US Inflation Nudges Higher

That US stocks and bond yields both rose after the latest USCPI figures demonstrates a different interpretation of the data among different markets. Equity markets seemed to focus on the headline CPI print being in line with forecasts, albeit rising 0.1% from the January data. Meanwhile, the treasury market took more notice of the core data which showed that even when excluding food and energy costs, the number was marginally hotter than expected. The net result appears to be that equity markets don’t believe that the latest inflation data will shift the needle when it comes to the rate cut time line from the Fed, while the bond market might be saying that current yield levels in the US could be around for a little longer with inflation ticking higher.

With the 10-year bond yield climbing five basis points in the aftermath of the CPI release, the gold price came under some selling pressure. Gold has had a meteoric rise in recent weeks to record highs, however the bond yield rise courtesy of the CPI print gave traders a reason to take some profit on long positions in the precious metal. The spot gold contract slipped around 1% lower. Support at $2149 looks to protect the downside for the time being, however if bond yields take another leg higher, support for gold at$2134 could come into play. So, while there is scope for gold to ease further from recent highs, on the upside, the $2200 level and beyond remains possible if expectations for FOMC rate cutting in the second half of 2024 remain intact.

Also, likely to influence the immediate future of the gold price is the US Dollar Index (DXY). The USD had a muted upward move in response to the February CPI data, but the DXY is still trading at sub 103 levels (as of Wednesday morning Asian trading hours). The USD has conceded ground against the major currencies over the course of the past week as traders turn their attention to expected monetary policy easing from the Fed (perhaps starting around June). The Yen has been a notable gainer verses the greenback, with attention focused on the upcoming spring wage negotiations (known as Shunto),as the outcome of this could impact the BOJ’s (Bank of Japan) preference for when to end their policy of negative interest rates. As such, the USDJPY rate could be one to watch for the remainder of March given the upcoming wage negotiations and BOJ meeting. The USDJPY rate has fallen 2% so far this month.

Looking ahead, while the February US CPI results are now in the books, we still have PPI data due on Thursday, and if prices at the factory gate illustrate a similar upwards shift, then some doubt could be cast on the time line for when the Fed may actually pull the trigger on a rate cut.