Inflation hits 7% and is nearing peak, stocks whip around, dollar falls, bitcoin rises

US stocks initially rallied after the latest reading of consumer prices showed the biggest gains since 1982, but was nevertheless, in line with expectations.  Wall Street was worried that a much hotter inflation report could have not only cemented four Fed rate hikes this year, but potentially made the May FOMC meeting a possibility for when the balance sheet runoff could start.

Inflation is not slowing down just yet, but the peak is getting close.  Today’s inflation report does two things, it does not alter the Fed’s course for a March rate liftoff and provides no incentive for Senator Manchin to return to the Build Back Better negotiating table. This inflation report will play a bigger story on the political front and could be mean Build Back Better becomes Build Back Never. Conservatives will argue that another massive piece of legislation such as Build Back Better will only fuel further inflation.

Equities pared gains as expectations still remain inflation will remain hot for another couple more months and in anticipation of bank earnings season which will show how much weaker the recent wave of price surges has made the US consumer.

CPI/FX

Consumer prices finished 2021 at the highest level since 1982. Consumer prices rose 7% in the year through December, matching the consensus estimate, driven by large increases for rents, durable goods, cars and trucks.  The gasoline index skyrocketed 49.6% over the past year and with energy prices likely to remain elevated, the pressure will build for the White House to take action again.

The dollar declined after a reading of consumer prices highlighted large increases but was still in line with expectations and confirmed the hawkish pivot by the Fed. King dollar has been on a tear but that move may have hit a major roadblock.  The move in Treasury yields has been overdone and the dollar could be ripe for a pullback here.

Bitcoin buoyed by US inflation report

Another hot inflation report triggered a sell the news event for the dollar which was positive for bitcoin.  The dollar has been gaining momentum as prospects of a very aggressive Fed in tackling inflation could deliver 4 rate hikes this year along with a June/July balance sheet runoff start.

Some traders might think bitcoin is once again an inflation hedge, but that is far from the case here in the US, but it does apply to several emerging market countries.  Cryptocurrency interest is growing across many counties in Latin America that are struggling with inflation and now it seems Turkey is joining the mix. Small countries getting into crypto might not be enough of a catalyst to get prices rushing back to record highs, but it should provide some underlying support and help get Bitcoin back to USD 50,000.

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