Mid-Market Update: Disinflation Danger, Wild market swings post Inflation report, Oil lower as SPR to get tapped again, Gold softer, Modest rise for Bitcoin

US stocks went on an inflation rollercoaster after a mostly in-line report saw extreme volatility.  The knee-jerk reaction to the January CPI figures was dollar strength as yields surged following the slight deceleration with pricing pressures from a year ago. Big declines with used cars and airfares were countered with strong increases with apparel and medical care.

The Fed won’t be changing their message, which means Wall Street is still confident that we could see just two more quarter-point rate increases.

US stocks are lower as disinflation trends are in danger, which could prompt the Fed to both deliver more rate hikes and for them to stay higher for longer.

CPI

The January inflation report supports the Fed’s latest mantra of ‘higher for longer’.  The Fed will focus on the month-over-month readings that show inflation is accelerating.  Disinflation trends will get tested here and that will probably be met with a steady chorus of hawkish pushback from the Fed. 

Inflation increased by 0.5% in January, in-line with forecasts and also much hotter than the 0.1% decline in December.  On a monthly basis core inflation ticked higher to 0.4%.

Consumer prices from a year ago rose by 6.4%, hotter than the consensus estimate of 6.2%, and only a tick below the 6.5% prior reading.  Inflation is showing signs of stickiness and that should cement the view that the Fed will continue to deliver more rate hikes. 

Inflation is like an onion. The first layer is commodities, then goods, and then you get to core services.  The problem with the disinflation playbook that a lot of traders are following is that by the time core services start softening, we could see some pricing pressures return to the first two layers.

If core stickiness becomes a dominant theme over the next couple of inflation reports, we could start to see the market fully price quarter-point rate rises across the March, May and June FOMC meetings. 

Oil

Crude prices are tumbling as more US oil is about to hit the market and as stubbornly high inflation could force the Fed to remain aggressive with its rate hiking campaign. The US government is planning on releasing 26 million barrels of crude from its strategic petroleum reserve.  The oil market was supposed to get a little tighter as energy traders were expecting the next move to be refilling the SPR. 

Oil could be in the danger zone if the bond market selloff intensifies and makes some traders price in deeper recession.  No one has strong confidence with their US growth outlook, which means the market could go from pricing in a ‘soft landing’ to a short & shallow recession or even a ‘classic recession’. 

Gold

Considering the chaos that followed an inflation report that showed the pace of moderation is approaching crawl level speeds, gold prices are holding up nicely.  Bond yields are sharply rising and that isn’t breaking gold’s back.  The risks that the Fed will have to remain aggressive and send the economy into a recession are elevated.  Gold got a modest boost initially from the weaker dollar, as Wall Street is still confident that the peak in rates will be reached this summer. 

Gold’s performing better than most risky assets and that could possibly on some safe-haven flows. The 10-year Treasury yield is up 8.0 bps to 3.782%, while gold is only down 0.2%.

Bitcoin

Just when most of the traditional macro crypto drivers turn bearish, Bitcoin tries to show some resilience. Bitcoin is posting a modest rise as the January inflation report suggests the Fed could keep rates higher for longer.  The market might be pricing in a little more Fed tightening but that isn’t weighing that much on cryptos today.  Regulation and contagion risks have pressured Bitcoin this month, so the downward move was potentially exhausted.  Bitcoin has massive support at the $20,000 level, which means something major probably needs to break in the cryptoverse for selling momentum to resume. 

It seems everyone is focused on what the SEC will say on staking and this wait-and-see period could support sideways price action for cryptos. 

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