The figures showed a certain setback in the CPI levels with data below expectations. The YoY Core CPI fell to 4% vs 4.2% expected, and the main CPI was in line with the expectations, at 5.3%.
Although still at very high levels, the slight improvement in inflation data confirms the Federal Reserve’s perspective that it is a transitory phenomenon, and it will be reversed over time.
Many analysts and economists don’t share this theory, given that disruptions in supply chains, the shortage of semiconductors and high energy prices are still present. Currently, there is no sign that these issues can be solved soon. All this comes into focus without counting the high prices of raw materials, which are still at levels much higher than those reported before the pandemic.
But far from taking this data as a positive factor in the sense that inflationary pressures will not force the Federal Reserve to act hastily, the market has interpreted it as a sign of a slowdown in the global economy.
Moreover, fears coming from China about a cooling down of its economy are adding fuel to the fire. This is reflected in the possible bankruptcy of the second-largest real estate company in the country, Evergrande.
With all these elements, the market has chosen to switch to risk aversion mode, a situation that has not been experienced in a long time. For investors, it means purchases of treasury bonds, falls in the stock and commodity markets, and the US Dollar acting as a safe haven currency, strengthening against all its counterparts except the Japanese Yen, which also strengthened for the same reason.
Of the American indices, the DowJones30 was the most affected because it is an index with a greater composition of cyclical stocks, most correlated with economic growth. The index was down about 1% and is technically approaching dangerous levels below the 34,750-support zone and the 100-day SMA line.
And although the US Dollar strengthened - with the only exception against the Japanese Yen - gold lost its usual negative correlation with the North American currency and paid more attention to the fall in the yields of American bonds, gaining around $12, although still trading in neutral territory. From a technical analysis point of view, it is away from the primary resistance of $1833/ounce and below the 100-day line SMA.
This sudden change in market mode can only be counteracted with better data from the leading indicators, and if the situation in China shows signs of improvement.
Sources: Bloomberg.com, reuters.com