Despite the fact that gold prices and the US dollar are both turning upward, a few factors are still keeping investors on the sidelines. Some of the reasons include the divergent performance of the US dollar and the Treasury yields. Others include a rise in the equities market. And lastly, there are a couple of sentiment indicators to watch.
U.S. wholesale price inflation
Several key US economic indicators are scheduled to be released before the weekend. Investors should pay close attention to the third-quarter GDP report, as well as the final version of President Biden’s economic package.
Expectations for US inflation on a year-ahead and five-year horizon are at their lowest levels in two years. These low expectations could provide a boost to greenback bulls. But the Fed’s tightening policy outlook is a source of uncertainty.
The US economy continues to look strong. Analysts expect growth to slow from 6.7% to 3.0% in the third quarter. They also expect to see a lot of lost growth pushed back to next year. However, rising cost pressures and supply chain issues are likely to slow the economy in the short term.
While inflation remains at elevated levels, the headline print may ease in August. But the stickier services costs and rising food and energy prices will keep the inflation print elevated.
China’s zero-tolerance approach to coronavirus lifted sentiment
Despite widespread public discontent, China’s top leadership appears to have staked its legitimacy on the country’s “zero Covid” policy. This policy’s key elements include lockdowns, mandatory testing and quarantines. This has created a major surge in infections, dampening hopes that the country will be able to reopen.
As the country prepares to reopen, leaders in Beijing are expected to further refine the methods used to contain the virus. The government has begun a messaging campaign. It is also planning to boost drug supplies to hospitals and schools, calling on citizens to treat mild cases of the disease at home.
Many analysts believe the policy will be a painful relapse in the next few months. The rest of the world has opened up to the pandemic, and China’s infection rates are still far below the level needed for herd immunity. This leaves officials facing the challenge of losing control of the public’s patience.
Some cities have already relaxed the restrictions. Shanghai, for example, has dropped the testing requirement for restaurants and entertainment venues. This could assuage public fears, though it will also require local officials to balance the outbreak against the economy.
Divergent performance between the US dollar and Treasury yields
Despite the Fed’s latest hike, the US dollar continues to slide. The DXY Index ended the week at a two-year low and closed down 8.4% from its September peak.
In terms of numbers, the Federal Reserve has hiked its fed funds rate target by 75 basis points. The increase was largely in line with the recent Fed policy statement. However, it does not mean that rates will continue to climb at the same pace.
There are a few notable exceptions. One example is the bond market. During the week, a net negative supply of bonds should provide some support. The high yield market experienced an outflow of $1.7 billion. This was followed by an inflow of $580 million in hard currency funds.
In addition, the ISM manufacturing survey showed that the economy was performing better than expected. While this did not prove that the Fed’s latest move was for the best, it did give traders something to mull over.
Stocks rose on the equity front
Despite a strong start, global markets and the US Dollar turned to sentiment and inflation data before the weekend. Investors digested data out of China, a potential slowdown in the Fed’s interest rate hikes, and commentary from notable business leaders.
The Producer Price Index, which measures monthly wholesale prices, was slightly hotter than expected in November. While it still remains below the level of the previous month’s 2.1%, it exceeded Wall Street expectations. This is likely to stoke greenback bulls. The core PPI, which excludes volatile energy prices, was also above the 0.2% level expected.
China’s CPI matched expectations and showed a 1.6% year-on-year increase. The government indicated that it is phasing out restrictions on Covid, a form of antibiotics used in the manufacturing and agriculture industries.
Stocks in Europe rose as global markets absorbed the inflation data. The French CAC 40 and Switzerland’s Swiss Market Index gained. In Asia, markets in Hong Kong and China led advances. However, Japan’s equity market saw a loss.