22,000.00. I continue to believe that a material break of USD30,000.00 will trigger another capitulation trade, which may trigger cash-raising selling in other asset classes.

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