14th August - A Soft PPI But Gold Fell?
The US PPI release was the main story yesterday, with core PPI m/m coming in soft at 0.2% against an expected 0.3%, while PPI m/m was 0% against an expected 0.2%. The main cause for this was a 3.1% fall in energy prices, as could have been expected since this period covered when oil was at its lowest last month.
The effects of the print were more muted than we may have expected, in the forex market at least, potentially as markets had expected softer prints thanks to lower oil prices during the period the release covered. One analyst from GDS Wealth noted, "Thursday's PPI alone doesn't change the calculus of the Federal Reserve, as the key to taming the inflation picture right now is a resolution in the Middle East." There were no meaningful movements on that front yesterday, and the Fed has no influence on geopolitics, so the argument would be that yesterday's print did not meaningfully change the outlook for the FOMC meeting next time around.
Forex
Considering we had a PPI print that was lower than expected, you could say that the USD had a good day as it managed to stay flat overall, again possibly showing us that the market expected worse. The DXY was steady around the 100.000 mark all day, without too much movement either side after gaining ground on the CPI print on Wednesday. There is still a fundamental weakness to the USD at the moment; almost every single major news release over the past month or so has been negative for the USD, with rate hike expectations falling every week as a result. We would need some form of significant catalyst to give strength back to the USD; otherwise, I could see a continued move lower over the next few weeks.
GBP was an interesting one to watch yesterday. We saw the UK's GDP figure release yesterday morning that came in strong, at 0.3% against an expected 0%. However, the GBP lost ground against the USD overall on the day, despite the effects of both the UK's GDP print and the US PPI print. The reason for this is not clearly down to one thing, it would seem. It could be a sign that the GBP's recent strength is now a little overstretched, with additional good news not having the impact it would have had otherwise. It could also be as simple as the GDP release not meaningfully changing the BoE's rate path, so markets just disregarded the figure. It will be interesting to see how GBP performs today to see where it ends the week.
AUD had another positive day, while the NZD continued to struggle. The CAD performed well once again, this time despite oil prices falling slightly yesterday. It is worth keeping track of this; recently, CAD has been very strongly linked to the price of oil, but yesterday there was another reason why CAD did well. It would be smart to keep an eye on the CAD/oil relationship to see if this was a one-off or a sign of something else.
Indices
Yesterday was a strong session for indices, as they enjoyed seeing lower inflation and reduced rate hike expectations. All of the major 3 US indices rose, with the S&P 500 posting an all-time high close of 7802.40, up 0.72% on the day. The Russell 2000 was another to make an all-time high close, showing it is not just the mega-tech stocks performing well recently.
The indices seem to be in a bit of an uncertain situation at present. Stocks react well to lower inflation, but they also need a steady economy and labour market to thrive. We have had lower inflation, but also weakness in the US labour market recently, so there are two macroeconomic factors pushing against each other. The real fear is stagflation, which, considering oil price fluctuations, is something that could be more of a concern with next month's CPI print. I would urge caution when seeing the all-time highs today, as we could well see indices struggle over the next month or two if economic data continues to come in below expectations over the coming weeks.
Precious Metals
The really interesting story came from metals. We had been saying this week that dovish inflation numbers would be good for metals, but when we saw a dovish PPI print, metals fell instead. We had argued that a hot print would give rise to stagflation fears, which would be good for metals, while a soft print would also be good for metals as it would lower rate hike expectations. What seemed to have happened, and what we missed, is that the figure seemed to thread the needle of both. The lower figure reduced the fear of stagflation and so reduced the appeal of a safe-haven asset, but it was also caused by lower energy costs and so was less of an indication of the overall trend within the economy. This meant that the dovish figure would be less impactful on the Fed's next rate decision and so negated the benefit metals would have seen.
I still see a very strong medium-term future for metals. The price action yesterday could end up being a blessing in disguise, as it may give us the pullback we need to be able to enter the metals market at a better price to then ride the wave long. In the chart above, on the daily timeframe, there seems to be a strong potential level around $4,200 where we can look to enter. Next week will be fascinating to see how the metals market behaves. Will it explode long, or will it retrace a little more before making a move?
Today's Key Market Drivers
Iran - As has been the case since the start of the war and as I repeat every day, news from the Middle East will be a key catalyst for market movement.
CPI & PPI fallout - There are no major news releases today, so the market has time to digest and react to this week's inflation prints. How capital positions itself going into the weekend will be interesting to watch.
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