While central bankers have reaffirmed their determination to keep rising rates, the financial markets have abruptly lost the optimism of the past few weeks, which was tied to the slowing of inflation and predictions of a halt in monetary tightening.
New Bear Run
Although small, the first major weekly decline in major global markets occurred last week, showing the start of a short-term bear trend. At this point, the reduction in risk-taking is relatively minor, but it does correspond with a resurgence of skepticism over the future of U.S. monetary policy.
The U.S. 10-year yield rose from 3.50 percent at the beginning of the week to 3.70 percent on Friday, indicating that investors are becoming increasingly concerned and seeking safety in safer investments. Even if it bears repeating, investors are more worried about potential rate hikes than they are about the slowing economy.
As we have mentioned before, the CPI numbers are lagging at best, but we don’t consider CPI an accurate meter of real inflation. The good news is that there is a FREE resource called Truflation that gives inflation numbers based on real prices and in real-time.
The Consumer Price Index report for January is anticipated to show a 0.5% month-over-month increase due largely to increasing energy prices. Forecasts call for annual headline inflation to slow to +6.2% in February from +6.5% in December. As of December, food costs are expected to rise while airfare and hotel rates are expected to decrease.
US-China Trade War?
The United States plans to impose trade restrictions on Chinese companies involved in recovering the downed Chinese spy balloon last week. My political insiders tell me the trade war will likely escalate in the coming months.
The biggest loser in this is the US consumer, who will end up paying for more goods when inflation has already pushed them to their spending limits.
CALENDAR & EVENTS
- Tuesday, February 14: CPI (MoM) (January)
- Wednesday, February 15: Retail Sales (MoM) (January)
- Debt Ceiling Fight
- US-China Trade War
Next week’s agenda includes price discussions and additional discussions about the cost of living in the United States. Investors will be looking to the January Consumer Price Index (“CPI”) and Producer Price Index (“PPI”) from the United States Bureau of Labor Statistics for indications of inflation.
I think the economy will show significant signs of slowing due to price pressure on the consumer. Inflation is falling, but the Fed reaffirmed its determination to reduce inflation permanently, and its authority to hike key rates remained unaffected.
Companies including Nestlé, Coca-Cola, Cisco Systems, Hermes, Deere & Co, and many more will release earnings reports next week.
Bonds are still processing the disappointing data on job growth in the United States, despite releasing an ISM manufacturing index higher than expected. Perhaps you expected things to return to normal after the initial shock.
However, the U.S. 10-year yield had shown a tremendous bullish reversal pattern, following the lead of the U.S. 2-year yield, which has been trending upwards since October, when it broke out of a consolidation channel.
Rates are expected to climb further in the coming days/weeks, with an initial checkpoint between 3.90 and 3.95 percent. In this regard, we will keep an eye on 3.47 percent related to the ongoing recovery trend. Germany is only marginally better off and is due to re-test critical resistance at 2.55%
OIL & ENERGY
For fear of Western sanctions, Moscow has decided to cut oil production by around 500,000 barrels per day. This is equivalent to about five percent of Russia’s daily output, and the adjustment has unsurprisingly led to a rise in crude oil prices. Brent crude is already up over 7% to $85.60, suggesting a solid finish to the week for the latter. WTI, the U.S. standard, is selling for 79.30 dollars per barrel at the moment.
The other big story is that the devastating earthquake in Turkey and northern Syria has disrupted oil exports from Iraq and Azerbaijan. Last but not least, weekly U.S. inventories keep rising, but this trend is currently in the background. As the price of natural gas in Europe continued to plummet, the Rotterdam TTF reached 53 EUR/MWh.
PRECIOUS METALS & GOLD
The consolidation phase of base metals is starting. For starters, there appears to be a gradual return to normalcy at certain Peruvian mining sites. However, the LME has reported an increase in aluminum and zinc stocks in its Asian warehouses, which is terrible news for the industry’s bottom line.
Despite this, it is worth noting that these stocks are now at very cheap levels. Current market prices place aluminum at about $2425, copper at $8950, and zinc at $3180. Gold continues to be valued at $1867 on the precious metals market.
Bitcoin has lost steam for the second consecutive week following a stellar January. Since Monday, the cryptocurrency’s price has dropped by over 4% and is now trading below $22,000 again. Investors are still wary of hazardous assets in large numbers, so the bitcoin market is under pressure. This market will need more time to recover from the wounds that 2022 inflicted on it.