US CPI is expected to ease to 8% and core inflation to tick lower to 6.5%. Cooler-than-expected inflation could raise bets that the Fed will slow the pace of rate hikes boosting stocks and Gold while pulling the USD lower.
· Midterm elections proved to be tighter than expected
· BTC/USD rises after hitting a 2-year low yesterday amid the ongoing FTX saga
· The market is pricing in a 56.8% probability of a 50 basis point hike in December
Stocks in Europe and on Wall Street ended yesterday in the red in a risk-off mood as investors digested the tighter-than-expected midterm election and a crypto market selloff.
No red wave materialized in the midterms. Instead, the race was closer than expected. The Republicans are still expected to win a slim majority in the House of Representatives, which could paralyze Biden’s agenda over the coming two years, a scenario that is typically bullish for stocks.
Bitcoin
Carnage in the crypto markets saw Bitcoin tumble to a 2-year low of 15574, and FTT, the FTX token, trades below $2 after trading around $25 last week. The selloff came as Binance walked away from an emergency deal to buy troubled exchange FTX after a liquidity crunch, with CEO Sam Bankman-Fried now saying his firm faces an $8 billion shortfall, without which the firm would need to file for bankruptcy. While BTC/USD is rising today, up around 5% at the time of writing, the mood remains cautious, and fear of contagion is very real.
The weaker close on Wall Street is translating to a weaker start expected in Europe on the open. The DAX is set to open 0.6% lower, and the FTSE -0.4% lower.
US CPI
The main focus today and arguably this week is on US inflation data which is likely to be more important to risk assets in the short term than the US midterm elections. The CPI data will likely guide expectations for the December 14th Federal Reserve interest rate decision.
Expectations are for headline CPI to cool to 8% YoY in October, down from 8.2% in September and 9.1% in August but still well above the 2% target rate. Meanwhile, core inflation, which has been rising until September when it reached 6.6%, a 40-year high, is expected to cool to 6.5%.
While a cooling of core inflation would be good news and could suggest the peak core inflation is passing, it would take a streak of steady declines before inflation could be considered under control.
Fed hike implications
The key question is what today’s inflation reading will mean for interest rate hike expectations. Hotter-than-expected inflation, particularly core inflation, could raise the likelihood of a 75 basis point hike in December as the Fed battles to lower inflation. This could pull stocks and gold lower and lift the USD.
Meanwhile, cooler-than-forecast inflation could see the market upwardly revise expectations for a 50 basis point rate hike which could help stocks resume the recent rally, potentially lift gold towards 1730, the October high, and pull the USD back below 110.00 versus a basket of currencies.
According to the CME FedWatch tool, the market is currently pricing in a 56.8% probability of a 50 basis point hike and a 43.2% chance of a 75 basis point hike.
Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.
Sources: Bloomberg, CNBC, Reuters
Original article provided by Trading Writers
