US CPI surges as focus turns to central bank meetings

 

 
So, the latest US inflation report came in well above expectations and the markets have reacted by sending the dollar higher and indices lower. But as I write this, the earlier moves have started to reverse, suggesting the market is still giving the Fed the benefit of the doubt and side with their “transitory” argument even if core CPI has risen as its fastest pace in 30 years (4.5% year-over-year). Headline CPI jumped to 5.4% after the biggest monthly (+0.9%) jump since June 2008.
 
The jump in CPI was obviously unexpected, given the market’s reaction. But the devil was in the detail. Inflation was boosted among other things by a big rise in prices of used cars and trucks. You can argue that this falls under the category of “transitory” factors and so it won’t change much in the way of the Fed’s policy. But with the cost of transport also rising and oil prices remaining elevated, there is a risk that inflation could remain stubbornly high for a lot longer than the Fed envisages. This is also the fourth consecutive month of above-forecast inflation on both the headline and core fronts.

Markets to give Fed the benefit of doubt

So, the Fed will have to try harder to convince the markets that price pressures are still going to be transitory. It will be interesting to see how the Fed will react to this latest surge in inflation - will the dovish policymakers still stick to “transitory” script or change tack? But if the current trend for inflation continues then surely the FOMC will have to react and do so sooner. For now, though, the market is probably going to give the Fed the benefit of the doubt. 
 
What now for gold?
 

Source: ThinkMarkets and TradingView.com

With regards to gold prices, is high inflation necessarily a good thing? Well, if it means the Fed is going to tighten its belt, probably not. But in terms of gold in the physical form, rising inflation should help to support the precious metal as it is seen as an inflation hedge. Given this dilemma, today’s CPI is not going to change much I don’t think.  In other words, gold could extend its recovery. 
 
Focus turns to central bank meetings
 
Will rising inflation in the US and elsewhere influence the policy decisions from central banks meeting this week? In short, probably not for the Bank of Japan. The Reserve Bank of New Zealand and the Bank of Canada might prove to be a bit more hawkish than expected.
 

 
Some analysts are expecting the Reserve Bank of New Zealand to signal a path to policy normalization at its policy meeting on Wednesday. The RBNZ is seen producing a new forward guidance, although it is not expected to commit to a particular timing for lift off of rates. Like some of the other major central banks, the RBNZ has brought forward its rate hike forecasts and at this meeting they could signal an even sooner rate rise in November 2022. Will the NZD/USD make a decisive move away from the sticky 0.70 handle in reaction to the RBNZ’s meeting?
 

 
The Canadian central bank is widely expected to announce a third cut in QE to CAD 2 billion from 3 billion previously on Wednesday. This would be in response to the sharp rebound in employment and as a result of the relatively high covid vaccinations rate. The first post covid rate hike is expected to be in the second half of 2022 and the central bank is likely to more or less re-iterate that view with the usual caveats. The USD/CAD has started to show signs of weakness neat that key 1.25 resistance area.
 

 
With Tokyo having been put in a lockdown just ahead of the Olympics, the road to recovery is going to be a long and bumpy one for Japan, as most other regions of the world. For this reason, the Bank of Japan is almost certain to keep its aggressive asset purchases program unchanged.